Startups Front Cash to Homebuyers in Bidding Wars

(Bloomberg Businessweek) -- The most active real estate broker in the Pacific Northwest this year is a former Microsoft Corp. program manager who used to work on Bing. Tushar Garg isn’t the typical salesman walking would-be buyers through carefully staged houses. He’s co-founder of FlyHomes Inc., a three-year-old real estate brokerage in Seattle that promises to turn its clients into cash buyers.

The idea is relatively simple: A house hunter hires FlyHomes as her broker. When she’s ready to bid on a home, she gives the startup a deposit of 5 percent of the bid price. FlyHomes then makes an all-cash offer for the property, using its line of credit from a bank. After the deal is done, it sells the house to the homebuyer once she’s gotten a mortgage. In return, the company earns the typical 3 percent commission from the original seller.

In tight housing markets, this pitch can be seductive. Stories of house hunters “losing” several homes before getting a bid accepted are legion in greater Seattle, where prices have shot up faster than any other big metro area in the country for 20 months. Cash has long appealed to sellers, because it gives them certainty and puts money in their pocket more quickly. FlyHomes says more than half its offers are accepted.

In U.S. cities from San Jose to Charlotte, a cutthroat mentality has set in as a shortage of inventory pushes buyers to adopt ever more aggressive strategies. “At first, it was love letters” to sellers declaring how much the would-be buyer adored the property, says Aaron Terrazas, senior economist at Zillow. That was followed by buyers waiving their right to back out of a deal if a home inspection turned up problems or if their financing fell through. People also shortened the time in which they were willing to close. “In these markets,” Terrazas says, “buyers are doing whatever they can.”

Seattle is adding thousands of high-paying jobs a year as Amazon.com Inc. and other tech companies expand their footprints in town. Yet the supply of single-family homes hasn’t kept pace with demand. Homes went into contract on average in just seven days in Seattle in May, according to brokerage Redfin Corp. Things move even faster in Denver. “The inventory problem is not going away overnight,” says Stephen Lane, co-founder and chief executive officer of FlyHomes. “Either we can ignore it, or we can provide a level playing field.”

After the Great Recession, the proportion of homes bought with cash climbed steeply, in large part because deep-pocketed institutional investors began snapping up single-family homes they planned to rent. While that activity has cooled, cash buying is still a major part of the market. Through March of this year, it accounted for about 30 percent of transactions tracked by Redfin. That’s compared with less than 20 percent during the height of the last housing boom.

FlyHomes’ ability to turn clients into cash buyers exploits a quirk in the capital markets that’s arisen since the housing meltdown: Consumers are being put through more rigorous standards when they apply for a mortgage. Meanwhile, it’s comparatively easy for companies—even those with new, barely tested ideas—to get buckets of money from banks, venture capitalists, and other institutional investors.

The VCs at Andreessen Horowitz led a $17 million funding round for FlyHomes in May. Two other companies—Ribbon and Knock—are pursuing similar models elsewhere in the U.S. Meanwhile, startups Opendoor and Offerpad LLC have raised imposing war chests to buy homes in cash and list them for sale. These companies charge a fee in return for the convenience of a fast transaction, but have nonetheless proved popular. Opendoor, which has raised $645 million in equity since launching in 2014, is buying homes at a rate of $2.5 billion a year across 10 metro areas. Zillow and Redfin are experimenting with similar models.

In addition to bringing its financial resources to the table, FlyHomes is trying to make homebuying more efficient by dividing up the various parts of the process and hiring specialists for each step, from negotiators to people who give home tours, Lane says. Garg, the co-founder, has often stepped in at the end and put his name on the sale to the buyer, which is why he catapulted to the top of the broker list in the Northwest. The company also offers its services in the Bay Area, Boston, and Chicago and plans to expand to Portland, Ore., this summer.

Redfin CEO Glenn Kelman says these new ventures are part of a shift in how homes will be bought and sold. “There is just money coming out of every possible part of the world, and it isn’t going toward the consumer,” he says. “It’s going toward real estate businesses who charge the consumer for access to that money.”

Then again, buying lots of homes is risky, even with someone else’s money. “To me a lot of these business models are highly dependent on a hot market where it’s easy to sell,” says Daren Blomquist, senior vice president at Attom Data Solutions. In a less frothy market, buyers “wouldn’t need someone to help submit a cash offer on one end. On the other side of the equation, if you did end up with inventory, it would be harder to unload it.”

Even if home values fall, Lane says, FlyHomes has a buffer for losses because of the deposit it requires and the fee it charges. Nor is it holding inventory for long. The company hopes that if prices cool, customers will appreciate the ways it tries to make buying easier—not just the ability to flash cash.

©2018 Bloomberg L.P.