What the Rise of iBuyers and Fin-tech Companies Means for Buyers

Cash sales accounted for 23% of all home sales in July this year, helped by an increasing number of iBuyers and financial technology companies entering the market. iBuyers are companies making cash offers instantly based on an automated valuation such as OpenDoor, Redfin Now, Zillow Offers, and more, reports the National Association of Realtors. Cash offers have helped buyers and companies stand out in bidding wars, but buyers who cannot offer cash can instead go to a cash financing company. This newer model instead has an institution purchase a property for a buyer or provides cash for the buyer to make an offer.

The objective is to increase the competitiveness of the buyer's offer by enabling the buyer to offer cash or assuring the seller that if the buyer can't find mortgage financing, the institutional buyers will buy the home for cash.

OpenDoor(link is external) launched its cash-backed offer program3 on March 4, 2021, whereby it backs up the buyer's offer with a cash offer to the home seller if the buyer fails to secure financing by the closing date. Essentially, the OpenDoor cash-backed offer provides the buyer more time to obtain mortgage financing while closing on a home and also gives assurance to the seller of a home that the sale will close. If the buyer is not able to secure financing, then OpenDoor purchases the home for the buyer and holds the home for 120 days at no cost to the buyer with a fee of 1% of the purchase price. If the buyer is not able to secure financing and wants to hold the home for another 120 days, the buyer pays OpenDoor 0.02% per day of the purchase price. In the table below, I calculated the cost for the buyer. Assuming that OpenDoor purchases the house for the buyer and the buyer needs an additional 120 days to secure financing, the total cost on a $300,000 is $10,200, or 3.4% of the purchase price.

Ribbon(link is external) purchases the home from the seller for cash on the buyer's behalf if the buyer is not able to secure mortgage financing. Similar to OpenDoor, the Ribbon Offer provides the buyer more time to obtain mortgage financing while closing on a home and also gives assurance to the seller that the sale will close. Ribbon's fee is written into the purchase contract and ranges from 2.0% in North Carolina, South Carolina, and Texas to 2.4% in Georgia and Tennessee, and up to 2.75% in Florida. Ribbon holds the property for up to 180 days and if the buyer is able to secure financing, the buyer repurchases from Ribbon at the same price. However, if the buyer is able to finance an all-cash purchase and does not need Ribbon to purchase the property for cash, the Ribbon fee is 1% of the purchase price (but the full fee must be deposited initially, and the buyer then just gets a credit that goes towards the buyer's closing cost).

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