Homebuyers in metro Denver have faced a tough market for years, with listings in short supply and multiple failed bids common on the path to the closing table. It can be especially frustrating when they lose out to cash buyers, whether investors looking to acquire rental properties or transplants who are shifting money from more costly housing markets.
Institutional buyers, who range from giant private equity funds to mom-and-pop landlords using an LLC, snapped up about one in seven of the homes sold in Colorado last year, according to the National Association of Realtors. Just over four in 10 of those homes were flipped or resold after making improvements, but a similar share of investor-purchased homes went forward as rentals.
“When investors buy homes it decreases owner-occupied homes in the market. As a result, prices go up,” said Shaival Shah, CEO and co-founder of New York-based Ribbon, the latest “power buyer” to enter the Denver market.
In markets like Denver where not enough homes are being built to keep up with demand, prices escalate. More would-be owners are priced out and forced to rent, which creates a stronger financial incentive for investors to convert more homes into rentals.
The key advantage investors, especially the larger ones, have over consumers is that they can raise capital and pay cash to purchase a home. Offers made using FHA, VA and USDA loans, which are more popular with first-time buyers, tend to fall to the bottom of the pile. Cash is king for a reason, even if a seller would prefer to hand over their home to a young family rather than a private equity fund.
Shah said the only way to break the cycle is to put cash into the hands of consumers and eliminate contingencies that borrowers normally have to include in their contracts. That way they can better compete with investors and start moving down the most common path to wealth accumulation.
“You have a rich uncle in your back pocket,” is how Elena Ramos, a real estate client trainer with Ribbon in Centennial, describes what “power buyers” like Ribbon bring to the table.
In Raleigh, N.C., a market Ramos said she is familiar with, it isn’t uncommon for potential buyers to make seven or eight unsuccessful bids before landing a home. That process is not only frustrating and inefficient for buyers but it is also draining for others helping them out.
And there is no guarantee that once an offer is accepted that it will make it to the finish line. About one in three home purchases under contract either get delayed or terminated, an enormous cost and source of friction for consumers, real estate agents and lenders alike, Shah said.
The traditional home purchase system is built on a whole chain of dominoes that need to fall at the right time for a deal to move forward. A buyer who currently owns a home with a mortgage typically needs an out or contingency clause in the event they can’t sell that home in time. And often the buyer of their home needs that same contingency, and so on and so on.
While that hasn’t mattered as much in the past two years given how quickly homes sell after hitting the market, it has historically been an obstacle.
Deals can derail because the appraisal came in late or under the amount being financed, Shah said. It could be that the employer didn’t get the verification of employment back to the lender in time. Or maybe the buyer lost income and no longer qualifies, which could become a bigger problem if a recession does hit.
Where Ribbon tries to add value is by smoothing out the purchase process, Shah said. It will guarantee a purchase price within a pre-established range to qualified borrowers and provides the amount in cash at closing. Depending on the level of protection desired, costs 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 make sure a sale goes through.
Buyers can rent the newly purchased home back from Ribbon for up to six months until they sell their prior home and obtain financing. While it is rarely required, Ribbon will step forward and honor an offer even if the buyer backs out completely, protecting the other parties involved.
Jordan Bellinger, a real estate agent with the 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, a mortgage bank he works with.
On his first go-around, his buyer presented an offer on a home at the value Ribbon guaranteed, resulting in a winning bid. But when the appraisal for the mortgage came in, it was about $30,000 under the offer price. The buyer borrowed up to the appraised value and Ribbon cut a check for the difference to the seller, allowing the deal to go through on time.
Bellinger said he was sold on the program after that and has used it on other purchases that have gone more smoothly. Offering a seller cash without contingencies, apart from the inspection, and free of appraisal risk allows for a smoother and more seamless process, he said. It also eliminates the headache some buyers face of having to make two moves across three locations when the timing between a sale and purchase doesn’t line up.
“These offers are more powerful,” he said.
Synergy One Lending, based in San Diego, began partnering with Ribbon last summer in Texas to create its private-label CASH Advantage, a lending program it is bringing to Colorado, one of its more important markets.
“This is a strategy that provides clarity and certainty for some homebuyers, giving them a leg up,” said Steve Majerus, CEO of Synergy One Lending.
The sharp rise in interest rates this year has caused mortgage refinancings to dry up. And while Synergy One, because of its focus on mortgages to purchase homes, has been more insulated, the mortgage market has become more competitive. To the degree it can help its borrowers secure a home, the more loans it will be able to generate.
“We do want to be able to follow through on our main function of providing home financing whether a consumer takes advantage of the various Ribbon products or other products like a bridge loan,” he said.
Are the fees worth it?
Ribbon is entering a competitive market, one where other power buyers like 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 the established network of real estate agents and lenders and a direct-to-consumer model that uses in-house 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 its team of real estate agents for their home purchases and sales. Orchard covers the cost of its program through existing real estate commissions, which can run up to 6% on a purchase.
“We are trying to solve for convenience and simplicity and make buying a home a lot easier,” said Peter Winscott, Orchard’s regional vice president of sales in Denver. “A lot of these power buyer models are going to be focused on agents. We can be direct to customers.”
Winscott said other models give brokers the power, not consumers, who often have to pay an added fee on top of whatever real estate commissions they are paying. For those not beholden to an agent, Orchard offers a better route, he argues.
Buyers need to weigh whether the added costs of going with a power buyer are worth it, especially in a market where prices might start falling and cash buyers become less active. But Shah and others involved with Ribbon said there are costs when a deal doesn’t get done or is delayed that can far surpass the up-front fee of 1% or 1.5%.
Zillow estimates that someone who purchased a typical home in metro Denver in May faced a monthly mortgage payment 54% higher than if they had locked in that purchase a year earlier. Interest rates are more than 1% higher in that time frame, and that added cost could be stretched out over multiple years until interest rates start falling again.
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Home prices in metro Denver have risen at an annual pace of more than 20% for 13 months straight, according to S&P CoreLogic Case-Shiller Home Price Index. Delaying even a couple of months in securing a winning bid on a home purchase would have cost a buyer far more than what Ribbon and other power buyers charge.
“Getting super specific on the differences misses the larger story, which is the beauty of power buyer solutions and how they can help consumers with competitive offers,” said Mike DelPrete, a real estate technology strategist and scholar-in-residence at CU Boulder.
Between January and May of 2019, 10% of winning bids in metro Denver were in cash, said Mandy Menaker, director of communications for Orchard. During the same period this year, 16% of winning bids were in cash.
As more buyers show up with cash and minimal contingencies, the more likely it is that approach will become what sellers expect and want to happen. If cash offers become common and preferred, that could severely disadvantage buyers going the traditional route.
DelPrete, who first coined the term “power buyer,” said he can’t predict if the model will become the norm, but it is the closest he has seen any recent real estate innovation come to winning mainstream acceptance.
“It’s a no-brainer for buyers and sellers,” he said.
And while offering cash may not prove as valuable in a softer market where less competition means only one or two offers show up, sellers will likely place a greater premium on the certainty of closing. Historically, cash offers resulted in buyers paying a lower price than financed offers, about 10% on average, Ramos said.
Those discounts may return, but even if they don’t, DelPrete said the appeal of “buy before you sell” will remain strong.
