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Cash is king in today's ultra-competitive housing market, where demand from both investors and owner-occupants far outpaces supply. Sellers would much rather close a deal quickly, without the time and risk of a buyer's loan financing. But most buyers don't have all that cash, and that's where a tech-based start-up is looking to cash in.
Ribbon is launching in one of the hottest markets in the nation right now: Charlotte, North Carolina. The company offers homebuyers and sellers cash backing, just in case the mortgage doesn't come through
"We're introducing the first ever platform that allows buyers, sellers and realtors to participate together to guarantee a home transaction," said Shaival Shah, founder and CEO of Ribbon. "Buyers can now compete effectively on the open market against institutional investors, Wall Street capital and very wealthy individuals."
Ribbon is not a lender, but it does underwrite potential homebuyers, as a lender would, using its own data system to predict whether a buyer will be eligible for a mortgage and for what amount. The start-up will also run an appraisal on the home the buyer wants to bid on, in order to determine whether it meets the sale price. In return, Ribbon charges the buyer 1.95 percent of the purchase price if the mortgage comes through and the sale closes.
Ribbon will only back single-family homes with sale prices between $100,000 and $600,000. It will also buy some townhomes or condos that receive traditional financing and allow for rentals.
If there is a problem with the mortgage, such as the home not appraising high enough, Ribbon buys the home and allows the client to rent until they are able to purchase it. Ribbon will sell the home to the client at the same price it purchased it, "in case you need more time," according to its website.
It offers the consumer the opportunity to rent for up to a year. If the client chooses to rent but not buy, Ribbon charges 2.95 percent of the original purchase price.
The cost can be steep, depending on the purchase price, but it is much like mortgage insurance, charged to borrowers with lower down payments or lower credit scores.
"We end up with a very small class of homes that we end up holding. In those cases we convey those homes to professional investors or landlords so that they can properly manage those homes on behalf of the consumer. That frees up our capital to be able to go help another consumer in the market," said Shah.
Ribbon also partners with real estate agents, who are also losing deals to investors with large stashes of cash. Shah said it already has more than 100 agents testing the program.
"We believe that the Realtor has a part to play with local knowledge and experience with the market," said Yuriy Vaynshteyn, a real estate agent at Engel & Volkers Charlotte, who is working with Ribbon. "It's an advantage to our clients because they're the ones being squeezed out of the market by 'ibuyers' – Zillow, Open Door — and large companies that are basically backed by venture capital money."
So-called ibuyers represent the new breed of financial technology companies that offer to buy and sell your home for you, supposedly taking the stress out of the historically stressful process. Ribbon differs in that it does not set out to buy the home for you. It just aims to back you with cash. Buyers with cash are more likely to win in a bidding war, and some sellers will offer a discount on the price just to get cash.
Ribbon itself is being backed, in part, by capital from NFX, an investment first headed by Pete Flint, who founded Trulia.
"We look at it as a real estate fintech company working to streamline the consumer transaction," Flint said. "Consumers can look at it like insurance."
Flint said he believes the real estate industry really matured on the data side from 2005 to 2015, with companies like Zillow and Trulia. Now it is transforming again.
"My thesis with NFX is the next 10 years is going to be about the transaction," Flint added.
Ribbon is also being backed by Greylock, Bain Capital Ventures and NYCA, according to Shah.
So far, in its first month before officially launching, Ribbon executives say they have $15 million of home transactions in the pipeline and have purchased three homes so far. The risk, of course, is that while the model works well in a very hot housing market like today's, the market won't always be hot, and Ribbon could be left holding the bag — as in holding homes that are not appreciating as quickly as they are now.
"In a market that tends to be declining, sellers have even more concern of a mortgage falling through, so they want certainty," added Shah.
Home prices in Charlotte were up more than 8 percent in April, compared with a year ago, and the number of homes for sale was down nearly 23 percent, according to the Charlotte Regional Realtor Association. Homes are selling on average in just 44 days, five days faster than a year ago.
"I've been in the business about 14 years and I've not seen anything like it," said real estate agent Vaynshteyn. "If a property comes on the market, an affordable house in a good school area, it's normal for us to receive up to a dozen offers in a couple of hours."
On a national level, inventory in March was at the lowest in history, according to the National Association of Realtors, and 1 out of 5 sales was all-cash. Ribbon is only in Charlotte now but expects to expand to other markets in the near future.