In hot housing market, startups offer all cash to help home buyers, but some are skeptical
Lenny Rowell and his family had to act fast.
The contractor for the U.S. Marine Corps and his wife, Brandi, were frantically trying to move from Northern Virginia to Charlotte, North Carolina, in time to enroll their kids in school. Like many households at the height of the pandemic, they wanted to live closer to older loved ones.
But after months of searching, there was no new home yet. With houses selling so quickly in Charlotte, one of the most competitive markets in the country, Rowell relied heavily on their Charlotte-based real estate agent Nelvia Bullock who suggested that the family might have to make offers on several homes she showed them virtually at the same time.
And, to stay in the running against dozens of bidders, Bullock also suggested Rowell come in with their best offer right up front – and consider doing an all-cash deal.
Skeptical, Rowell wanted to move less aggressively, but two homes his family really liked were quickly snatched up and bought with cash. With his Virginia house not yet sold, Bullock then suggested a third-party entity called Ribbon, a startup "power buyer" based in Charlotte and New York City that helps qualified buyers get their new house by providing all-cash offers to sellers.
Rowell got an all-cash bridge loan from Ribbon and paid a 1% transaction fee in order to "jump to the front of the line," he said. As a result, his family was able to buy a 3,400-square-foot, 5-bedroom, 4-bathroom home in a suburb about 40 minutes north of Charlotte.
The new house provides plenty of space for their four kids ranging in ages from 1 to 9.
"I never did anything like this before, but this was a decision driven by the market and time," Rowell said about borrowing from Ribbon. "I took a chance, and it all paid off."
The rise in all-cash home buying comes during a continuing seller's market that exploded during the pandemic. Coming in with all cash may be the best way to bypass or win a bidding war, some experts say. And for some buyers, initially skipping a more traditional mortgage and borrowing from "power buyers" like Ribbon, Orchard, UpEquity, Flyhomes and Better.com, has proven vital during a time when there is a shortage of homes for sale.
How can I buy a house if I don't have enough money?
Currently, all-cash purchases comprise 33% of home sales, compared to about 19% at this time two years ago, according to the National Association of Realtors (NAR).
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Shaival Shah said he co-founded Ribbon with Wei Gan in 2017 to help level the playing field for the average homebuyer and also in part because he remembers his parents having difficulties becoming homeowners after immigrating to the U.S. from India in the 1960s.
"For buyers, speed is of the essence," Shah said. "When a home comes on the market, it can be gone within 24 to 48 hours. ... We're here to help."
With more than $650 million in funding since its inception, including receiving a $150 million infusion from investors last fall, Ribbon assists home buyers with cash offers ranging from $100,000 to $1 million, Shah said. It partners with about 20,000 real estate agents and more than 100 lending partners in states across the South and plans to expand to the Northeast, Midwest and West Coast.
Shah said Ribbon is not a mortgage company, but rather a "power buyer" to help home buyers from all economic backgrounds compete with investors who throw cash at sellers who want a quick sale.
Scott Emidy of Memphis, Tennessee, turned to Ribbon after being outbid on two homes because of quick all-cash offers. Dejected, the software engineer who'd just gotten a job promotion, was ready to renew his apartment lease in December when his real estate agent urged him to try the company.
Soon, Emidy found a renovated house he liked in east Memphis that was move-in ready. He envisioned having a downstairs theater room and a gym in his garage. His agent contacted Ribbon and within hours the startup agreed to make a cash offer on Emidy's behalf for a 1% transaction fee.
The seller accepted the deal, and Emidy, his girlfriend and his dog moved into the 3-bedroom, 2½ bathroom home, a month ago.
"I feel like ... Ribbon made it easier for me to get it," Emidy said.
Baby boomers tap home equity to make all-cash offers
Besides fewer houses for sale, the NAR says restrictive lending standards are also fueling the spike in all-cash purchases as many buyers, especially those who are wealthy, decide to bypass a loan.
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Additionally, aging baby boomers who are downsizing and selling their houses, are able to use decades of equity to pay for their new homes with cash. And a growing number of foreign buyers who don't have a credit history in the U.S. are buying homes outright.
Many prospective and qualified home buyers, however, don't have those resources, said Tamesha Wells, a Houston-based real estate agent who uses Ribbon for her clients.
"In this market, cash is king," said Wells, who works with a lot of first-time home buyers. But not only do many of those buyers not have access to available cash, they are also being outbid by buyers who sometimes offer between $20,000 to $30,000 over the asking price.
"Individuals are having a tough time competing with that option," Wells said.
Wells was introduced to Ribbon about a year ago by a colleague who had success with it. Now, more than half of her clients have used Ribbon to get their homes.
Power buyer companies that compete with Ribbon typically take half of the standard 5% to 6% real estate commission that is based on the sale price, the NAR said. Ribbon's transaction fees can range from 1% to 3%, depending on the service and the state.
Wells educates her clients so they can decide if using Ribbon works for them.
For example, Wells typically prefers using Ribbon's Reserve option for clients who are in the middle of selling one home and buying another.
With Boost, Ribbon works directly with the real estate agent to write a noncontingent cash offer on the pre-approved buyer's new house.
With Reserve, Ribbon will buy the new house on the home owner's behalf in cash and rent the new house to them for up to six months, allowing the owner the time they may need to sell their current home and secure their loan. When the homeowner is ready, Ribbon will sell them the house at the same price they paid for it. And if the buyer doesn't buy the house back, Ribbon will put it back on the market for another buyer.
"Ribbon has been my go-to," Wells said. "It's another tool in the toolbox."
All cash deals? Some aren't buying it
But not all experts are sold on all-cash deals, a tactic that was also popular in the years leading up to the housing bust in 2008, when all-cash bids were up as much as 30% according to the NAR.
Christopher Mayer, the co-director of the Paul Millstein Center for Real Estate at Columbia University, believes the current housing market is "unhealthy" and all-cash home purchases are among the causes, although he understands the rationale behind it.
"If you’re a seller and you have two people who make you the same offer and one is cash, why would you not take the cash offer?" Mayer said.
But a majority of would-be homeowners just don't have that kind of cash flow, and if "the fad" for all-cash offers remains popular, it's going to be a major problem for the housing market, Mayer added.
Over time buyers will bristle at the idea they should pay an intermediary to help them get a house, says Mayer adding that he believes entities like Ribbon are not "a durable business model.''
"The housing market has worked quite well,'' Mayer said. "Why do we need somebody in the middle to complicate the action?"
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Brandon Colberg, a regional executive at MortgageRight, a mortgage lending company with branches across the South, says he's not opposed to all-cash offers. But buyers shouldn't feel that they have to pay a third-party entity to get a house when they have secured a loan and all of their paperwork is in order.
"When a seller hears the word 'mortgage,' they may have issues, but that should not be the case when a buyer has done the work and is working with a professional lending institution," Colberg said. "That mortgage approval should be as good as cash."
Is it worth buying a house outright?
Ribbon CEO Shah agrees that not everyone gets a fair chance to own a home and that there's "a severe housing crisis" in America.
The housing shortage is due to a combination of factors including home price appreciation that is eliminating affordable housing, low housing inventory and investors scooping up houses nationwide, leading to what he fears will make the U.S. "a renter nation."
Still, deciding to use third parties such as Ribbon should be a well-thought-out process, said Katrina Jones, vice president for Racial Equity Strategy & Impact at Fannie Mae, one of two government-sponsored mortgage finance agencies.
"This is where I would rely on the expertise of your realtor because every market is going to be different," Jones said. "Give your realtor an opportunity to be your advocate by getting your financing lined up, whether you are using an all-cash option or not."
And being an advocate is part of the job, said Sharon Wrenn, a realtor based in Burlington, North Carolina, who learned about Ribbon through a presentation in her office.
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"I thought at first, 'What’s the catch? Where’s the hidden fee?' " Wrenn said. But once (Ribbon) explained the process, it’s a no-brainer to explain to my clients."
One of her clients who's married with two kids had been looking for a new home after quickly selling their two-bedroom house in Burlington, North Carolina, in December.
Wrenn told him about Ribbon. He applied, and the family was able to make a cash offer on a 3-bedroom, 1,400-square-foot home in nearby Greensboro. The family is scheduled to close on that house March 24, Wrenn said, just in time for their youngest daughter's first birthday.
Wrenn said she will consider Ribbon for most of her clients.
"I don't want them to be in second place, " Wrenn said. "I want winners. In the end, I'm doing what's best for my clients."
That is Bullock's thinking as well.
"It's not even a matter if you can get a loan,'' Bullock said. "It's how do you get the house because the competition is so fierce out here."
Rowell, who was frantically trying to find a home in Charlotte, remembered Bullock told him bluntly that, "'time is not on your side with this market so hot.' She was right. We had to act."
He was worried he might be hit with some surprise fees, but Bullock and the Ribbon support staff eased all of his concerns.
Now, nearly two years after moving into his home, Rowell said his family is happy and he will consider using Ribbon again if they buy another home as his kids get bigger.
His advice to other home buyers? Do your homework.
"This is a race to the finish," Rowell said. "You need to take advantage of every option you can get."