In a hot market, you can buy a home with cash — even if you don't have a lot of it

Nicole Howson and her partner spent the pandemic cooped up in a small rental apartment in Florida with their two kids. So they decided it was time to move back to the Atlanta area, where they have family, and buy a house with more space.

Howson was in for a shocker. When they started looking at houses near Atlanta, they kept hitting a wall.

"I did, I think, 27 offers," she says. "None of them got accepted."

They discovered that this is the toughest housing market buyers have faced in many years. There aren't enough homes to meet demand, and they sell very quickly.

Howson liked one house so much that she put in a bid over the asking price. She loved the fenced-in yard and neighborhood children playing nearby. She remembers praying, "God, please let this be the one!" But that offer didn't get accepted either.

Howson started hearing that the winning bids often came from buyers offering cash. That meant people or investors that could show they had the money in the bank. Cash is incredibly attractive for sellers, who often worry that deals might fall through if a buyer doesn't quality for a mortgage.

Howson doesn't have hundreds of thousands of dollars in her checking account. She has a job selling cosmetics and doesn't make that kind of money. But then her real estate agent told her that his company had a new program that would let her make a cash offer anyway. The company would front her the money.

"At first I was skeptical," Howson says. "I was like, so you are telling me that if I want the house, you guys are just going to buy it for me and I'm going to pay you back?"

Her real estate agent said that's exactly how it would work. "He's like, yeah, I mean, you find a house, you put in the offer and then we buy it and we sell it back to you."

Her sister warned that it sounded fishy and might be some sort of scam. But it turns out a bunch of legitimate companies are starting to help homebuyers make cash offers this way — some on homes up to $1 million.

In a hot housing market, wealthy people and investors have an edge because they are able to offer cash. About a quarter of home sales now are cash offers.

Some companies are seeing this as an opportunity. The way it works is that they offer to buy the house on your behalf with cash and wrap up the loan portion with you later.

"Cash offers were traditionally reserved for the few that can afford to make a cash offer," says Tom Willerer, an executive with Opendoor, one of the companies doing this. Now, he says, "you can use our cash to back your offer, and that really democratizes access to cash offers."

Some of these lenders also have realty operations, so they make real estate agent commissions or other fees. So the companies are hoping to make more money with these cash-offer services by helping more customers put in winning bids on homes, since cash offers are more likely to get accepted.

"They are four times more likely to win the bid on the homes that they want," says Christian Wallace, the executive in charge of the new cash-offer program at Better Real Estate, the company that Howson worked with. "When they're coming to the table with cash, it is so much more appealing to the sellers."

Before Howson could make a cash offer through Better Real Estate, the company wanted to make sure she could really afford it and qualify for a mortgage. "They want your W-2s, your tax returns, your pay stubs," she says.

The companies also have another guardrail in place. They don't let you offer more than they think the house is worth.

"We have models and algorithms running in the background that will predict the value of the house," says Shaival Shah, the founder and CEO of Ribbon Home, another company that helps buyers make cash offers. He says the same day you find a house you like, the company can quickly generate an estimate on its value and clear you to make a cash offer up to a certain amount.

"Everything is fully approved, ready to make a written cash offer," he says. "So it's really, really, really fast."

Howson figured she'd try it. She found a house she really liked in Griffin, Ga., with a nice yard for the kids.

"It's super-cute," she says. "It kind of reminded me of the home that I grew up in."

Better Real Estate quickly approved her to make a cash offer for $170,000, which was just a bit above asking.

"This house was the first cash offer that I put in, and it won," she says. "I was like, 'Oh, thank God!' It was like this big weight lifting off of my chest. I was just so happy, very happy."

Many of these cash-offer services are new, and so far they represent just a tiny fraction of cash offers for houses. Each company has a different set of fees and rules, and those may change as things evolve.

"I would highly recommend reading the fine print to make sure that you understand all the terms and conditions," says Deeksha Gupta, a finance professor at Carnegie Mellon University who studies the housing market.

For example, Ribbon Home charges a 1% fee for most homebuyers if their offer is accepted — so on a $400,000 house, that's $4,000. Better Mortgage is structured differently and makes its money on the real estate agent side of its business by making a buyer's agent commission from the seller. So Better doesn't charge that 1% fee.

But if there are issues with the loan and the actual homeowner can't buy the house from Better, they stand to lose a 5% deposit on the house. "If the customer is unable to purchase the home from Better Real Estate, the Security Deposit shall be forfeited to Better Real Estate," the company's website says. On a $400,000 home, that's $20,000. Opendoor says you can lose a 1% deposit.

"It might be a great way to be able to be very competitive in a hot housing market," says Gupta. "But there are risks."

Gupta says to be sure to ask these companies what happens if you run into unexpected trouble getting a mortgage or if the formal home appraisal comes in lower than expected. And get the terms in writing.

It all worked out, though, for Howson in Griffin, Ga. She got a good mortgage rate and no extra fees. And now, it's time to start tearing up and replacing the bathroom and kitchen floors. "We've been doing a lot of renovations," Howson says.

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