Replacing the Wholesaling Industry With a Better Way for Homeowners
$10B in home equity is lost to wholesalers each year by owners of “houses that need love.”
When you hear the word “wholesaling”, the term may conjure images of truckloads of produce, spools of fabric, or other goods sold in bulk. It’s a term well known in the retail industry, referring to the sale of merchandise to a retailer or manufacturer who then sells it to the end consumer, adding value along the way through local distribution or as part of a new finished product. What many people may not know is that wholesaling is also common practice in the residential real estate world, and it generates massive profits.
Those massive profits come at the expense of hard working homeowners. I’ve heard story after story of folks being cheated out of tens, even hundreds of thousands of dollars. One story that sticks out to me is Martha S., from San Diego, CA. She owed a couple hundred thousand dollars in medical bills relating to her late-stage cancer. She was desperate and her home was in disrepair but she had no money to fix up the house and needed cash. A wholesaler convinced her to sign a low-ball offer on her house that was valued at $450,000, then took her contract and assigned it to a property investor that paid almost $100,000 above the contract price. For a few hours of work, the wholesaler pocketed almost a hundred grand in lost equity that Martha would never see again. With skyrocketing medical bills, she moved into her car which was parked outside her former home.
Every year, hundreds of thousands of Americans like Martha tell a similar story after being preyed upon in one of their most vulnerable moments: selling a house that needs renovations or repairs, or what we call a “house that needs love”. This epidemic of equity skimming by so-called cash buyers is happening to more than half a million homeowners each year in the US. In 2019, an estimated 544,911 properties were sold off-market with an average wholesale fee of approximately $17,200. That adds up to as much as $10 billion in lost equity that wholesalers pocketed in assignment fees, or about $18,000 per minute, every day in our country.
For your average homeowner, selling a home that’s older and in need of renovations and repairs becomes a difficult transaction. Realtors tend to be reluctant or unable to help, knowing that houses in need of some ‘love’ spend longer on the MLS and traditional buyers may struggle to secure financing for a house that needs significant renovation. This opens the door for wholesalers whose “cash for your house” handwritten signs by the freeway capitalize on sellers who are often in a financial bind and out of options. They specialize in targeting desperate sellers like Martha who are dealing with difficult life circumstances such as the loss of a spouse or mounting medical bills.
Wholesalers make their money by getting sellers under contract and then assigning the contract to a property investor looking for their next fixer upper. The wholesaler’s goal is to offer the seller as little as possible. They use a number of well honed predatory tactics such as bait and switch offers, phony inspections, and legal threats to lock in the seller at a price far below what the house is worth. They then turn around and sell the house to an investor and pocket the spread as their ‘assignment fee’ without ever purchasing the home or putting up any money. For a few hours of work wholesalers can pocket tens if not hundreds of thousands of dollars, representing huge sums of lost equity for the seller.
In a recent Bloomberg article that shined a spotlight on the residential wholesaler tactics, writer Michael Sasso interviewed Philadelphia-based Community Legal Services attorney Michael Froelich. According to Sasso, “In Philadelphia, Froehlich said he heard complaints of wholesalers using a bad news-good news approach on homeowners. The bad news is that a house needs tens of thousands in repairs. The good news is the wholesaler will take it off their hands for $30,000, though it’s really worth $100,000.”
We started Sundae to create a better way, with a mission to help homeowners get the best outcome when it’s time to sell a house that needs some love. Our model is designed to displace the wholesaler by giving sellers access to a large pool of vetted buyers so that they benefit from a competitive offer process.
Further reading: See first-hand how Bert S. sold his inherited property using Sundae’s marketplace.
Sundae serves as a marketplace with a model that maximizes the seller’s proceeds by facilitating a competitive offer process in contrast to wholesalers who are simply a middle man profiting at the seller’s expense. We package the property and market it to thousands of vetted property investors who compete to buy the house. We standardize all offer terms so that sellers can confidently compare offers apples to apples, and within a couple of days homeowners receive about 10 offers on average, often as many as 20 or more. Sellers pay zero fees and there’s never an obligation to accept an offer. If the seller accepts an offer, the buyer pays Sundae a fee as a percentage of the offer price, so our incentives are aligned with the seller. We even offer the seller up to a $10,000 cash advance to help with financial needs before closing.
In addition to helping sellers, Sundae’s two-sided marketplace serves the needs of real estate agents working with those sellers, and investors looking for properties they can buy in order to grow their business. For investors, Sundae helps with the difficult task of finding these properties, and offers an online platform at investor.sundae.com where they can view available properties and make offers. Once an investor signs up to join the marketplace, they can access the full inventory of properties with detailed information including photos, floor plan, 3D walkthrough, and a 3rd party inspection report.
Today I’m thrilled to announce that Sundae has raised an $80M Series C round of financing with support from a number of notable investors. Our team is energized by this funding because it will help us put an end to the predatory wholesale industry — an industry that not only takes from the pockets of homeowners, but creates distrust amongst legitimate fix and flippers working to revitalize neighborhoods across the country. But more than that, this funding will allow us to reach more homeowners before they get scammed, and help them keep more of their hard earned equity when it’s time to sell a house that needs some love.
Learn more about our mission and get resources to help spot and avoid real estate scams at sundae.com/better-way.
Sundae Co-Founder & CEO