November 29, 2023

Listings are few and competition is fierce, particularly in her $350,000 to $400,000 price range and in the popular Inner Loop neighborhoods where she wants to buy. She’s heard stories of first-time homebuyers getting outbid on properties time and time again, often losing out to buyers making all-cash offers.

To increase her chances in the bidding wars, Collazo is considering a new program that would allow her to forego a financing contingency in her contract and make an all-cash offer — a proposition that would make her bid more attractive to sellers. The program, called House X Lab, is first launching in Houston, and soon will expand into other markets across 11 states.

The program was formed by a unique partnership between the New York fintech company Ribbon, Austin-based real estate brokerage House X World, and the Georgia mortgage company HomeStar. They also are working with Houston businessman and philanthropist Jim “Mattress Mack” McIngvale.

First-time homebuyers shut out

Similar initiatives are underway across the country as first-time homebuyers lose ground to high prices, rising mortgage rates and well-heeled buyers and investors who can pay in cash. The percentage of homebuyers making all cash offers accounted for 25 percent of home sales in February, up 3 percentage points over in the past year, while the share of sales going to first-time homebuyers fell by 2 percentage points, to 29 percent, according to the National Association of Realtors. Historically first-time buyers accounted for up 40 percent of the market.

Generally, cash offers are more attractive to home sellers because they don’t have to worry about financing falling through prior to closing. But cash offers are usually out of reach for first-time homebuyers, disadvantaging them in bidding wars.

“First- time homebuyers are getting just beat up basically because they’ll find a house they can afford and they’ll put an offer in and there’s already five or more offers on the same house already,” said Lawrence Dean, senior vice president in Houston for Zonda, a housing data firm.

Innovative models

Programs to help first-time homebuyers compete with all-cash offers essentially act as insurance, allowing a buyer to waive a financing contingency in the contract. The expectation is buyers will get a mortgage, but the programs will come up with money if the financing falls through or gets delayed before closing. Buyers typically must be pre-approved for the loan to qualify for all-cash programs.

Doug Duncan, chief economist at Fannie Mae, said House X Lab is one of several new innovative models designed to give buyers a leg up. Ribbon, for example, provides the guarantee to turn a conventional offer into a cash offer for a 1 percent fee. Ribbon will also buy a home sought by a buyer and sell it back to them later at a locked-in price for a fee of roughly 2 to o 2.75 percent.

Any buyer can use Ribbon services, but first-time homebuyers have a particular need for them, said the startup’s co-founder Shaival Shah. The inability of new buyers to break into the real estate market can have long-term consequences for their wealth generation, he noted.

“Home ownership is a multiple-layer journey,” Shah said. “If that starter home is not available, then there is no shot you’re going to be able to move up to that second home or that home that you’re going to retire in because you never had the ability to appreciate in that [first] home.”

Shah’s company has raised $900 million from investment firms Greylock Partners, based in Silicon Valley and Burlington, Mass.. Bain Capital of Boston, and Greenspring Associates of Owings Mills, Md. Ribbon operates in Texas, North Carolina, South Carolina, Tennessee, Georgia, Alabama, Virginia, Florida, Indiana, Oklahoma and Missouri.

Houston Association of Realtors Chair Jennifer Wauhob said she’s hasn’t worked with Ribbon, but has success with other companies using similar models, such as the Austin company Homeward. Other firms such as Orchard of New York, Own Up of Boston and Flyhomes of Seattle offer varying models for helping buyers make cash offers.

“It just makes their offer stronger,” said Wauhob, who is also an agent with Better Homes and Gardens Real Estate Gary Greene. “When you receive 10 to 15 offers and I’m putting them all side by side for my sellers, the fewer the contingencies obviously the better.”

How House X Lab works

Under the House X Lab program, buyers must be approved for a loan by mortgage lender HomeStar. The mortgage firm uses part of its commission to cover Ribbon’s fees. Buyers also get a gift certificate to Gallery Furniture equal to 1.5 percent of the home’s value – so about $5,250 on a $350,000 home. Real estate brokers with House X World use part of their commissions to cover the costs of the gift certificate.

“I’m passionate about people living the American Dream. Anytime we can help people get into new home it’s great for our business,” McIngvale said in an interview. McIngvale, noted that new homeowners typically spend anywhere between 5 to 10 percent of their home value on buying new furniture within the first 18 months of ownership, so participating in House X Lab allows Gallery Furniture to capture some of that business.

In markets without a Gallery Furniture retail location, the homebuyer could choose to shop online or use the money toward down payment assistance or buying points to reduce their mortgage rates, according to House X World.

Both House X World and HomeStar commissions would typically be covered by the sellers in the transaction, according to the companies.

To participate in House X Lab, homebuyers must use HomeStar as their lender and a real estate agent within House X World’s network of brokerages. House X World is a web-based network of residential real estate brokerages founded in 2020 by Texas real estate broker William Farrell, Houston investment banker Kristen Williams, Houston broker Gary Kob, Seattle Microsoft program manager Ivan Judson and Houston entrepreneur David Goswick. The network operates in more than 20 states.

House X World is Goswick’s latest stab at a new venture after a long career in advertising for high-profile real estate clients. Two of his earlier real estate ventures fizzled out. The 2008 housing crisis wiped out one of his former firms that had planned a mixed-use project in Pearland and led him to file for personal bankruptcy protection in 2011 because had personally guaranteed the firm’s loans. Then in a separate homebuilding venture, Houze Advanced Building, a dispute over debt with one of his former business partners resulted in litigation in 2015 that eventually led to his resignation.

Houze isn’t actively doing business now, said Gary Kob, a House X World co-founder who was an investor in Houze. Goswick, who holds stake in House X World but is not a broker, has no fiduciary role in the brokerage and focuses on marketing.

Kob, a veteran commercial land broker with 50-plus years in the industry, said he wanted to get involved with House X because he viewed its model as innovative. Kob said the brokers charge about 1.5 percent commission — half what buyer’s agents typically charge — but said that House X agents still can make a decent living through a high volume of sales.

Early impact

Buyers working with House X Lab would still have appraisal and inspection contingencies, but removing financing contingency helps to overcome a major hurdle.

Making a cash offer isn’t a guarantee that every offer gets accepted, but HomeStar division president Wendell Couch said he’s already seen an impact among his clients using Ribbon’s cash offer program. He estimates it has increased their chances of getting their offers accepted by about 20 to 30 percent compared to making an offer with a traditional FHA loan.

“This puts another tool in the belt for homebuyers,” Couch said.

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