Anyone who has sold a home knows there’s a fair amount of uncertainty in the transaction between receiving an offer and actually closing the sale, which can take as long as 90 days. A buyer’s mortgage application could unexpectedly be denied, or the buyer could walk away from the deal at the last minute, forcing the seller to start the whole process over again by putting the home back on the market.
It’s no wonder then that when armed with an all-cash offer on a home, the offer is 97 percent more likely to be accepted, according to Redfin. Cash offers remove much of the time and uncertainty associated with obtaining a mortgage for the transaction, allowing sellers to move in short order and on coordinated timelines.
With one economist calling this spring “the most competitive housing market in recorded history,” all-cash offers have become a trump card for the wealthy in home-bidding wars that have erupted all over the country. But Ribbon, a startup that launched last week, wants to give the cash-offer advantage to everyone.
Backed by venture capital firms NFX, Bain Capital, Greylock, and NYCA, the startup launched in Charlotte, North Carolina, and represents both home buyers and sellers, and, in short, provides a guaranteed offer to facilitate all-cash home transactions, in exchange for a 1.95 percent fee.
“We’re taking that single value proposition that a lot of these institutions and iBuyers have, which is access to capital, and we’re democratizing that capital for the benefit of consumers instead of using it for corporate profits,” said Ribbon CEO Shaival Shah. “Cash discounts that consumers earn from our program flow directly back to the consumer. Based on our early deal volume, customers are seeing an average of 5 percent savings to the purchase price by using Ribbon.”
When representing a buyer, Ribbon backs the buyer so it can make an all-cash offer on a home, and the buyer secures financing for the home with a traditional mortgage lender either before or after closing the deal and moving in. While the company is still experimenting with representing home sellers, the concept is similar; Ribbon turns whatever offer the seller accepts into a cash offer by providing the money to facilitate the transaction, although the seller can choose to complete the transaction without Ribbon if they so desire.
This concept streamlines the transaction so it can close in a week instead of months, and negates the cash advantage deep-pocketed folks have in bidding wars since any buyer or seller who qualifies with Ribbon can access the capital necessary to make it a cash transaction.
Prospective home buyers apply with Ribbon by filling out an online application, a process the company says takes 10 minutes. In 24 hours, the company gives a buyer the maximum dollar amount they’re willing to back in an offer. Ribbon also appraises the values on homes the buyer is interested in to find a match. Because Ribbon doesn’t originate mortgages, a lot of their assessments are about making sure buyers can secure financing through mortgage products available on the market.
While the company is only operating in Charlotte at the moment, the concept is a potentially potent one. With spring and summer being the prime homebuying season, reports of intense bidding wars have spiked. Some homes get multiple offers before they even officially list on the market.
“Even though all-cash share of sales has come down significantly [since the foreclosure crisis], I would consider it elevated,” said Daren Blomquist of ATTOM Data Solutions. “It’s a competitive market and cash buyers are sitting pretty in it.”
The intense competition has a way of reinforcing itself, as existing homeowners who want to downsize or upgrade shy away from selling their current home for fear of not being able to land the type of house they want to move in to. Since the housing bust in 2008, the average time a homeowner stays in a home has doubled from a little over four years to eight years.
Cash offers tend to win these bidding wars. The national percentage of homes sold to cash buyers was about 30 percent in the first quarter of 2018. That’s lower than the peak of 44 percent set in 2011 when homes were sold in bulk out of foreclosure to investors, but higher than pre-crisis levels, which hovered just below 20 percent in any given quarter.
The prevalence of cash sales varies across price ranges. For affordable, starter homes that tend to attract first-time buyers, cash offers are much more common, and then they taper off as homes get more expensive. However, cash offers jump up again for the most expensive homes, a result of sales to high wealth individuals or foreign investors.
Trends vary across markets as well. In Florida, a number of cities saw cash sales well north of 40 percent in the first quarter of 2018, according to Blomquist. More affordable markets such as Mobile, Alabama; Toledo, Ohio; and Oklahoma City also see high levels of cash sales.
The rise of big data and technology platforms has already changed the way people list and market their homes, with companies such as Redfin, Zillow, and Trulia leading the way. But the advantage of a cash offer is symptomatic of a home buying process that hasn’t incorporated any major innovations for some time. That could be changing. Pete Flint, Trulia’s founder and now a partner at NFX, recently told CNBC that the next wave of real estate tech innovations will be about real estate transactions.
Other startups offer services aimed at streamlining transactions. Opendoor and OfferPad, dubbed “iBuyers,” will buy your house in cash at a price determined by their algorithm, and then sell it on the open market after you’ve moved out. Zillow (Instant Offers) and Redfin (Now) work similarly. Another startup, Knock, buys a customer’s new home in cash, similar to Ribbon, and then also sells their old home on the open market.
Because all the offers in a Ribbon transaction are produced by bids on the open market, it allows a home seller to get the best price on their home. People who sell their homes to iBuyers could potentially be leaving money on the table because the offers from iBuyers are a “fair market price” produced by an algorithm; the price they fetch on the open market could end up being higher. Meanwhile, Opendoor says the vast majority of its revenue is a transaction fee, not from flipping the home at a higher price.
The rush of venture capital into homebuying startups shows that FinTech will likely play a large role in transforming the real estate transaction over the next decade. The fact that a lot of these startups either just launched or have been operating only a few years means the outcome of this transformation is still unclear, and the companies that best capitalize on the opportunity may not even exist yet.
“The real estate transaction today is unpredictable by nature because so much has to happen after an offer is put in and an offer has been accepted,” Shah said. “What we have set out to do is transform the real estate transaction.”