A year ago, Shaival Shah’s principal concern was keeping up with the demand for his company’s alternative financing products.
“When interest rates were low and supply was low, you were seeing a lot of multiple offer situations, and our first-time homebuyer product, Ribbon Boost, was all the craze in the market,” said Shah, the founder and CEO of “power buyer” Ribbon. “We were to the point where we had gone from 0% to then 4-5% market share in some of the markets we serve almost overnight. But the low interest rates were masking a real underlying crisis, which is affordability and we saw that this summer when interest rates started to shift.”
From January 2021 to June 2022, Ribbon grew its total transaction volume “30x,” Shah said. But as mortgage rates have climbed dramatically and bidding wars have largely vanished, the company’s products no longer hold as much appeal to buyers whose financing costs have exploded over the last year.
The market has changed dramatically in recent months: high inflation has persisted, interest rates are rising dramatically, and home sales have fallen from historic highs. Coupled with affordability concerns, fewer buyers are seeking homes.
Tim Heyl, CEO of Homeward
The drop in homebuyer demand resulted in Ribbon laying off 136 employees in late July.
“As a leadership team, we have tried to delay this decision for as long as possible, but we are not immune to what we have been seeing elsewhere in the market,” Shah wrote in a statement informing employees of the cuts. “The market conditions exposed areas that need improvement across our product and team to evolve with the changing consumer. I am ultimately responsible for all those decisions and this decision, as a result. The next phase of Ribbon will be more agile. We needed to define the team and systems to make this plan happen with operational excellence for the next several years.”
Ribbon, which has raised $905 million in funding since 2017, is hardly alone in laying off workers and reorganizing its business. Hundreds of mortgage companies over the last year have cut their workforces or been forced to shutter, and real estate brokerages too have been trimming the ranks of late.
But this housing market presents a particularly vexing problem for the crop of venture-backed alternative financing companies that have proliferated in recent years. Fewer buyers benefit from their flagship cash offer products in this environment, the companies lack brand recognition among consumers they need to reach, and the cash fronted by VCs is, well, finite. Very finite.
After a market shift, one or two of the best run and best capitalized companies in the space will survive.
Steve Murray, founder of RealTrends Consulting
Flyhomes, which offers both a cash offer product and a buy-before-you-sell product in addition to a full-service brokerage, laid off roughly 200 workers in mid-July. The Austin-based firm Homeward, which achieved a valuation of over $800 million in May 2021, also made cuts, reducing its staff by 20% in early August. Other well-funded players such as Knock and Orchard have also made substantial cuts in the face of market headwinds.
RealTrends Consulting co-founder Steve Murray is not surprised that many of these firms have struggled as the market has softened.
“When you have the kind of market we had in 2020 and 2021, which was highlighted by extreme scarcity of inventory and rapidly advancing prices, if some entity can step into the middle of that and provide instant liquidity for either someone who needs to sell before they can buy or a first-time buyer that can’t compete against all cash offers as they have contingencies on financing — the companies that can help with that should do very will in that kind of market,” Murray said. “They are filing a market need because of the market imbalance between sellers and buyers. It goes without saying, therefore, that if you ease that market pressure by bringing inventory more into balance with actual market demand, then the demand for those people who provide liquidity would go down.”
For Murray, firms like Flyhomes, Ribbon and Homeward need to improve their brand recognition and expand their partnerships with other real estate industry entities to secure their futures.
“After a market shift, one or two of the best run and best capitalized companies in the space will survive,” Murray said. “What Opendoor did with Zillow, in my view, is they decided to secure their future as one of the survivors. So now if I am one of the others, like Orchard or Ribbon, I go see if I can team up with Realtor.com or one of the large national real estate organizations or a regional brokerage or a large real estate team. They will need marriages of people with these services because there needs to be a way for the firms to distribute their products and the best way is through brokerages and agents.”
Tim Heyl, the CEO of Homeward, said his firm is doing just that – partnering with real estate agents and teams to get closer to the transaction.
I am convinced that eventually every offer will be a cash offer because it is like having a credit card for real estate. So many things can go wrong with financing and timing things, that it just streamlines the process.
Tushar Garg, CEO of Flyhomes
“What we have learned is that there are a lot of forward-looking agents and teams that want to be on the cutting edge of solving clients’ homebuying struggles, whether they need a cash offer to be competitive or need to sell their current home before they can afford to buy a new one. Agents know that if they can solve these problems they go in ahead of the game when they go on a buyer consultation or listing appointment,” Heyl said.
Homeward has opened its buy-before-you-sell product to any agent or team in the markets it serves (Heyl said it’s their bread-and-butter product). And while any agent can access its cash offer products, the firms says that agents at brokerages that have partnered with Homeward have access to deeper benefits and the chance to develop new products with the firm.
Ribbon, meanwhile, partners with real estate agents to offer its products to their clients, as well as with local mortgage lenders in its various markets.
“When a consumer is qualified for a mortgage, they can automatically be upgraded to an all-cash offer, strengthening their offer,” Shah said.
Shah also pointed to its partnership with listing agents, largely through a program called Ribbon Reserve. Through the program, Ribbon purchases the home on behalf of the buyer, providing up to 12 months to secure financing. Ribbon leases the home to the buyer, then sells back with a guaranteed home price lock for 12 months. This gives existing homeowners who are buying a new property the time needed to sell their current home before taking out a second mortgage.
Shah, who is projecting growth to slow from 10x to 3x in 2022, sees the wide variety of partnerships at Ribbon as integral to the future success of the firm.
“We are an open platform, and our partners are the ones who introduce us to the market,” Shah said. “Unlike other companies in the space, any real estate agent from any firm can work with us. With a lot of other companies in the space, all or some of their business competes with the existing ecosystem. For example, they may have an in-house mortgage company or real estate agents, and this in turn creates friction in the market because they become competitive with those already in the market.”
The product mix was 80-90% first-time home buyers, but in the last six-to-eight weeks that has shifted to 50% existing homeowners using our buy-before-you-sell product and 50% first-time buyers using our cash offer product. We have also seen the number of transactions slow down on a year-over-year basis over the past few weeks, similar to the overall market.
Shaival Shah, CEO of Ribbon
As a full-service brokerage that also offers buy-before-you-sell and cash offer products, Flyhomes sees things a bit differently. Tushar Garg says the future success of the firm, which notched an $800 million valuation in June 2021, is guaranteed by the wide variety of services Flyhomes offers, which includes an in-house brokerage, title firm, and mortgage lender.
“We put people at the heart of the transaction,” Garg said. “It is one of the largest transactions in someone’s life and we wanted to make it incredible for them, making each part of it better. We are not just a brokerage, or a mortgage company or a title firm. We are a consumer company helping customers be able to buy their homes the best way possible.”
Garg says that the fact that his firm also offers buy-before-you-sell and cash offer options as just a bonus to the other offerings of his firm. In addition, although any agent is able to utilize Flyhomes’ financing products through its Sailbridge program, by owning its own brokerage, Flyhomes is able to provide these services at no extra cost to clients using a Flyhomes agent, something other firms within the space are unable to do.
“The homebuying process is very stressful because everything has to come together in a choreographed way and some buyers might have to sell before they can buy or they might be waiting on financing,” Garg said. “I am convinced that eventually every offer will be a cash offer because it is like having a credit card for real estate. So many things can go wrong with financing and timing things, that it just streamlines the process.”
Like Garg, Heyl believes that while times might be tough for Homeward and other alternative finance companies in the housing space, there will always be a market for his company’s products.
“People frequently need the equity from their home in order to buy something new,” Heyl said. “Even when the market was slower and people didn’t have to worry about finding some place to go if their home sold in a day, they still needed to have the equity from their current home in order to make an offer on a new home.”