In case you haven’t heard, it’s an extreme seller’s market right now. That means when houses go on the market, particularly starter homes that are favorites for flippers and buy-and-hold investors, they’re selling like hotcakes, usually for top dollar.
Cash buyers typically have an advantage in this type of market. A cash deal is generally easier all around: There are no lenders who could deny a buyer during due diligence, no appraisal is needed, and cash buyers can typically close faster. So sellers often choose a cash buyer over someone who needs to finance the deal.
If you want to better your chances of buying an investment property but don’t have the cash, you can still make an all-cash offer. How? By using a third party.
You might be familiar with some of the many companies that buy people’s homes for cash. Called iBuyers, or instant buyers, firms like HomeVestors (the “We Buy Ugly Houses” company), Knock, Zillow (NASDAQ: ZG) (NASDAQ: Z), Opendoor (NASDAQ: OPEN), and Offerpad all buy homes from sellers for cash.
What you might not know, however, is that some companies that buy homes using cash, like Accept.inc and Ribbon, will let you benefit from their acquisitions. These types of businesses buy a house you pick using their cash reserves, and they then sell the house to you.
How this works
Take Accept.inc. You apply for a mortgage through them; Accept.inc is a lender. If you’re accepted, Accept.inc will buy the home for you. The seller gets an offer from an all-cash buyer (Accept.inc) who can close in record time — as little as 72 hours.
If the seller accepts the offer, Accept.inc buys the home for cash. After the closing, Accept.inc holds the home until your mortgage is finalized, at which time Accept.inc sells the home to you at the same price they paid for it. Accept.inc says its loan costs are the same as a traditional mortgage lender. Note that at the time of this writing, Accept.inc only operates in Colorado. Because Accept.inc is a lender, it makes money off the loan.
Ribbon works in a similar manner but isn’t a lender. Ribbon will buy a home for you, and you then have up to 180 days to get financing from a lender, at which time you’d buy the home from Ribbon.
There are two catches with Ribbon. First, it operates in only five states at the time of this writing: North Carolina, South Carolina, Tennessee, Georgia, and Texas. Second, it buys homes for people who intend to use the home as a primary residence. You usually need to live in a primary residence for a year before using it as an investment property, but you’d need to look into Ribbon’s terms. Ribbon makes money by charging a 1% to 3% transaction fee.
There are also rent-to-own companies that buy homes for cash and then rent them to you with an option to buy at a future date, usually within three to five years. This option is usually for people who want to own a home now but don’t qualify for a mortgage.
The pros are that you’ll have a house to buy at some point in the future, and you buy at today’s prices, usually lower than future home prices. The cons are that rent-to-own companies typically only operate in select areas, and you typically pay a lot for the service, either by an increased rent, an option fee, or both.
The Millionacres bottom line
Whether you take advantage of the various companies that buy homes on your behalf depends on your circumstances. Real estate investing can be a great way to make money, and these types of companies can help give you the start you need. But this tends to be a more expensive way to get in the game. Weigh the costs, study your market, and make the best decision for you.