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Cash offers will eventually become the standard way homebuyers make offers, even as the bidding wars that characterized the pandemic fade, said leaders of two of the top companies in the Power Buyer business Wednesday.
While funding may be more scarce for real estate startups these days, Power Buyers Knock and HomeLight are having no trouble securing capital to continue growing their businesses, CEOs Sean Black and Drew Uher said Wednesday at Inman Connect Las Vegas.
The biggest hurdle to universal adoption of cash offers, the executives said, remains getting agents and consumers comfortable with the mechanics of the process and the ins and outs of competing business models.
Agent-matching service HomeLight got into the mortgage business with the 2019 acquisition of digital mortgage lender Eave. In June, the company announced $115 million in new funding and an agreement to acquire cash offer provider Accept.inc — a deal HomeLight made the largest “agent-focused” cash offer program in the U.S.
In March, Knock put off plans to go public through a merger with a special purpose acquisition company (SPAC), instead raising $220 million in private funding and laying off close to half of its workforce. But the company continues to expand and plans to have a presence in 90 markets by the end of the year.
Era Ventures Managing Partner Clelia Peters, moderator of the panel, “Can Power Buyers Thrive in a Downturn?” asked whether access to debt capital might get tricky for Power Buyers.
Black, the co-founder and CEO of Knock, pointed out that, unlike iBuyers, “we don’t buy houses.” Knock is like a rich uncle that provides backing, allowing clients to make cash offers until they secure their permanent financing — a mortgage that’s also provided by Knock.
“I think you have to have a rich uncle, too?” Peters said of the debt facilities that lenders typically rely on to fund their loans.
“So for us, because we’ve been around so long — we’ve done thousands of transactions in 75 markets — our debt facilities are actually getting cheaper,” Black said.
Knock recently renegotiated one of its debt facilities and was able to cut its rate in half — savings the company can pass on to consumers, Black said.
“If you’re using the Knock Go with your client, it’s no more expensive than a traditional (mortgage) — in fact our rates are better right now than traditional,” he said of the company’s cash-backed offers for clients who don’t have a home to sell.
“Same thing on our side,” HomeLight CEO Uher said. “The fact that we have capital markets relationships [and an industry] track record … if anything they are coming to us.”
Black and Uher agreed that it’s a different story for companies that are just getting started.
“I don’t think you’re going to see new entrants come into the [Power Buyer] market and get access to capital with no track record,” Black said.
Back in 2018, Uher said, it was hard to tell how many startups would hitch their fortunes to the Power Buyer model.
Today, “I think the playing field is set because of this correction,” Uher said, predicting “no new entrants in this space in the next couple years.”
Uher and Black were quick to agree with Peters’ take that, five years from now, “every buyer will be a cash buyer,” and buy-before-you-sell Power Buyer services will be “much more broadly used.”
Power Buyers have pitched cash offers as a way for buyers to gain an edge in multiple offer situations.
But “it doesn’t matter what the market is,” Uher said. “Sellers want a cash offer, and because sellers want a cash offer, it just makes sense for the buyer to provide that cash offer.”
HomeLight’s research shows that homebuyers can pay as much as 4 percent when using a cash offer, Uher said.
Black acknowledged that cost can be a factor for consumer adoption of Power Buyer services.
“How do you take the value prop — certainly and convenience and cost savings — and adjust it to what customers care about right now?” he said. “Which is obviously certainty and convenience, but now we want it at something less than full cost.”
Black pointed to this week’s rollout of interest-free equity advances, which let Knock Home Swap clients buy down their mortgage rates directly, or qualify for better rates by making bigger down payments, as a new twist on the Power Buyer value proposition.
While Power Buyers have come a long way, they have even farther to go before realizing their vision of becoming the standard way of doing business. Black and Uher agreed that agent education is key.
“The hardest thing for a startup to do is to get product-market fit,” Uher said. “That’s what’s really exciting about the Power Buyer space. These products have a very clear product-market fit.”
But while “every single agent you talk to, they know the essential process,” Uher said. “The really annoying thing preventing immediate adoption across 100 percent of the market is just education, changing the reason we do business, working on the kind complications of the product.”