Hello, LOs!
Not much can compete with cash, when sellers have bushels of offers to choose from.
A pack of new startups has taken notice, reports Alex Roha. With the help of tons of cash from investors like Blackstone, LiveOak Venture Partners, Y Combinator and DN Capital, could these startups eventually replace the mortgage?
First, let's take a look at their existing business models.
Mortgage startup Accept.inc requires borrowers to go through a pre-approval process (this sounds vaguely like the mortgage process to me), and then it makes a cash offer on a home on behalf of the buyer once it does a valuation on the home. If it's the winning offer, Accept.inc will purchase the home and "reserve" it, while the borrower gets their finances in order.
Then, when the borrower is able to buy the home (with a mortgage), Accept.inc sells the home back to the buyer at the same price it was purchased for, though Accept.inc will also charge origination fees and interest. This is how Accept.inc makes money.
The all-cash contract between the startup, which buys the house, and the homebuyer, who buys the house later, can have an inspection contingency (like a mortgage), perhaps, to avoid some potential pitfalls of buying a house sight-unseen.
Other startups that offer similar services, like Ribbon, have said they make their money from sellers, who pay them a 1.95% fee for the certainty that Ribbon can provide with its all-cash offers.
I'm not sure how that would go over in this market. I'm guessing most sellers would not pay a premium for a cash offer, when they might have a cash offer anyway.
Flyhomes, a five year-old real estate startup which just nabbed another $150 million in funding, makes its money from brokerage fees. Homebuyers pay Flyhomes to hold onto the home while they secure a mortgage, but Flyhomes also gives them a commission rebate which they say often zeroes out those charges.
The cash which investors are pitching into all-cash buyer startups seems to reflect the current impossible market. These startups argue it's not enough to be mortgage ready. Homebuyers should also be prepared to compete with the speed of an all-cash offer.
In all of these scenarios, however, the homebuyer also needs a mortgage — unless they had an expected windfall, and needed this startup to bridge the gap.
Have you worked with borrowers using one of these all-cash offer startups? Does it raise any eyebrows with lenders? Send me a note: gkromrei@housingwire.com
Georgia Kromrei
Senior Mortgage Reporter, HousingWire
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