What is Power Buyer in real estate?
What is a Power Buyer?
A Power Buyer is a home buying service that guarantees a buyer's offer through a "cash-backed offer". If the buyer's financing falls through, the power buyer will purchase the home in cash on behalf of the buyer.
The Power Buyer allows the buyer to make what effectively amounts to a cash offer with no financing contingency. In a competitive housing market, this has proven to be a highly effective way for buyers to present a more attractive offer to home sellers.
Cash-Backed Offer
Power Buyers enable "cash-backed offers" to help home buyers provide a superior offer and get their offer accepted. A cash backed offer means the buyer is working with a lender, but if there is a delay or financing falls through, the power buyer steps in and purchased the home in cash on behalf of the buyer and works with the buyer after the transaction to secure a mortgage on the property.
Power Buyer Offer Success Rate
According to data from Knock, the guarantee of a power buyer cash-backed offer contributes to a 4x increase in the probability of a buyer's offer being accepted. This comes as no surprise, since with power buyer cash-backed offers there is no financing contingency and appraisal gap assistance.
Power Buyer Financing Contingency
A financing contingency means the buyer is able to back out of the contract if their lender does not approve the loan. According to Rocket Homes, in August 2021, 8% of contracts fell through due to financing issues.
A cash-backed offer through a power buyer comes with a guarantee that they will step up to buy the house if the buyer's financing falls through. This allows the buyer to submit an offer that does not include a financing contingency.
Power Buyer Appraisal Contingency
If the lender's appraisal comes in lower than the purchase price, the buyer is required to pay the difference out of pocket at closing. For example, let's say you are in contract for a $500,000 purchase price but the appraisal comes in at $450,000. The lender is only willing to lend based on the appraised value, so there is a $50,000 shortfall. If you still wish to purchase the house, you need to come up with $50,000 out of pocket at closing. This situation has become common during the COVID housing market where bidding wars are driving up home prices above appraisal values.
The power buyer is able to bridge the appraisal gap through closing cost assistance up to 3% of the loan amount which increases the buyer's ability to move forward with the purchase.
Power Buyer Mortgage Attach Rate
According to research from Mike DelPrete, because the power buyer model is focused on serving the home buyer, they have a 70% mortgage attach rate as compared to Zillow's 1% mortgage attach rate and under 10% mortgage attach rate from iBuyer services that focus mainly on serving sellers.
This means that 70% of power buyer customers end up originating their mortgage through the power buyer's financing division. For reference, the highest mortgage attach rates are seen among home builders which are also buyer-centric.
Power Buyer Business Model
Power buyer services increase the success rate of the buyer (and their agent), provide peace of mind to the seller (no financing or appraisal contingency) powerful indicator that the most successful proptech companies will be those focused on serving buyers.
What are some Power Buyer companies?
Power Buyers for consumers:
- Knock
- Orchard
- Homeward
- Opendoor
- Compass
- Flyhomes
We expect to see notable new entrants into the Power Buyer consumer space, including Zillow, Redfin, and other traditional brokerage brands.
How do Power Buyers make money?
Power buyers make money through mortgage origination
This is where the mortgage attach rate comes in. Instead of working with a traditional mortgage lender such as Quicken/Rocket Mortgage, Guaranteed Rate, Caliber Home Loans or Mr. Cooper, your mortgage lender is the power buyer and they earn origination fees ("points") and sell the loan to in the secondary mortgage market.
Power buyers make money as a listing agent
So you've made a cash backed offer with a power buyer and your offer has been accepted. The power buyer provides incentives to list your current home with them. Now they are participating in two separate real estate transactions and earning a 6% fee across
Power Buyer Fees
From our research, power buyers do not charge fees unless they need to step up and purchase the house on behalf of the buyer because the buyer's financing has fallen through. In this case, for example, Opendoor-backed offer charges 0.02% per day which is a 7.3% annualized interest rate.
Power Buyer for Investors
Real estate investors can benefit from access to reliable and cheap capital to confidently submit attractive offers. OfferMarket Capital empowers investors to make attractive offers with bridge financing:
- 6.99%
- 2 points
- 90% of purchase price, 100% of rehab
- 30 day close or faster*
(*) Closing timeline is influenced by borrower's speed to complete loan approval checklist. Get pre-qualified with OfferMarket Capital to avoid closing delays.
