How do cash offers on houses work?
Imagine you’ve just found your dream home. There’s an open house scheduled for tomorrow.
You scramble to find a babysitter for your kids and rush to get there on time. Turning onto the block, you’re shocked to see every parking spot on the street is taken. There’s a small crowd of people standing on the front steps of your dream home. You’re normally a nice person, but these people have just gone from being random strangers to your competition.
This scenario might sound far-fetched, but countless people have found themselves in this exact situation over the past few years. What are you supposed to do? How can you stand out from the crowd?
Use a cash offer.
Bringing a cash offer to a seller is the strongest way to separate yourself from the pack in a seller’s market and the best way to give yourself more negotiating power in any market. But not all cash offers aren’t created equal so it’s important to do your research ahead of time.
Here are 10 questions you should ask to understand how cash offers work before you choose a cash offer program.
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Cash offers sound straightforward. Pay with cash, right?
At the broadest level, cash offers are pretty simple to define. A cash offer is when a homebuyer offers a home seller the complete cost of the house without any kind of mortgage or financing contingency involved.
While that might seem pretty simple, making a cash offer is a bit more involved than simply handing a bag of cash to the seller. And since the details of every cash offer program differ, it’s important to understand the big picture of how cash offer programs work.
At a high level, most cash offer programs involve several steps:
- Pre-approval. You get approved for a specific loan amount and start shopping for a home.
- Offer. You work with your agent agent to make a cash offer with the cash offer company as the buyer.
- Closing. The offer gets accepted and the company finalizes their purchase of your new home.
- Buyback. Once your mortgage is finalized, you buy your home back from the company.
How much do cash offers cost?
Fees for cash offer programs vary widely.
The fee for this service is usually based on a percentage of the purchase price of your new home. These fees normally range from 1-5%. According to a recent article on Realtor.com, “The cost of obtaining a cash-backed offer or cash offers is not much higher than the 3.7% to 4.4% average percent above the list price that buyers have already been offering to sweeten their offer.”
On top of this fee, additional fees, credits, and discounts may apply. For instance:
- You may get a credit at closing when you use the company’s preferred mortgage provider.
- You may pay rent for the period of time between when the company buys the home for you and when you buy it back.
If there’s a moral to this story, it’s that you should always do your research before choosing a cash offer company to work with.
A great first step is looking at the company’s pricing. Easy-to-find, transparent pricing should give you more confidence that you won’t be in for any unhappy surprises further down the road.
If a company's fees are hard to understand from their website, do your due diligence before moving forward.
Can I still work with my own real estate agent?
Every cash offer company approaches real estate agents differently. Some allow you to work with any real estate agent you’d like and others omit the agent altogether. But most dictate that you choose an agent from their list of preferred partners.
Buying a home is one of the biggest purchases you’ll make in your life. And, according to a 2018 survey by Homes.com, 40% of Americans say buying a new home is one of the most stressful life events in modern life.
“Working with a local agent that you've built a relationship with means you control who will shepherd you through what can be a stressful process,” explains Julie Youngblood, a Homeward partner lead and nationally recognized real estate coach. “If you have an existing relationship with an agent and you want to work with them, make sure you choose a cash offer program that gives you that freedom.”
How soon can I move in after using a cash offer?
When you’re excited about a new house, you don’t want to wait 30+ days to move in. The good news is that some cash offer companies allow you to move in as soon as they purchase the home on your behalf.
You won’t technically own the home yet — the company will — and they’ll typically charge you rent, so it’s important to ask a few questions about how that works:
- Do they mark up rent?
- Is the rent prorated?
- Is there a security deposit?
- When does rent begin? When does it end?
- Do you need renter’s insurance?
Being able to move in right away is especially helpful if you also have a home you need to sell. Selling a home while living in it is a major pain. You’re always trying to keep the place spotless, and you’re constantly forced to leave so prospective buyers can check it out. When you use cash to buy before you sell, you can move out before you list your old home and skip the showings.
“We were able to spare our children the many disruptions inherent in listing our house while still living there,” explains Jennifer, a homebuyer who used a cash offer to buy a new home before she sold her old one. “We were able to complete renovations [after we moved out] and get top dollar for our old house.”
This all sounds too good to be true. Is it?
This all sounds too good to be true. Is it?
Nope. Cash offer programs are a welcome evolution of the traditional real estate transaction and they are very real. In fact, in 2021 nearly one-third (30%) of homes were purchased with cash. Of course, some of these cash offers came from truly wealthy individuals and investors with very deep pockets. But because of historically low inventory, competitive interest rates, and a housing shortage, many of the other cash buyers were people like you who leveraged cash offer programs to make their offer stand out in a competitive market.
“Honestly, [we] thought it was too good to be true,” says Katherine of Texas. “We were moving from Midland to the Bastrop Area. The builder we wanted to buy from refused our contingency sale offer so we went to Homeward. They helped us buy the house we wanted. We would not have the amazing house we have now without them. It was an amazing experience.”
That said, a little skepticism is healthy. Check out the Google Reviews for any company you’re considering working with. As far as the seller is concerned, they’ll get a “proof of funds” letter with the offer. This is the company’s way of proving that they have the cash to make good on the offer.
Will you buy my old home, too?
“We buy your house with cash!” You’ve probably seen signs like these on the side of the road, claiming to offer top dollar for your old home. While they’re common, the businesses that post these signs aren’t the type of cash offer we’re talking about — they’re wholesalers. They buy homes at a discount and then sell them to investors.
Instant buyers or iBuyers also buy homes directly from consumers. These companies use technology and data to make an offer on your home in minutes. But iBuyers optimize for speed, not equity. So when you sell to an iBuyer, you’re leaving money on the table.
While cash offer programs don’t buy your old home instantly, some of them will promise to buy your old home if it doesn’t sell after a certain amount of time. Think of this feature as an insurance policy. You have a guaranteed buyer if you need it, but you get to try selling your old home for top dollar on the open market first.
Real estate agents like Britni Davison appreciate this because they’ve watched too many clients rush the list-buy process. “As a Realtor, I love the Homeward product as a solution for clients who need to buy before they sell in order to keep their lives moving forward during a move,” she explains.
Do I have to use a specific mortgage company?
Some cash offer companies require you to use a specific mortgage company when you work with them. With other cash offer companies — including ours— using the preferred lender is optional (and may include some incentives).
If the cash offer program you’re considering requires you to work with a certain lender, do your research. Make sure they offer the loan type and terms you want and that the rates and fees are competitive. “Don’t focus solely on rate,” says Sarah Lopez, vice president of mortgage at Homeward. “Look at the cost at a given rate. For instance, 2.875% with $5,000 in points isn't necessarily better than 3.000% with no points. Ask your lender to see rate options and compare the costs at the same rate across lenders.”
If using an affiliated lender is optional, investigate the incentives. “Does the company offer you a seller’s credit during the buyback?” asks Lopez. “Is the process quicker? Will you work with a loan officer who will help you understand your options?”
Does this cash offer work with the mortgage I need?
There are four common types of mortgage:
- Conventional loans - mortgages that are not backed by a government entity. This is the most common type of home mortgage in the United States.
- VA home loans - mortgages from the Department of Veterans Affairs, designed for active-duty military personnel, veterans, and surviving spouses.
- FHA loans - mortgages insured by the Federal Housing Administration. FHA loans typically enable buyers with lower credit scores to make lower down payments.
- Jumbo loans - jumbo loans exceed the underwriting guidelines of conventional loans, typically because they’re for more money than the loan limits for an area.
Very few cash offer programs work with all of these different types of loans. So make sure you can get the loan type you need before you waste too much time and energy.
Will I need to make a bigger earnest money deposit (EMD) for a cash offer?
Earnest money is the deposit you put down to show the seller you’re serious about buying a home. While you offer EMD upfront, it’s not an extra fee. Your earnest money deposit gets applied as a credit to the purchase price when you close on your new home.
EMD usually ranges from 1% - 5% of a home’s purchase price. When you’re working with a cash offer program, you can typically expect to put down a similar amount of earnest money.
Why do sellers prefer cash?
When it comes to buying a new home, cash is king and queen. There are two big reasons sellers prefer cash offers:
- Cash offers are less risky for the seller. When you buy a home with a traditional offer, there are a lot of dependencies attached. Your offer might be contingent upon you getting a loan, selling your original home, or the appraisal. Each contingency increases the risk of the sale not closing successfully, which puts the seller in a tough position.
- Cash offers close faster. Most sellers want to sell quickly. They don’t want to deal with never-ending showings or open houses. And most importantly, they want to get their equity out of the home as soon as possible.
This explains why cash offers are four times more likely to beat financed bids. “Sellers can be confident that [a cash sale] is going to close without hiccups or surprises,” explains Tim Heyl, our Founder and CEO.
How do I become a cash buyer?
The approval process for becoming a cash buyer works much the same way as getting approved for a mortgage does. The process can take anywhere from a few days to a few weeks, depending on the company you use. It’s a good idea to get approved to buy when you start looking for a new home. That way, you’re ready to make an offer as soon as the home you love comes on the market.
If you're a homebuyer interested in learning more about becoming a cash buyer, schedule an appointment with a Homeward Advisor here.
If you're an agent interested in turning contingent clients into cash buyers, schedule an appointment with a Homeward Advisor here.