SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
CHRIS ARNOLD, BYLINE: And I'm Chris Arnold.
WOODS: Chris Arnold, you report a lot for NPR on the housing market, which is going pretty bananas at the moment - prices going up and up and up.
ARNOLD: Yeah. And for anybody who wants to buy a house, something paradigm-shifting has come along that can actually help you.
WOODS: I'm ready as soon as I heard the phrase paradigm-shifting.
ARNOLD: Game changing, even.
WOODS: So if you look at home sales today, about 25% of homes are bought with all-cash offers.
ARNOLD: And those come from investors that do this. Wealthy people can do it. But the bottom line is that most of us do not have hundreds of thousands of dollars in cash sitting around to buy a house with.
WOODS: So for the rest of us, if we're trying to buy a home, that lack of cash just waiting on hand puts us at a really big disadvantage because, you know, if you're selling a house, why wouldn't you go with the person that just has the cash waiting and ready?
ARNOLD: So this brings us to the game changer.
WOODS: To the paradigm shifter.
ARNOLD: Yeah. So some companies are getting creative now to help the rest of us put in one of these really strong cash offers - and here's the thing - even if we don't actually have the cash.
NICOLE HOWSON: I'm not going to lie. I was very skeptical at first. I have a sister-in-law who is a realtor, and she's like, I don't know. Be careful. That sounds a little fishy.
ARNOLD: But this is actually a real thing, and it can make it much more likely that your offer on a house gets accepted.
WOODS: Today on the show, we're going to find out how the all-cash offer works.
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WOODS: All right. So, Chris - so with the pandemic, a lot of people have been trying to buy homes. They want more room, and a lot of us are still working from home.
ARNOLD: Yeah, that's exactly what happened with Nicole Howson and her family. They spent the pandemic cooped up in a small rental apartment in Florida.
HOWSON: You know, we've got the two kids and the two of us in a two-bedroom apartment. The toys are everywhere. And it's just like - we wanted the space.
WOODS: So Nicole and her family decided it was time to move back to the Atlanta area where they both have extended family and they wanted to buy a house. But that didn't go so well.
HOWSON: I did, I think, 27 offers. None of them got accepted.
ARNOLD: The couple found out that this is the toughest housing market that buyers have faced in just years and years and years. There aren't enough homes to meet demand, and they sell just really, really quickly. Nicole was hearing, too, that, often, the winning bids were coming from buyers who were offering cash.
HOWSON: Like, investors and stuff were putting in cash offers.
WOODS: And on average, every home that goes up for sale is getting about five offers from different buyers. So if just one of them can offer cash, they can blow everybody else out of the water.
ARNOLD: In fact, some mortgage companies that we talked to say you are four times more likely to win the bid if you offer cash.
WOODS: But Nicole has a job selling cosmetics and doesn't have a giant pile of cash lying around.
ARNOLD: Then she got a new realtor with a different company called Better real estate. And this guy said that they had this new program and that the company could front her that big pile of money that she doesn't have so that she could actually put in a cash offer.
HOWSON: I was like, so you're 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? 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.
WOODS: Nicole read over the materials, and it seemed like a legitimate thing. And it actually is. Remember - these are not the days of the housing market collapse and the resulting financial crisis. There is the Dodd-Frank Act and other changes in laws and regulations that have put a bunch of rules in place that stop lenders from offering people crazy home loans.
ARNOLD: What is happening here is that some real estate and mortgage companies are getting hurt by all these cash offers, too, 'cause if you get beat out by a cash offer, your realtor that you're working with, as a buyer's agent, they don't get a commission, and the mortgage company doesn't make any money 'cause they can't give you a loan if you're not buying a house.
WOODS: So some companies have come up with this pretty creative fix. Instead of just getting a regular mortgage, they will essentially buy the house for you with a cash offer. Usually, that can be anywhere from $150,000 up to around a million dollars. And then you wrap up the loan part later, either with them or with another company.
ARNOLD: I talked to Tom Willerer about this. He's with Opendoor. It's a company that's also doing this.
TOM WILLERER: Cash offers were traditionally reserved for the few that can afford to make a cash offer. And now, you can use our cash to back your offer, and that really democratizes access to cash offers.
WOODS: I'm not sure if it's all about democratizing the housing market. I mean, maybe it's doing that, but it's also helping some big businesses along the way, right?
ARNOLD: Absolutely.
WOODS: They make money off this and, in different ways, traditional realtor commissions. Some charge you these fees upfront to be able to do the cash offer. And if you get the eventual mortgage from them as well, they make money that way.
ARNOLD: Yeah. And what was interesting to me about all this, actually, is that, for the homebuyer, doing this cash offer thing often doesn't really cost any more than a traditional mortgage 'cause you basically end up with the same kind of interest rate that you would have had doing this the old way. And sometimes, you could even get a better deal overall because, even if you have to pay, say, a 1% fee to get that money for the house upfront, with a cash offer, you can often bid a little less and still get the house. So you could even come out ahead.
WOODS: The companies do have a couple of big guardrails, though. Nicole says before she could make the cash offer with Better, the company wanted to make sure that she could really afford it and qualify for a mortgage.
HOWSON: They want your W-2s, your tax returns, your pay stubs.
ARNOLD: And another guardrail in all this says they do a super-fast preliminary home appraisal, basically, and then they don't let you offer more than they think the house is worth, either. Shaival Shah is the founder and CEO of Ribbon home.
SHAIVAL SHAH: So we have models and algorithms running in the background that will predict the value of the house. So same day, everything is fully approved, ready to make a cash offer. So it's really, really, really fast.
ARNOLD: Now, finance experts that we talked to who say, look, you definitely want to look at the fine print. Different companies have different fees and rules. Some, there's very little risk to the buyer. But with Better mortgage, for example, on their website, it says that you might lose a 5% down payment if you just walk away and don't buy the house after they buy it for you. Now, Better says that that's very unlikely to happen.
WOODS: But it's a lot of money. This is very new. The rules might change as more homebuyers and companies start doing this. So definitely read the fine print.
ARNOLD: OK, so Nicole Howson, though - she found another house that she really liked. This one was in Griffin, Ga.
HOWSON: It's super cute - kind of reminded me of the home that I grew up in.
WOODS: Better real estate quickly approved her to make a cash offer for $170,000.
HOWSON: This house was the first cash offer that I put in, and it won. And I was like, oh, thank God. It was like this big weight lifting off of my chest. I was just so happy - very happy.
ARNOLD: And for Nicole, she got a good mortgage rate with no extra fees, actually, 'cause she got her home loan through Better and also used one of their realtors, and that meant they didn't charge her anything to do the cash offer. So it worked out really, really well for her.
WOODS: And now it's time to start replacing the bathroom and the kitchen floors.
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ARNOLD: Which her partner actually started doing during our interview.
HOWSON: Yeah, we've been doing a lot of renovations (laughter). But it's like, really? Right now, you choose to start pounding on the bathroom floor?
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ARNOLD: So, you know, the cash offer thing definitely changed things for Nicole. And back to my perhaps overenthusiastic paradigm shift - who knows? But you got to think this really might just change the whole industry.
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WOODS: This episode was produced by Nicky Ouellet with help from James Willetts. It was fact-checked by Corey Bridges. Our senior producer is Viet Le. And our editor is Kate Concannon. THE INDICATOR is a production of NPR.
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