Cash offer home financing: What you need to know

5 things to know about cash offer financing products

July 19, 2021 11:34 AM

“Cash is king” when it comes to home buying, Fannie Mae chief economist Doug Duncan, said in a recent interview with National Mortgage News, and in 2021, statistics show that to be the case.

The evidence shows up in the rising number of all-cash offers on new purchases, according to Gay Cororaton, senior economist and director of housing and commercial research at the National Association of Realtors. While buyers paying for a new home with cash is nothing new, it has been on a noticeable upswing in the first half of 2021.

“Supply is very tight. Cash offers are what sellers prefer just because the deal will go through faster — you don't have to have an appraisal. And so that's what we've seen tracking at about 25%,” she said.

In another recently released analysis of public county records conducted by Redfin, the data similarly showed that all-cash offers accounted for over 30% of home purchases in the first four months of the year.

Supply-chain issues and a shortage of inventory pushed prices to record highs this year and made bidding wars commonplace, often driving offers well above the original list price. Where a year ago, a home on the market might receive two or three offers, it now averages approximately five, according to Cororaton.

To assist buyers who lack sufficient equity to make an all-cash purchase, a number of businesses and programs have emerged, offering clients the opportunity to compete by purchasing homes on their behalf, and then reselling or transferring the properties to them at the exact same price. If current buying trends are sustained, these types of companies and products are likely to gain a larger piece of the market.

“I think that before you know it, every offer will have to be a cash offer. Sellers are going to demand that people bring cash offers because it reduces their risk,” said Tim Herman, cofounder and CEO of UpEquity, an Austin-based mortgage-technology platform providing funding for buyers to make these deals.

No two programs serve buyers in exactly the same way, but they were designed with similar goals. Here are a few things to know about the products and those who offer them.

Programs are designed for quick turnarounds and sales

While traditional mortgages typically take between 40 to 60 days between time of application to closing, cash-offer transactions will be completed in approximately 10 days, a feature sellers sometimes favor more than the offer price.

“One of the interesting things that we see pretty consistently is that we're rarely the highest offer on the home,” said Nick Friedman, cofounder and chief operating officer of Accept.Inc, a cash-offer platform based out of Denver. “When there's multiple offers, I think just over 75% of the time, we're not even the highest offer on the home in those multiple-offer situations because the sellers value that speed and certainty of cash versus taking the highest-priced finance offer.”

Only highly qualified applicants pass muster

With the high-risk potential and quick turnaround of these transactions, buyers need to come in highly qualified, typically the type of borrower who could make at least a sizable down payment when applying for a conventional mortgage. Due diligence and underwriting are conducted in the beginning to the fullest extent possible.

“You really have to, because when you present a cash offer, we are putting our name on it,” said Tamra Rieger, chief operating officer of Evergreen Home Loans, a three-decades-old traditional lender who introduced a cash-offer pilot program in 2021. “We will close that cash purchase in as little as 10 days, so I have to have everything buttoned upfront before they even find the house.”

The greatest risks in these transactions fall on the companies making the purchase on behalf of buyers, especially if their client ends up in financial distress and becomes unable to make payments. The business making the initial purchase is still on the hook for the home, which it somehow must unload.

Another risk comes with appraisal. Since homes are typically not appraised before a price is agreed upon with the seller, an appraiser could later subsequently value the property at a different price point. If it comes in higher, the company making the purchase somehow has to cover the increase — or pass it on to their client.

Programs are leveraged to compete with iBuyers and institutional investors

Among the reasons given for introducing these programs was to allow buyers and agents the opportunity to compete with

iBuyers

and other investors able to make cash purchases for the purposes of resale.

“There had been a trend we were seeing over a year ago and maybe longer of large real estate firms getting involved in mortgage, and our real estate agents with our relationships were having to compete with what these other large companies and large firms were offering. And that's where we started thinking about this program,” said Rieger about Evergreen’s pilot. “What was happening a year ago is similar to what's now, but now it's even more exacerbated with customers who are competing against other buyers who have cash. And this program was designed to help them compete.”

For Accept.inc, which was established in 2016 specifically to develop a cash-offer platform, it was the opportunity to level the playing field against institutional buyers that led its founders to establish the company.

“You can think about us sort of like a rich aunt or uncle, who fronts cash for buyers, and lets them go out and compete in the market,” said Friedman. The process also provides sellers certainty in the transaction and allows agents to pass on that certainly to their clients and receive a guaranteed commission, according to Friedman.

First-time buyers qualify, but government programs don’t

The nature of these cash-offer programs is akin to bridge financing, Cororaton said, a positive for many potential first-time buyers with sound fundamentals.

But the products do not align with regulations of government-sponsored programs that lower-income and first-time buyers depend on for entry-level homes. With demand and corresponding prices expected to continue rising for the rest of the year, the programs won’t be able to assist many actively seeking to accumulate equity through homeownership.

“It’s said that the market is booming, but I think it's a case, kind of a case of a K-curve recovery, where it's the haves who are participating in the recovery and the have-nots are losing. And I think that's what's happening in the housing market,” Cororaton said.

All-cash products are currently concentrated in the western U.S.

The current spate of cash-down programs and companies are found primarily in the West. Based in Bellevue, Washington, Evergreen Home Loans operates its pilot in Washington State and Nevada, and recently extended it into Idaho.

Accept.inc is licensed to operate in Colorado and has been seeking to add locations outside the state. In June, the company announced it had raised $90 million in debt and equity from venture capital firm Signal Fire, as well as existing seed investors Y Combinator and DN Capital,

Currently licensed in Texas, Colorado and Florida, Herman has even more ambitious plans for UpEquity, which secured $90 million in Series A funding earlier this year. “I don't know when it's going to be but we will be licensed in another 10 states within the year,” he said.

After founding the company in 2019, Herman estimates that UpEquity is conducting approximately 150 transactions monthly and hopes to originate $700 million in loans this year.

“I think that companies like us, and, and particularly our company, are just at the very beginning of many years of exponential growth.”