Power Buyer Review
How I tried to make a cash offer on a new home . . . without cash
I’m moving to Phoenix. Eventually.
And the market there is silly right now. Prices increased 60% in the last two years and more than 80% in the in-town markets where I would want to live. That means home prices will double every 2.5 years. Put another way, your $500k home in 2018 is now worth $2M!
Utter nonsense.
I’ll do what everyone else does and blame the comps-blind and cash-rich Californians migrating into a market that is just a 30 minute flight from their beaches.
Regardless of the reason for the nonsensical run up, I still need a home for my family.
So, rather than make weak offers that are contingent-upon-sale or contingent-upon-financing, I’m going to have to make cash offers to have any sort of chance of getting a home in safe-for-a-family urban Phoenix.
Enter Power Buyers.
For those of you that don’t know, a Power Buyer is an offshoot of the (recently beleaguered) iBuyer concept. Instead of buying homes for cash and then flipping them like an iBuyer, Power Buyers give you the cash you need to make an all-cash offer and simply charge you a fee for using their cash.
For those of you that are tech purists, it’s not really a tech play.
They’ll claim their proprietary algorithm and online portals are tech but you’ll see below that I’m skeptical. It’s just a financial instrument that I think has some value. Still, just because they aren’t true technology products doesn’t mean they aren’t useful.
A mortgage isn’t tech but it’s still pretty useful for buying a home.
Same concept here.
Before I get into the full review, here was my process:
Research Power Buyers
Reach out to connections at the firms
Application
Analyze the cost/benefit for each
Make my offer
Final Review
On to the review -
Research
I had a cheat code here. I’m a member of GEM and Drew already did a market map of the players. (If you aren’t a member of GEM and have interest in residential PropTech, you should join.)
Here is who he listed and you won’t be able to see it unless you’re a member:
So, I had my list and now I just needed to start whittling down the candidates. I can’t possibly work on 13 cash offers from 13 platforms at once. So I dug into the products of each and reached out to friends/execs at each firm.
Reach out
Next step was to reach out to fellow GEM members and my LinkedIn connections to see who I knew at the firms that would be a good entry point. Here is how that went and how long it took:
Orchard: I had a connection here to someone on their board. So I went through him and then their Director of Partnerships. Had a great chat with him and decided to move forward (I had already started their application the week before).
HomeLight: Reached out to Director of Strategic Partnerships and he responded immediately (within a day). We had a great chat and he got me onboarded into the flow for new customers.
Homeward: I just went straight to their website and started applying. I used a couple industry connections to try and get to the founders but neither was responsive. So, since I knew Homeward’s reputation and capitalization, I ended up just jumping into the application as a proxy for how consumers with no PropTech connections would experience the platform.
FlyHomes: Reached out to the CEO and he was super responsive. He replied the same day and we had a call within a couple days. Very impressive but they weren’t active in either of my markets. Bummer.
Knock: (The Power Buyer not the CRM) I reached out to an exec and she responded . . . . 45 days later. (See Caveat below) I ended up being impressed with their product but couldn’t use it because it was more than a month too late. I’ll add some comments below.
Ribbon: I went through LinkedIn here and got to a Director of Risk. She responded same day and we had a call within 48 hours. She told me that they had just let go of 90% of staff. That told me I probably shouldn’t bet my children’s home on that particular platform for the foreseeable future.
Setpoint: I know one of the founders and some of their team. I have sent them multiple referrals for their venture debt product and know their platform somewhat. Power Buying isn’t their main focus and so I chose not to pursue it. Still, that may change or evolve over time so they deserve to be on your radar for this.
Compass: I reached out to one guy in NY (he never responded) but chose not to pursue them aggressively because I didn’t want to get stuck with one of their realtors. This isn’t their core product and they are struggling in their post-IPO malaise. Probably more trouble than its worth. And I already had 3 good options when they didn’t respond.
UpEquity - Mostly a mortgage platform so I didn’t pursue it strenuously. I don’t have anything positive or negative to say about them.
Zavvie - This was positioned more like a tool for brokers/realtors and not really for me (the buyer). While I like the concept, I have no way to test it as I’m neither a broker nor a realtor. So, again, I have nothing positive or negative to say.
RealSure: I reached out to their Chief Revenue Officer but she never responded.
Accept: I reached out to one of their executives but he never responded.
CAVEAT - I realize that not everyone checks these non-core (i.e. non-email or Slack) messaging platforms. Still, all of those platforms send you email alerts and I don’t know anyone who doesn’t check their email every day. As you can see above, nearly half of the people I reached out to (cold) responded. So, while I’m not going to name names and do not want to vilify any person or company, the lack of responsiveness is part of customer service. You get points taken away from your customer service score if you can’t even find the time to respond.
So, that narrowed my list substantially:
Accept - No Response.
Compass - No response, too much trouble, and not their core product.
FlyHomes - Not in my markets but otherwise great.
HomeLight - All good. Moving forward.
Homeward - All good. Moving forward.
Knock - Did not respond immediately but I did eventually talk to them.
OpenDoor - Out of the market
Orchard - All good. Moving forward . . . temporarily. See below.
RealSure - No Response
Ribbon - 90% staff cut
Setpoint - Not their core product so I opted out.
UpEquity - Focused on mortgages so I opted out.
Zavvie - Focused on realtors so I opted out.
Last three standing are HomeLight, Homeward, and Orchard and I would quickly narrow that down to two.
Since I knew that each of these had raised $742M, $501M, and $472M respectively, I didn’t have any concerns that I would get caught up in a bankruptcy, messy merger, or simple closing because of lack of capital.
Application:
To me, it was no big deal to start multiple applications at once. If one firm was going to pull my credit, I might as well have all of them pull it at the same time so it doesn’t decrease my credit score. And since they all need the same docs, I just went ahead and put them all in a Google Drive folder that I could either share or easily upload from.
So I went ahead and applied through their online portals.
This is when the trouble started.
Let’s start with Orchard.
As I said above, I enjoyed my chat with the guy who walked me through the platform and some of their offerings. I ended up filling out the online application on Jan 22. I then had a call with a loan officer within a day to go over all those documents I mentioned above. They wanted to verify a few things and confirm what extra documents I needed (more on that later).
Next step was to set up a virtual walkthrough of my current home.
Side note - I understand why this matters. Home interiors vary wildly and homeowners are all over the map when it comes to home improvement and home maintenance. If you are going to help someone use the equity in their current home to offer on their next home, you should see the inside of their home. This is a smart practice and I have no problem with it.
The problem was that I was about to make an offer on a home and needed this wrapped up quickly. The only time they could do it was 7 PM on a week night. Not catastrophic but pretty inconvenient as I’m a single dad this Spring with my wife already moved to PHX. Taking 45 minutes to walk through my home on a glorified Zoom call showing every nook and cranny of my house while trying to feed, bathe, and help with homework for my two boys was pretty inconvenient. Still, buying and selling homes is hard and I dealt with it.
I then had another call to confirm my financial details and documentation for the underwriters.
It was then that I was told that Orchard is no longer active in Phoenix.
So, to recap, I’ve spent a few hours on filling out an application, gathering missing documents, talking to loan specialists about my profile, walking through my home on a call at night. I’ve probably got 5 hours into the relationship at least.
And THEN I find out there can be no relationship because they didn’t even operate in my markets.
This is infuriating and Orchard should be embarrassed.
It’s basic customer screening and expectation-setting. Pretty standard for startups (and humans in general).
Still, onward and upward.
HomeLight and Homeward are both active in my markets so let’s pick up with the actual players who I could work with.
HomeLight - Intro on Jan 26
Jan 27 - Got an onboarding email from my Client Advisor, Dylan (who was terrific, so I’m including his first name)
Jan 27 - Sent him the accumulated documents I had put together for our underwriting (Tax returns, pay slips, W2s, credit scores I pulled, proof of my salary, etc)
Jan 28 - Dylan said he would review over the weekend and enter all of our basics into the HomeLight portal as we were trying to make an offer the next Monday!
Jan 29th - Request for more documents
Jan 30 - Dylan sent our Cash Buyer Program Agreement for review
Jan 30 - I asked for clarification on the fee structure (more below) and Dylan clarified same day. He actually told me that there was no fee for the program if we used their mortgage program but that ended up not being true.
Feb 1 - Request for more information = They wanted 10 photos of the home. As I said above, this is a fair request but one I could’ve been asked a week before when I wasn’t scrambling to get an offer written. I sent them within an hour.
Feb 3 - HL requested a home inspection.
Feb 4 - Request for more information + conditional approval. They needed me to sign a form, provide my SSN (again) and a letter on why I can work from another state.
Feb 13 - Got pushed to an “approval specialist” who offered to answer questions about what items they STILL needed to approve my application.
This is where they asked for something silly. They wanted all of the K1s for my investors on all of the entities I manage. As an angel investor, that’s more than a dozen LLCs I manage and probably more than 100 individual investors. They said they needed signed K1s for ALL of them and that, for some reason, Fannie Mae was requiring it (see Scapegoating below). This makes no sense. Why would my investors (most of whom report $0s every year because these are non-dividend-paying startups) have LITERALLY ANYTHING to do with my credit and ability to repay this debt? How does someone else’s income affect me? Either they misunderstood what Fannie wanted or they lied. Either way, I couldn’t provide it and they wouldn’t move forward without it.
Feb 14 - I spoke to the women at HL and told her the above and she told me they couldn’t move. So I basically called her on it and said “does this mean you are rejecting my application?” She said she would get back to me.
Feb 15 - I even asked to speak with the head of underwriting to see if I could talk it out with her to see if this is REALLY what they wanted or if it was a deal-killer on their end. She refused.
Feb 15 - The approval specialist called me to confirm they DID need the K1s and that the head underwriter would not speak with me. So I put her on the spot again and asked if this was the end of the relationship. She said it was.
Factual Overview of HomeLight-
The facts : I applied on Jan 26th in order to make an offer on Jan 28. I was rejected on Feb 15th (20 days later). Those are the facts. I’ll share my opinions in the conclusion.
Homeward: Intro on Jan 23
Jan 24 - Received a “rate sheet” after speaking to a Loan Officer.
Jan 27 - Submitted application
Jan 30 - Request for more information (they do not work on the weekend)
Jan 30 - They also reached out to my realtor for information but they did this incorrectly. They were trying to get details on my current home and they reached out to the realtor we were using to find a home in PHX.
Jan 31 - “We are reviewing your application” and then “Your application is complete.” A lie. Still, fun to see.
Jan 31 - “Additional information required”. Of course. Most of the things they asked for (W2s) they already had in the folder I mentioned above. One of the weird ones was proof I had paid my taxes. I remember thinking - “Wouldn’t I be in jail for felony tax evasion or have massive payments shown as unpaid on my returns if I hadn’t paid my taxes?” Still, I logged onto the IRS website and got my payment receipts for the last few years. It was doable just a weird request that no one else asked for.
Feb 2 - “Matt is approved to make a cash offer”. Neato. This was sent to my realtor so she knew it was an option.
Feb 6 - Sent details on home we intended to offer on. Approved for offer within a few hours.
Feb 6 - They sent us their two contract addenda for AZ contracts as well as their service agreement.
Factual Overview of Homeward:
Facts - I got introduced on Jan 23rd and saw their rates on Jan 24. Submitted my application on Jan 27 and was approved on Feb 6 (11 days later)
Analyze Cost/Benefit
Welp, this part was pretty easy. I only have one product to review because Knock didn’t respond and HomeLight couldn’t figure out my underwriting.
Homeward sent me three documents to review once they approved my application
An AZ-specific addendum to the purchase contract that let the seller know about the program I was using. It spells things out for the seller so they know exactly what I am using and why there will be two closings on the home they are selling. It’s 8 pages long and I’m sure they would share it with you if you requested.
A second AZ-specific addendum that just has 2 pages of definitions. Not sure why this can’t be combined with the first addendum but whatever.
Service Agreement. These are the terms and conditions we are agreeing to for the transactions. As you would expect from a financial agreement, it’s reasonably long (15 pages) and comprehensive. This includes what to expect, how it will happen, and what the costs will be. The costs are all generic and not calculated based on your purchase price (you get that from your loan officer).
They also sent me this Buy-before-you-sell guide. It’s helpful and I recommend looking it over if you are still curious about how the program works.
All told, this was pretty standard to not onerous. Outside of reading 30-ish pages of legally-binding documents, it was pretty painless.
The fees were as follows:
$999 loan origination
$999 dual appraisal + $65 credit report
1.9% of purchase price
-0.5% if we use their mortgage (for a net fee of 1.4% of price)
Rent - This is calculated on the price of the home. Ours was $6,600 per month and was prorated by the day. So if we closed on both homes and didn’t need to “rent” the home from Homeward for a month, we would pay less than this.
Total - $30,000 give or take
The thinking here is mathematically simple - If you think you can get $30k off the price of the home by making an all cash offer, then this is worth it. If not, then just make a traditional, contingent offer.
Make offer:
So, we talked to the realtor on the home we wanted, laid out the two options, and let his seller choose which structure they preferred.
It’s worth noting here that I had been dual-tracking my mortgage while I was doing this Power Buyer work.
I had been working with two lenders on structures where I could buy a home using the equity in my current home as a down payment. That would be structured like a HELOC and then we’d get a small bridge loan to cover the cost of the purchase while we waited to sell our current home. Basically, I was solving the same problem the power buyers solved but I was just doing it with traditional lenders instead of “innovative” startups.
Shout out to my lender Cross Country for making this work! (Yes, an apt name.)
So, the seller had two choices -
A. an all-cash offer from Homeward + Me with several strings attached (double-closing, special warranty, etc)
B. a contingent-upon-appraisal offer from Cross Country + Me that was a HELOC + bridge.
The seller chose Cross Country and the HELOC + Bridge loan option.
Now, was that because I was the only buyer bidding? Was it because he knew my lender?
I don’t know exactly and don’t want to overstep with my assumptions here.
But I will say that I was told that some of the terms in the addenda were non-traditional for AZ transactions. I’ll have to take their word for it as I’ve never bought in AZ and I’m not a realtor. Still, it seems like they were a factor and worth mentioning here.
Some thoughts before my conclusion:
You may notice that in my timeline above that I was careful to always be EXTREMELY responsive with requests for information. Maybe that’s because I’m a former lender and well aware of the borrower-caused delays that derail many loans. Or maybe it’s because I was in a rush to write an offer on a home in a competitive market (i.e. seemingly their target customer). Either way, I was not going to be a scapegoat for the delays with my approval and offer.
Speaking of which, you may be able to tell (or may know from borrowing money before) that these platforms fall into the same traps that all lenders do - scapegoating. It’s ALWAYS someone else’s fault. It’s never your relationship manager (according to them).
“Oh that darn credit committee and their demands!”
“Can you believe what Fannie Mae makes us do?”
“My borrower disorganized and we’ve spent weeks collecting documents for underwriting.”
It’s always someone else’s fault.
Maybe that’s endemic to lenders and their regulations in the US but wouldn’t it be nice if one relationship manager, just one, had the authority to take charge of a loan and take responsibility for it’s timely closing instead of passing blame around?
Dear startups, please fix this.
Also, my wife and I have great credit. We are both at or above 800 depending on the credit bureau. (Hers is higher than mine because she’s a stud.) We make well over $200k per year consistently and have no debt to speak of other than a little college debt I keep because Biden will eventually forgive it anyway.
The point is - we are great borrowers.
We have high incomes, great credit, and almost no debt. The only wrinkle is that I work for myself . . . and have for ten years. Other than that, we are a squeaky clean, down-the-fairway borrower for a mortgage product.
So, while I’m always cautious of applying my unique circumstances to everyone else, in this case I think we were a pretty good fit. If I told you that you had two high-income earners with near-perfect credit moving across the country can you think of a better borrower profile for these power buyers? If they can’t serve us then exactly who are they targeting?
Final Review:
We started with 13 options for Power Buyers. Through a combination of no-response, not-in-my-market, or not offering what I needed, the list came down to three: Homelight, Homeward, and Knock.
Knock took a month-and-a-half to respond so they were never in the running. They seemed sharp and impressive but I had absolutely no contact with their actual product and it’s underwriting process.
Just Homeward and HomeLight left standing.
HomeLight took three weeks to figure out they could not underwrite me. Homeward took 11 days and allowed us to make an offer.
But, at the end of all of this work, I still used a traditional lender.
Me.
The PropTech nerd betting his entire career on innovation in this space.
Me.
With high-income, near-perfect credit, and a sudden move across the country.
I couldn’t use the product.
And I think that’s the crux of my analysis here:
Who is this product for?
Exactly what problem are you solving?
If I’m not a good fit for HomeLight because of their bizarre and choppy underwriting, then who is? Is it single, high-income earners with perfect credit who are moving between 2 or 3 specific states in the US (probably CA and NY)?
How big is that market?
Even when it worked with Homeward, the seller still rejected the option to have a cash offer (potentially) because it had too many strings attached.
Isn’t that the entire point of power buyers - to eliminate the attached “strings” to buyer’s offers in a competitive market?
If so, I’m not sure we are hitting the mark just yet. And since these companies have each raised hundreds of millions of dollars, aren’t we a tad late in the game for stumbling around product-market-fit?
If I were an investor in these companies, here is what I would recommend:
An extremely precise definition of who your target borrower is. It’s ok if you have close-enough archetypes to compliment the limited number of “strike zone” borrowers you find. But if you do:
BE A STARTUP! Make it 10 times easier than a bank to apply and get approved. That means you get ZERO additional requests for information from your borrowers. I want to apply once and get approved or rejected. Every time you request additional information, I lose respect for you as a startup. That means you didn’t filter/qualify me properly on the front end. Now you’re just a bank.
In order to do that, you don’t need fancy tech. Just make a list. List out everything you could POSSIBLY need from a borrower to verify their income and approve their credit. Make the list and then build it into your application work flow.
Example - “Oh, you are self-employed. Congrats! Here is the list of 5 additional documents you’ll need to provide in order for us to verify your income/credit.” That’s easy. It’s not even technology. Just simple list-making and expectation management.
That’s it.
These problems are not tech problems. These are organization and customer-service problems.
Recommendation:
If you are trying to buy a home before you sell yours, this could be the right tool for you. As you can see above, it didn’t work out for me and there are still PLENTY of wrinkles to iron out.
Still, I DID make an offer with Homeward. It worked. But the seller wasn’t interested.
So, as long as your are open to the bumps along the way, I’d say give it a shot. If you happen to be in an EXTREMELY competitive market, this might be a useful cash offer product.
One final note:
I think the fees are high in this space. 2% of purchase price is about what all of them quote me for using their cash to make an offer.
Remember - buyers and sellers have been griping about realtor fees for a long time (I’ll write more about that later). We are already paying 6% of the price to simply close the transaction. You want to add another 2% to the cost and a housing affordability crisis only gets worse.
My hunch is that fees will settle closer to 1% (less if you can cross-sell other products and monetize your customers that way). As I said above, it wasn’t offensively high, but I think it needs to come down.
Anyway, that’s my power buyer adventure.
It was an interesting ride and I was really hoping to report that I was a user of one of these platforms. Maybe next time I move across the country . . .
Let me know what I missed in the comments and thanks for reading all the way through if you are still here!
Wow, thanks for sharing your journey, in detail. As you stated, if there is anyone who is going to use the Power Buyer path to purchase their home, it is you. So, thanks for giving them all of the answers to the test. And hopefully you shared this journey, because you closed on the house in AZ!