All-Cash Companies – Too Good to be True?

Economics Housing

New Orleans

There’s a stretch near Canal Street in New Orleans where I can’t get the signal as clearly from WAMF, our low power station, which focuses primarily on the downriver and eastern part of the city. I usually switch to the local NPR outlet for the end of my drive to the gym. Yesterday, I caught a segment on “All Things Considered” about the hot real estate market and the growing popularity – and power – of all cash offers, and the companies that are facilitating these purchases for outgunned home hopers. This piece, part news and part promo, carried the title, “Everyday people can buy a house with cash with this new type of loan.” What could go wrong?

The hook for this story is that about a quarter of homes are now selling on all-cash offers. Such offers obviously favor those bidders who in fact have the hard cash in their pockets. Often that means not just other, richer families, but companies trying to gain an increased footing in the market for rent or resell. The market is red hot right now, so that’s a factor as well. Oh, and of course, these cash offers are not always legit either. Just this week, in taking aim at a significant source of corruption, the Treasury’s Financial Crimes Enforcement Network, or FinCEN, announced a proposed regulation on real-estate purchases made in cash. The initiative, subject to a public comment period, would seek to make nationwide current reporting requirements on transactions in 12 metropolitan areas with residential property selling for more than $300,000, officials said.

I’ll let Treasury worry about the high-end, money laundering part of the market, and I’ll worry instead about the “everyday people” part of the market. NPR’s reporter focused on a Black woman in Atlanta, who sells cosmetics for a living, and her partner and two children who had lost out on 27 offers in trying to buy a first-time home and move out of a rental. The deal is that you sign up with an agent and company that approves you and gives you the money to make an all-cash offer and, if you win the bid, you work out the loan and pay them back, rather than the seller. The woman interviewed thought it sounded too good to be true. She checked them out and dived in. I’m still skeptical that too much has been left unsaid about fees and interest rates. These companies are not charities after all in our age of rapacious capitalism.

There were three companies quoted in the article Better Real Estate, Ribbon Home, and Opendoor. Going to their websites was interesting, but not reassuring. Better, which had handled the offer in the NPR story, touted the fact that you could save 1% on the purchase, because the agent took less. They promised to not charge many of the closing transaction fees and do everything else digitally to get you to the money. Ribbon, felt it necessary, in their FAQ to explain that they were NOT a rent-to-own company. I found that disconcerting in the Nixon, “I am not a crook” sense. There must be things about their business model that have led many to wonder, likely with good reason, that they are a rent-to-own outfit. Warning light now flashing! Opendoor on its website wasn’t marketing its ability to get you cash up front, as it was willing to buy your property outright with their cash, and then fix it up and resell it. They seemed to be an online version of the signs plastered on telephone poles in our neighborhoods that say “We Will Buy Your House for Cash.” All of them advertise their digital savvy, their algorithms, and their no contact, fast action. I’m not sold on their story.

Even if these companies are not intrinsically predatory, their play for the most part seems to be using their databases to get around the exorbitant real estate agent, appraisal, and closing fees, and I suspect collect them in other ways instead. I’d like to know a lot more about their fees, terms, and interest rates, before I would be willing to suggest, as NPR seems willing to do, that “everyday people” give them a try. In real estate, desperation feeds predation. Remember, it’s a loan. How does it work?