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With the Fed’s efforts to fight inflation triggering talk of a recession and rising home prices and mortgage rates expected to dent home sales this year and next, it’s fair to ask: “Can Power Buyers Thrive in a Downturn?”
Black knows a thing or two about downturns, having weathered the Great Recession of 2007-09 as a member of Trulia’s founding team. More recently, Knock put off plans to go public through a merger with a special purpose acquisition company (SPAC), instead raising $220 million in private funding in March. That’s less than an IPO would have raised, so Knock laid off close to half of its workforce, but said it plans to continue expanding and have a presence in 90 markets by the end of the year.
Knock works with certified agents and partners with real estate brokerages to market its alternative mortgage products — Knock Home Swap and Knock GO (Guaranteed Offer) — to homebuyers.
Knock GO, which stands for Guaranteed Offer, is a “cash-like” conventional mortgage product Knock introduced last fall, to allow first-time homebuyers to write an offer on a home without including a financing contingency. For buyers who have a home to sell, the Knock Home Swap, introduced in 2020, provides the funding to buy a new home before listing the old house, including a mortgage and an interest-free equity advance loan, which covers the down payment on the new home.
Knock launched in 2015 with a slightly different business model, providing a guaranteed offer to sellers and marketing homes on their behalf. Knock no longer employs that “trade-in” model, which in some cases required it to buy and sell homes. But it acquired expertise that helped the company pivot to its current role as a provider of alternative mortgages.
After expanding into five new markets in Washington in April and adding jumbo loans to its offerings, Knock is available in 75 markets.
The following interview has been edited and condensed for clarity.
With interest rates on the rise, there’s a lot of talk that we may transition from a seller’s market to a buyer’s market. If that happens, what’s the advantage of using a Power Buyer to make a cash offer?
I would just start by saying we’ve been around for seven years. So we started long before this current two-year run of it being a seller’s market, post COVID. We didn’t set out to solve an auction environment problem. We’re solving a much bigger problem of, there’s 300 million people searching every month on the top three sites, but only 6 million people buying and selling every year. And the cataclysm in between is because there’s so much friction and uncertainty, inconvenience and costs.
So when we launched the trade-in in 2015, it was really about the two-thirds of people who are both buying and selling, and giving them certainty and convenience by making them effectively cash buyers — letting that seller have confidence that they can move into their next home, letting the buyer know they can enroll their kids at that new school and all that good stuff. So remember, we operated for four years in an environment that was more or less normal — more even, anyway. And what we saw in that environment, we were solving a convenience, cost, uncertainty problem, not a cash buyer problem.
What we saw pre-COVID was that we got people into their dream homes before they even had to list their old homes, so they got all that upfront gratification. They often got a 3 to 5 percent discount from the seller. And think about it — in a normal environment where sellers have fewer options, the cash offer becomes — instead of being about bidding, beating a winning bid, winning a bidding war — it becomes about certainty, convenience and cost savings for both you and that seller. I will say that for those models who offer backup offers as a service, I don’t see how anyone needs that in a market that’s a buyer’s market. Whether that’s six months, or a year from now, or two or three years from now, it’s inevitable. But that’s not at all the service or business that we’re in.
So how will the different business models employed by Power Buyers work, or not work, as the market shifts? If you’re actually buying homes, then you’ve got a couple of transactions, which creates additional costs like transaction fees. If you’re providing a bridge loan, you avoid having two transactions, but you’ve got other costs, such as financing.
I guess it depends on the consumer, right? I don’t think we’re anywhere near a buyer’s market, given the inventory constraints, but in a market where it is a buyer’s market, and sellers don’t have as many options, I’m sure iBuying makes a lot more sense. [Sellers] are willing to take a bigger discount — and by the way, iBuyers are going to be able to get a bigger discount and charge more fees. Eric Wu was pretty vocal about that when he started OpenDoor. “What if there’s a downturn? Well we can just charge more and pay less, right? Because we have all the leverage in those environments.” Which is not good for the seller, because rates are already higher, home prices are higher, and they’re gonna get less for their home? Talk about an affordability problem, right?
What we’re trying to solve is how do you create a true liquid marketplace, where people have certainty and convenience without taking a huge hit on the equity side of the fence. Pre-COVID, our customers’ homes sold because we helped them prep the home as part of our services. We’re helping them figure out how much their own home is worth, how much they should put into it in terms of paint and carpet, and helping them prepare it to be listed. That helps them achieve top dollar.
Right now, in a market that’s slowing down, that house may sit on the market longer — which makes what we do even more valuable. For example, if [a seller is] trying to get into a school district by September, but the house housing market requires six or seven or eight months for that house to sell, they’re either going to need to take an iBuyer offer at a huge discount, or they can do it with us and get top dollar. Maybe it takes four months or five months [to sell], but they’ve already moved up, they’ve already moved out.
I don’t think [the business model] can be the jack-of-all-trades. I think that the companies who just keep bolting on different options, that is confusing for the consumer. And it’s hard to manage as a business, which means it’s hard to scale. If you’re doing everything for everybody, you’re usually not doing a whole lot of anything for anybody. It’s really hard to build technology for a million different types of services. That becomes a very manual, old-school mortgage lending type company. Then you have all that cost associated with it that you pass on to the customer. So we’ve been doing the home swap, in some form or another, for seven years now, so we have a lot of efficiencies in terms of product and automation and process, focusing on that.
Your Inman Connect Las Vegas panel moderator, Era Ventures’ Managing Partner Clelia Peters, has predicted that by 2030, half of all residential real estate transactions could involve nontraditional financing, such as Power Buyer services. Do you think Power Buying will eventually become the way everyone buys and sells homes?
It’s different if it’s a first-time homebuyer versus the person buying and selling, because there are a lot less constraints on the first-time homebuyer. That said, to the extent that where you’re lending someone money, some of the constraints for us are, we can’t go into the middle of Montana where somebody owns 10 acres on a ranch, because you can’t predict pricing on that. We can’t help them finance out of that house. There are lots of examples like that in the middle of the country and in markets where there just isn’t enough data and the housing stock isn’t standardized, or it’s too expensive. Beverly Hills, they don’t need our money anyway. So I agree with Clelia.
It shouldn’t depend on whether it’s a buyer’s market or a seller’s market, because if you’re solving for convenience and certainty of liquidity, it doesn’t really matter whose market it is. Somebody needs liquidity. Someone is at an advantage, someone is therefore at a disadvantage. A buyer, or a seller — in some cases or both, right? So you need liquidity, you need transparency, you need convenience. And I think what you have to have for [Power Buying] to become the de facto standard, is costs have to go down. Not only is it just as cost effective, but hopefully it’s even cheaper than a traditional transaction, because it has taken a lot of uncertainty and inconvenience out.
It’s like anything else, once any fintech goes from early adopter to mainstream, it’s about costs. When we all started, we had a high cost of capital, as we all get more mature and have more of a track record, we get increasingly lower cost of capital that we can pass on to the consumer. We build technology to automate and need less people touching every transaction — all those cost savings can go to the consumer.
I do believe the housing market has to look and feel more like a liquid marketplace. People have to be able to move more freely. At least in the major markets, of which there are now many more [after COVID], they want that. And by the way, they want it all on their phone, with the convenience and certainty and transparency that they own. You think about this generation — the biggest, fastest growing generation of homebuyers being Millennials — everything else they do, they do on their phone — from ordering food, to ordering an Uber, to buying a car on Carvana. Obviously you’re going to be programmed to want to do your home transaction on your phone, as much as possible, too.
In terms of adoption, how important do you think it is to educate agents and their seller clients about the advantages of the Power Buyer model? When you go into a new market, do you find people aren’t familiar with it, or do you think Power Buying has already become more well known and accepted?
I think in the markets where it’s readily available, consumers are more aware than ever, because they obviously are trying to find solutions to not losing out on the home, the very little inventory there is when they do get it. So I think by default, agents are trained and they are also you know, the news cycle includes a lot more of this stuff now. So that’s super helpful.
I think it just depends on if a consumer needs it enough, which they almost always do, because the two-thirds of people buying and selling are almost always families — they have kids, they have jobs. The uncertainty and the inconvenience and the unknown is very disruptive to their lives if it doesn’t work out. So I think they educate themselves and look to their agents.
We increasingly almost exclusively work with top agents and teams, because they have the throughput, or the volume, but they also just have experience and division of labor within the team to be educated, and have people on the team dedicated to helping the consumer understand their options. Whether that’s a really experienced agent that now has a lot more time because they’re not doing, say, showings or installing yard signs because they have help, or it’s the actual assistants that are helping the consumer in the front end with this stuff, but I think it’s important. At the end of the day, we all know that 90 percent of consumers work with agents and, at the end of the day, the agent has a lot of influence over how the consumer transacts.
Hear more from Sean Black in person — Aug. 3-5 at Inman Connect Las Vegas! Join us.