An emerging model for homebuying
Startups step in with cash for homeowners to help avoid purchase delays, enhance offers
“A third of the time, when you’re borrowing from a big bank, there’s a delay in closing.”
David Atkins, an agent with Sotheby’s International Realty
More than half a dozen offers came in for the pink-and-orange bungalow on Peddie Street in the Heights, many of them in cash, above asking price.
Mike Malet’s family fell in love with the home, which sported a mural by Houston street artist ACK! But they were in the position of many homeowners hoping to trade up: Most of their money was tied up in their home, meaning they’d have to make what’s known as a contingent offer — an amount they could pay if they sold their current home in time.
“We would not have accepted a contingent offer,” said Carol Rowley, the real estate agent representing the seller. “There were too many other good offers.”
So Malet went online and filled out a form for Homeward, an Austinbased real estate company. The form asked questions about the home that he owned and how much equity he had in it. Within the hour, Homeward put a cash offer on the pink-andorange bungalow on the Malets’ behalf. That cash offer won the home.
For as long as people have been buying and selling homes, there have been those who cannot afford to buy their next house until they’ve sold the one they’re currently in.
“It’s a real catch-22 in the real estate business,” said Ryan Gorman, chief executive of NRT, one of the largest brokerage companies in the nation. “A very significant percentage of mortgage applications are denied because the sellers frankly can’t afford to carry two homes… It’s sort of a minor miracle that as many homes close as they do today.”
Capital influx
Investors are now betting billions that homeowners will pay to avoid the time-old inconveniences of selling a home. Venture capitalists poured $9.6 billion into real estate companies in 2018, a large sum that was swiftly surpassed by a whopping $14 billion invested during the first six months of 2019 alone, according to the real estate research company CREtech.
With the influx of capital, companies such as Homeward have begun
offering capital-intensive solutions to old problems. Can’t afford your next home because you haven’t sold the current? For a fee, any one of a host of companies will buy it for you.
Homeward, which launched in Houston in October, is among them. It has raised $25 million to buy people’s future homes and fund operations. It holds the houses until clients sell their old ones, freeing up the funds to purchase buy the new homes themselves. As a safety net, Homeward agrees beforehand to buy the old home at a preset price if it does not sell within six months.
Clients pay market-rate rent on the new home during the period Homeward owns it; when the homeowner ultimately buys it, it’s at a 1.9 percent markup to the price Homeward paid.
Knock, an New York and San Francisco-based company with a similar model, has raised $600 million; Ribbon, of New York, has raised $225 million. And Better.com, a mortgage startup that has raised $254 million, has partnered with Compass, a brokerage funded by the WeWork backer SoftBank, to offer short-term loans covering the cost of a new home until the owners can secure a mortgage.
Leveling the playing field
If the model takes off, the market could see an increase in cash offers, putting people whose offers are contingent selling a home or obtaining a mortgage at a disadvantage. Already, more homes are bought for cash than before the housing crash of 2008; 27 percent of homes in 2018 were bought with a cash offer, compared to 20 percent in 2006, according to the real estate data company ATTOM. Many of those cash offers have been driven by a rise in the number of investors buying singlefamily homes.
Courtney Lott, a real estate agent with Gary Greene, said she’s seen clients lose out on homes that were snapped up by investors with cash offers. “That is a huge issue out there for first-time homebuyers,” many of whom have been able to cobble together enough only for a down payment, she said.
While programs like Homeward’s have the potential to increase the number of cash offers competing with first-time homebuyers, they could also give people with equity in their home an edge when it comes to homes on which investors are bidding.
“They will be coming to the table with a cash offer,” Lott said. “So even if there are other offers on the table, they will be able to negotiate very well.”
For Malet, the nearly 2 percent bump in price for his new home was worth it. “I firmly believe that had (the offer) not been cash, had it not been written up so quickly, we would not have had this place,” he said.
Malet was one of Homeward’s first Houston customers in part because he is a real estate agent at the Heyl Group, a brokerage run by Homeward founder Tim Heyl.
Moving quickly
Other real estate agents were skeptical. David Atkins, an agent with Sotheby’s International Realty, said he’s gotten cold calls from other companies offering to buy a homeowner’s next house in cash. Like Homeward, they say they’ll buy the former home if it does not sell within a set number of days. The thing to pay attention to, Atkins said, is how much lower that safety net offer is than the market value of the home.
“They’re doing it to get their foot in the door to make it seem guaranteed,” he said. “But the companies that I know that do something similar are agreeing to buy homes at a ridiculously low rate.”
Homeward said its safety net offer is usually 88 percent to 95 percent of market value. “That would be pretty darn good if we had sat on the market,” Malet said. In September, homes took 55 days, on average, to sell in Houston.
Atkins explained that a cash offer can often be more appealing than an offer financed with a mortgage, because mortgage applications can run into unexpected complications and delays.
“A third of the time, when you’re borrowing from a big bank, there’s a delay in closing,” Atkins said. In addition, banks will not lend more than what an appraiser says a home is worth. If a home is in a neighborhood with quickly appreciating home values, banks may not be able to lend as much as people are offering on homes or may require greater down payments. In such situations, Atkins said, “A cash offer would be superior.”
Rowley, who represented the seller of the pink-and-orange bungalow, said Malet’s offer won for two reasons: because it was not contingent and because it was flexible. When her seller wanted to stay in the home for a few days before moving out, Homeward was happy to rent it to her.
Plus, she added, a cash offer
“is always appealing.”