Imagine a family moving from Idaho to Utah. Already in an unfamiliar market, the family discovers that they are far from the only buyers desperate to close on a home. Their first four offers were rejected, but their fifth attempt was ultimately successful only after a crucial change: they made a full cash offer.
This family’s story is far from the exception and is becoming the new normal in housing markets across the country. Millennials who tried to buy a home in 2021 found that it took several offers to finally be accepted. Landlords looking to take advantage of the market quickly find themselves overwhelmed by buyer fatigue and abandon the process early and often, choosing to stay where they are or continue to rent, despite rising rental prices.
Market conditions in 2022 are not making the home buying process any easier; in fact, it will only get worse. As home prices continue to rise to historic highs, buyers will continue to find themselves locked in insurmountable bidding wars against competitors with deeper pockets and greater liquidity who can afford to make cash offers.
cash is king
Historically, low supply has tipped the balance and increased buyer demand. Active registrations in Utah alone fell 69% between January 2020 and January 2022, and Beehive State is no anomaly; the sharp drop in inventories is consistent with the rest of the country. With less inventory, deals pile up. To get a seller’s attention, it’s not uncommon for desperate buyers to arrive in force, offering tens of thousands of dollars above the asking price.
How does a seller know which one to choose when so many tempting offers are presented to him? They start by looking at cash offers first. Cash gives sellers more confidence that a buyer will follow through on their offer. And because not all shoppers use cash, those who do stand out. In a study of sales from 2020 to 2021, it was found that a cash offer quadrupled a buyer’s chances of winning a bidding war – even when offering less cash – and that they closed faster.
Who are home buyers competing against?
The use of traditional offers is causing buyers to fall behind big players in the real estate market, such as investors, flippers and iBuyers – companies that pay cash for homes, allowing sellers to close in as well. just two weeks.
In fact, Wall Street investors dominate residential real estate. With help from deeper-pocketed tech giants, Wall Street’s plan to “eat” the market has been a resounding success. In the Atlanta metro area, four out of ten home sales went to investors (subscription required).
First-time buyers have to deal with giants, and the biggest players use cash. As a result, almost a third of sold homes tracked by Redfin were all-cash purchases in 2021, and that number is growing.
Level the playing field
The reality of competition with Wall Street can discourage first-time homebuyers. Fortunately, making a cash offer is not as inaccessible as one might imagine. Several companies now offer services that allow buyers to make cash offers and compete with Wall Street to offer a cash offer.
Services vary by location and company, but most follow a similar formula. The company puts in money to impress the seller and close quickly. Meanwhile, the buyer has some time to secure a mortgage to pay off the business through a more traditional loan without worrying that their home will go to someone else.
Compete with Wall Street
In today’s competitive market, conventional mortgage structures can be insufficient, and average buyers are paying the price. Without the deep pockets of iBuyers and investment companies, many families don’t have much hope of winning a bidding war on their dream home — or even their first home. This is also not expected to change for the foreseeable future. Awaiting a major market correction, the main problem facing homebuyers is the lack of inventory which is driving up the prices of a limited number of available homes.
If buyers choose to partner with a company that offers home purchase cash in exchange for a refund, there are a few things they should know before making the leap. In today’s competitive marketplace, it’s important that shoppers understand a company’s requirements for its cash offer program. Many companies have a credit score requirement and may charge a program fee.
The company can also make money by earning the buyer’s agent commission and/or earning a commission on the house you sell before buying the next house you need money for. Additionally, buyers should determine which cash offer programs offer limited contingencies. This allows them to choose which contingencies to include, which can be very desirable for sellers.
Finally, buyers should research and make sure they understand how the cash offer works. Typically, most companies offer the cash offer as a bridging loan. However, some iBuyers and real estate companies will buy the house themselves and resell it to you. A solid company will be transparent with fees and able to explain all costs in detail that a borrower can easily understand.
Building new homes will take several years, while interest rates are likely to rise during this period. The end result will be increased costs, which can be especially difficult for the traditional buyer given the down payment. While buyers can work with a real estate agent to try and reduce the down payment burden, I am convinced that part of the future of residential real estate lies in cash offers. The ability to provide the buying power of cash without immediate liquidity allows buyers to compete in an increasingly competitive landscape where more traditional mortgage structures are failing.