Editor’s note: Startups Knock and Opendoor are looking to reinvent the real estate industry as is Zillow, which recently branched out to offer its own “cash” model for houses. Now comes Charlotte startup Ribbon, which recently raised a huge amount of venture capital – $225 million – and launched its own cash-for-house model in Cary. Here’s the backstory from WRAL TechWire’s Jason Parker.
CHARLOTTE – “I made a mistake,” said Shaival Shah, co-founder and CEO of Ribbon, the latest entrant into the blazing hot real estate markets in Charlotte, where the company holds a dual headquarters location, and the Triangle, where the company just recently announced an expansion as they secured $225 million in Series A funding.
The mistake happened early – and it came in how the company planned their entire business model.
But before talking about the pivot, which helped the startup raise a whopping $225 million from investors, it’s best to examine the backstory of Ribbon’s founding.
Housing bubble burst, opportunity
When the housing bubble burst in 2008, and local real estate markets reached their lowest points in decades, investors began to see a financial opportunity through the purchasing of homes and property. In 2007, 71 percent of families owned their home. In 2017, only 64 percent of families own their home, the same rate of home ownership as in 1964. Yet according to a 2016 study by the Pew Charitable Trust, 72 percent of all renters–more than 43 million families in the United States – 9 million more families than in 2007 – say that they want to own a home.
As home prices plummeted, and interest rates dropped, investors and tech-enabled real estate startups saw a market opportunity by leveraging one of the most important assets available to buyers in a real estate transaction: cash.
By purchasing homes quickly, for cash, investors snapped up a significant portion of the home supply, a trend which has continued into 2018.
“When a real estate investor purchases an owner-occupied home,” said Shah, “the result is the drying up of supply.” Through the past decade, said Shah, this has resulted in a vicious cycle, with investors acquiring more than $1 trillion in real estate assets. “This has put a lot of pressure on home supply,” said Shah. “Across the country, this is a problem.”
Shah decided to build a solution.
Facilitating real estate transactions by infusing cash
Investors and tech-enabled startup companies profit at the two ends of a real estate investment, said Shah, when an offer to purchase is accepted, and when they sell the property. If there’s a $250,000 home, and an investor buys it at $225,000, but can later sell it at a higher price, said Shah, “the only person that made a profit is the corporation.” Sellers lose out on as much as $25,000 in value, and buyers pay full price.
“They’ve turned home buying into high-frequency trading,” said Shah. According to the company, more than 200,000 homes worth $30 billion have been purchased this way, and 35 percent of all real estate transactions have been purchased with cash offers, with discounts compared to list price as high as 25 percent.
Shah wanted to use the tactics of real estate investors, “but give that money to the buyers, to keep that money in the consumer ecosystem.” He wondered what would happen if he could guarantee buyers and their agents had the financial backing to write into an offer to purchase from a seller.
“Cash is so important,” said Shah. “A cash offer provides sellers with certainty.” Most real estate transactions still rely on homebuyers securing a mortgage, a timely process that is not guaranteed. Offers to purchase are often written with a mortgage contingency, even when homebuyers already have a prequalification letter from a lender. In a competitive market, sellers are going to select offers that provide certainty.
Shah and Wei Gan, a Duke University alum, wanted to test their theory. They co-founded, built, and launched Ribbon, an open platform that invites everyone involved in a real estate transaction an opportunity to participate in a symmetrical environment, not an asymmetric one. Shah became the company’s CEO, and Gan became the CTO.
“The Ribbon platform utilizes technology, intuitive software and access to capital to equip consumers and Realtors with the power of a guaranteed home transaction,” said Shah. Sellers receive certainty. Buyers gain purchasing power, the ability to negotiate with an all-cash offer, and the certainty of moving into the home they purchase. Realtors build trust with their clients and can quicken the pace of real estate transactions while lowering administrative overhead.
The mistake -and the business model pivot
Shah and Gan built a pricing model relying on charging buyers 1.95 percent of the transaction costs, assessed during closing once buyers secured mortgage financing. Until financing was secured and closed, buyers received the option of an early-move in with an assessed rental rate fixed and tied to local market rates in the community. That was Shah’s mistake. The company value proposition was resonating with buyers, sellers, and Realtors, said Shah, “but this was a friction, the fee was large enough there was a pause in the transaction.”
The Ribbon plan
- Ribbon Offers have no financing, appraisal, or home sale contingencies
- Instant buying power and personalized home valuations designed just for you
- Find the home you love and win immediately
- Earn thousands of dollars in discounts for certainty you can provide yourself and the seller
- Close when you want. In as little as 7 days or as long as 6 months
- Ribbon makes buying your new home the wonderful experience that it should be
For a company that aims to facilitate real estate transactions, introducing a friction point slowed down the process and hampered the model, reducing value on all sides of the transaction. Last week, Shah announced that Ribbon would no longer assess that 1.95 percent fee to buyers, and instead, would charge the fee to sellers that accept a Ribbon buyer’s offer to purchase. It’s a dramatic shift in the company’s business model, and it’s a shift that came from an unexpected source: Realtors.
The company made this decision after they saw Realtors change the terms of transactions coming through the platform. Some Realtors begin to negotiate on behalf of their buyers to have the seller pay the 1.95 percent fee, and many Realtors also offered to take a discounted commission payment in order to facilitate the transaction.
“We didn’t ask Realtors to lower their fees,” said Shah, “but that’s what happened in the marketplace.” The result? “Deals happen faster, and close at a higher rate, which gives Realtors the opportunity and time to complete more transactions.” There’s an efficiency in speed-to-close and in having access to Ribbon’s mobile application and transaction support team that Realtors enjoy, said Shah.
Now, in Charlotte, and in Cary, and in everywhere Ribbon operates, buyers can harness the power of an all-cash offer, and use Ribbon at no cost. By doing so, would-be homebuyers increase the odds of winning a real estate transaction by two times.
Realtors a critical part of home buying process
There are more than 1.5 million Realtors in the United States, and most of them are experts in a hyperlocal real estate market. “Realtors are people too,” said Shah. They contribute to their local economies. They have children that attend local schools. They support local businesses. And they’re often really great at a critical aspect of the home buying process that often gets missed, said Shah, helping families navigate the home buying process.
“This is the largest purchase someone is going to make,” said Shah. And it’s an important one. The average net worth of a family that owns their own home is $195,400, but the average net worth of a family that rents is just $5,400, according to the New York Times. “There is a lot going on on an emotional basis,” said Shah, “and Realtors do a fabulous job helping folks navigate the process.”
Ribbon works directly with Realtors, and certifies Realtors to provide their clients with access to an all-cash Ribbon Offer in order to purchase a home. Realtors can invite their clients, and home buyers can also apply to receive Ribbon Buying Power in less than 15 minutes online. Realtors also benefit from the assistance of Ribbon’s transaction coordinators, who help facilitate the transaction and close the deal.
“Ribbon felt like a safety net throughout the entire transaction,” said Deb White, a Charlotte-based Realtor with Helen Adams Realty. “They gave my clients peace of mind early in the process, with no strings attached.”
Launched in Charlotte, regionally-focused
Ribbon launched in Charlotte with a team of four full-time employees, after closing a $4.4 million seed round of funding at the end of 2017, money invested by the company to test, validate, and pilot their concept and application.
The company evaluated 52 different local real estate markets across the United States and chose to launch in Charlotte along with building the company’s regional headquarters in the Queen City. Charlotte ranks at the top of the list of cities that attract millennials and also boasts one of the highest rates of net migration in the country, along with the Triangle. “The local community in Charlotte has quickly become the new place to innovate and to manage a balanced lifestyle,” said Shah, noting that the region also just received the number one ranking for technology professionals.
The company launched in the Triangle earlier this month and has job openings listed in Dallas, Nashville, Orlando, and San Antonio. To fuel growth into these markets, the company raised $225 million from investors including Greylock, NFX, Bain Capital Ventures, and NYCA.
“Our key focus are markets where consumers are having to compete with aggressive corporate buyers and investors,” said Shah, “areas of the country where the percentage of cash transactions are high and where families are being blocked from affordable homeownership.”
The company anticipates hiring rapidly, expanding from 30 employees at the end of 2018 to more than 300 by the end of 2019.
“This is something I have always dreamed of doing,” said Shah, whose prior experience came at Lending Club and Hunch. Other members of the founding team have leadership experience at AirBnB, Twitter, Spotify, and Invitation Homes.