Homebuyers in Metro Denver have faced a tough market for years, with listings in short supply and multiple failed bids common on the way to closing tables. This can be especially frustrating when they lose out to cash buyers, whether investors looking to acquire rental properties or implants who are shifting money from more expensive housing markets.
According to the National Association of Realtors, institutional buyers, who range from giant private equity funds to mom-and-pop landlords who use LLCs, broke into one in seven homes sold in Colorado last year. Four out of 10 of those homes were flipped or resold after making improvements, but a similar proportion of homes bought by investors went ahead as rentals.
“When investors buy homes it lowers the number of homes owned by owners in the market. As a result, prices go up,” said Chaval, CEO and co-founder of New York-based Ribbon, the latest “electricity buyer” to enter the Denver market. Shah said.
In markets like Denver where not enough homes are being built to meet demand, prices go up. Owners having more are reduced in price and are forced to rent, which creates a strong financial incentive for investors to convert more homes into rentals.
The main advantage investors, especially larger ones, have over consumers is that they can raise capital and pay cash to buy a home. Offers made using FHA, VA and USDA loans, which are more popular with first-time buyers, tend to fall at the bottom of the pile. Cash is king for a reason, even if a seller may prefer to hand over their home to a young family rather than a private equity fund.
Shah said the only way to break this cycle is to put cash in the hands of consumers and eliminate the contingencies that borrowers usually have to factor in their contracts. This way they can compete better with the investors and start following the most common avenues of wealth accumulation.
“You have a rich uncle in your back pocket,” is how Elena Ramos, a real estate client trainer with Ribbon, describes what “electricity buyers” like ribbons bring to the table.
In Raleigh, NC, a marketer Ramos said he is familiar with, it’s not uncommon for potential buyers to make seven or eight unsuccessful bids before landing a home. This process is not only frustrating and inefficient for the buyers but it is also turning out to help others.
And there is no guarantee that once an offer is accepted, it will finalize it. Shah said that one in three home purchases under the contract are either delayed or terminated, posing a huge cost and source of friction for consumers, real estate agents and lenders.
The traditional home buying system is built on a whole series of dominoes that need to be struck at just the right time for a deal to proceed. A buyer who currently owns a home with a mortgage usually requires an out or contingency clause in the event they cannot sell that home in a timely manner. And often their home buyer needs the same contingency, etc.
While it hasn’t mattered as much over the past two years, given how quickly homes sell after they hit the market, it has historically been a deterrent.
Deals may derail as valuations came in late or under the amount financed, Shah said. It could be that the employer did not get the verification of employment back to the lender in time. Or the buyer may have lost income and is no longer eligible, which can become a major problem if a recession strikes.
Where Ribbon tries to add value, it also simplifies the buying process, Shah said. It will guarantee the purchase price to eligible borrowers within a pre-established limit and provide cash at closing. Depending on the level of security desired, the cost can run from 1% to 1.5% to 2.25% of the purchase price. Some lenders are willing to cover all or a portion of those costs, and if the market softens significantly, more sellers may be willing to cover the costs to ensure a sale.
Buyers can rent the newly purchased home with a ribbon for six months until they sell their previous home and receive financing. Although it is rarely needed, the ribbon will go ahead and honor an offer even if the buyer backs out completely, protecting the other parties involved.
Jordan Bellinger, a real estate agent with Bacon Bellinger Real Estate Group in Plano, Texas, said he didn’t know what to expect when he first tried out Ribbon’s program, when it was offered through Synergy One Lending. was introduced to, a mortgage bank he works with. ,
On her first visit, her buyer submitted an offer on a house at the Ribbon Guaranteed Price, which resulted in a winning bid. But when the appraisal came in for the mortgage, it was about $30,000 under the offer value. The buyer borrowed up to the appraised value and the ribbon cut a check for the difference to the seller, allowing the deal to be done in a timely manner.
Bellinger said he was then sold on the program and has used it on other purchases that have gone more smoothly. Offering cash to the seller without any contingencies, apart from inspection, and allows for an easier and more seamless process free of the risk of appraisal, he said. It also eliminates the headache some buyers face when making two moves in three positions when there is no time between selling and buying.
“These offers are more powerful,” he said.
San Diego-based Synergy One Lending began partnering with Ribbon last summer in Texas to build its private-label Cash Advantage, a lending program it’s bringing to Colorado, one of its more important markets. .
“It’s a strategy that provides the clarity and certainty for some homebuyers to move forward,” said Steve Majerus, CEO of Synergy One Lending.
The sharp increase in interest rates this year has caused mortgage refinancing to dry up. And while Synergy One, due to its focus on mortgages to buy homes, has remained more untouched, the mortgage market has become more competitive. The extent to which it can help its borrowers secure a home, the more loans it will be able to generate.
“We want to be able to follow through on our core function of providing home financing, whether a consumer takes advantage of the various Ribbon products or other products such as Bridge Loans,” he said.
Is the fee worth it?
Ribbon is entering a competitive market where other power buyers such as Orchard, Knock and Homeward are already active. They offer different twists on the model, but the biggest divide is between an open-platform approach that works within an established network of real estate agents and lenders and a direct-to-consumer model that works in-house. Uses real estate agents or lending options.
Orchard, which launched in Metro Denver in the fall of 2019, has a direct-to-consumer model where customers use their own team of real estate agents to buy and sell their homes. Orchard covers the cost of its program through an existing real estate commission, which can run up to 6% upon purchase.
“We’re trying to solve for convenience and simplicity and make buying a home a lot easier,” said Peter Winscott, regional vice president of sales for Orchard in Denver. “A lot of this power buyer model is going to be focused on agents. We can be direct to customers.”
Winscott said other models give power to brokers, not consumers, who often have to pay an additional fee on top of whatever real estate commission they are paying. For those who don’t consider an agent, Orchard offers a better route, he argues.
Buyers need to weigh whether the added cost of going with an electricity buyer is worth it, especially in a market where prices can start to drop and cash buyers become less active. But Shah and others associated with Ribbon said when a deal doesn’t happen or is delayed there are costs that can be much higher than an up-front fee of 1% or 1.5%.
Zillow estimates that someone who bought a typical home in Metro Denver in May faced monthly mortgage payments that were 54% higher than they closed in that purchase a year earlier. Interest rates are over 1% in that time frame, and that additional cost can add up to several years until interest rates start falling again.
According to the S&P CoreLogic Case-Shiller Home Price Index, home prices in Metro Denver have risen at an annualized pace of more than 20% for 13 straight months. A few months’ delay in securing the winning bid on the purchase of the home would have cost the buyer much more than the ribbon and other power buyers’ charges.
Mike Delpreet, Real Estate Technology Strategist and Scholar-in-Residence at CU Boulder, said, “Being super specific on the differences misses the big story, which is the beauty of power buyer solutions and how they can help consumers with competitive offers. Huh.”
Between January and May of 2019, 10% of winning bids in Metro Denver were in cash, said Orchard’s director of communications Mandy Menaker. During the same period this year, 16% of the winning bids were in cash.
As more buyers show up with cash and minimal contingencies, the more likely the outlook will be what sellers expect and want to happen. If cash offers become common and preferred, it could lead to serious losses for buyers going the traditional route.
DelPrete, who first coined the term “power buyer,” said he can’t predict whether the model will become the norm, but it’s the closest he’s seen to any recent real estate innovation winning mainstream acceptance. Is.
“It’s a no brainer for buyers and sellers,” he said.
And while a cash offer may not prove valuable in a soft market where less competition means only one or two offers appear, sellers will place a higher premium on the certainty of closing. Historically, cash offers have resulted in buyers paying a lower price than financed offers, on average about 10%, Ramos said.
Those discounts may come back, but even if they don’t, Delprete said the appeal of “buy before you sell” will remain strong.