How homebuyers can navigate a housing market governed by cash offers
New research from real estate firm Opendoor confirms what frustrated homebuyers already know: In the post-pandemic real estate market, cash is king.
72% of sellers prefer cash offers, according to research published this week by Opendoor. The iBuyer also found that three-quarters of sellers said an offer subordinated to a mortgage would have to be 10% higher than a cash offer to deserve equal consideration.
In other words, if you are bidding on a $ 400,000 home and need financing, you may need to bid $ 440,000 to get the seller’s attention, according to Opendoor research.
“Certainty is so important to sellers, especially in this market,” says Kerry Melcher, real estate manager at Opendoor.
Sellers fear moving into the home they are going to buy, and they need the money to compete in a booming market, says Melcher. Opendoor and other iBuyers are touting themselves as a workaround – companies are giving buyers the certainty of closing dates, although iBuying can come with high fees as well.
Premium sellers give cash offers a meaning, according to real estate experts. If a funded offer fails, the seller may have to put the house back on the market and wait additional weeks for a transaction to close.
Is the cash bonus really worth 10%?
Not everyone thinks that funded buyers are so disadvantaged. Adam Pollack, co-founder and managing director of financial technology firm Accept.inc, a mortgage company that submits cash offers on behalf of borrowers, says the 10% premium seems high. In his experience, sellers generally require home buyers who need mortgages to bid 3-5% over cash buyers.
“I wouldn’t say it’s 10% based on our experience,” Pollack says. “But the concept that Opendoor has demonstrated is certainly true – that sellers are more likely to accept a lower cash offer.”
Andy Sachs, a Keller Williams broker in Newtown, Connecticut, also claims that premium sellers offer cash deals is around 3%.
“Money is king, but 10 percent feels really steep to me,” Sachs says. “Are you telling me that someone won’t roll the dice to accept a $ 500,000 offer for a $ 450,000 cash offer?” “
Sachs advises sellers to scrutinize the details of the financing. If a buyer needs a loan but pays a large amount, that offer can be as good as a sum of money. On the other hand, a buyer who pays only 3% or 3.5% is more likely to lose funding if the appraisal or inspection is surprising.
Why door-to-door sellers prefer cash offers
Lenders approve millions of mortgage loans for purchase each year, but a home loan rating is not a certainty. A job loss or some other financial problem can kill a deal.
Even so, most home buyers have strong credit scores, so loans are usually granted. “If someone qualifies for a mortgage in today’s market, there’s a good chance they’ll close,” Sachs says.
In today’s rapidly appreciating market characterized by record appreciation rates, a different threat is derailing deals: low valuations. Estimating value has become the biggest hurdle for many transactions, says Sachs: “The appraisal is probably scarier right now than the inspection process. “
It is not unusual for a buyer to bid aggressively, and competitive auctions can push the price above the value established by an appraiser. In this case, the buyer may need to bring more money to the closing table.
“It’s just hard for valuations to chase this market when it’s grown so much,” says Melcher.
To deal with the possibility of a low appraisal, enthusiastic buyers include appraisal waivers – a promise to the seller that if the appraised value is low, the buyer will simply make up the difference with a larger down payment.
Another workaround is to use one of the new lenders – Accept, along with Homeward and Ribbon – who are making cash offers on behalf of borrowers.
An additional option for buyers is “immediate decision approval”, also known as underwritten pre-approval or initial underwriting. These conditions mean that the loan is funded and the buyer can fund the contingencies of the offer without fear of losing the down payment.
Tips for buying a home in a sellers’ market
Here are a few other ways to make your offer stand out:
- Have the money for closing costs.
- Be prepared to move quickly when you find a home you love.
- Go through the entire subscription process before you make your offer.
- Make sure your offer is aggressive enough to stand out, but not too expensive for you.
- Promise to close the deal even if the valuation is lower than you expected.
- Realize that making a small down payment can put you at a disadvantage.
- Be prepared to bid on many houses. Some agents report that buyers can make 30 offers before a single one is accepted.