Maybe the roof is worn, the drywall peeling, the pipes rusted to the core. Of the 6 million American homes sold per year, several hundred thousand are in states of disrepair, waiting for a buyer who will put in money with the hopes of flipping the house for a profit.
Sundae, a two-year-old start-up, just raised a $36 million Series B funding round with the promise of consolidating that historically fragmented landscape into a nationwide marketplace of flippable houses.
“Everybody else is tackling the 87% of homes that trade that are non-distressed,” says Josh Stech, the San Francisco-based company’s cofounder and CEO, who notes that there is no player in the business with more than 1% of distressed property sales. “The top hundred operators in the United States do less than 13% combined market share, it’s just unbelievably small.”
Sundae doesn’t actually acquire run-down homes; it instead creates a network of prospective buyers who participate in online “auctions” when new properties are listed on the platform. By expanding the universe beyond the usual well-marketed local home-flippers, Stech says Sundae has been able to get sellers higher prices on their properties, though he eschews specifics.
The company currently operates in Los Angeles, San Diego, Sacramento and California’s so-called Inland Empire, an area east of Los Angeles. In November, the platform processed about $35 million in sales, collecting a small percentage in buyer-paid fees. (Sundae declined to disclose revenue or profitability figures, but conceded that the business is not yet profitable.)
“This is the type of company that could be the size of an Invitation Homes, or the size of some specialty real estate player in the ecosystem,” says Frank Rotman, a partner at QED Investors, which led the latest round. That’s a very optimistic forecast; Invitation Homes, which holds an enormous portfolio of over 80,000 single-family houses, has a current market capitalization north of $16 billion.
Stech cofounded Sundae with Andrew Swain, who served as CFO at Stech’s last startup, LendingHome, an online mortgage bank. Prior to that, Stech spent even more time dabbling in distressed properties. As a graduate student at Stanford, he wrote his honor’s thesis on the subprime lending crisis that predated the Great Recession, then moved to Las Vegas to cash in on rock-bottom home prices.
“I smelled opportunity,” he says. “It was the second time in history that you could buy a home for less than you could build it.”
Distressed homes dominated the market around that time, reportedly accounting for nearly half of sales in the last quarter of 2008. That number has since fallen more than two-thirds, though due to a nationwide housing shortage, demand is still strong.
“In a lot of areas, you don’t have the opportunity to stamp out new inventory,” Rotman says. “So the best thing you can do is take old inventory, put a little work into it, and basically it turns into new inventory.”
Now Stech, who saw upside amid the 2008 tumult, is benefiting from another crisis—an uncomfortable but undeniable truth. Covid has boosted selling activity across the U.S., thanks to low interest rates, accelerated retirement plans and changing relocation trends.
“We knew that it was ultimately going to be a tailwind for the business,” Stech says, of the pandemic. “The unfortunate reality out there is that there’s an ambient level of distress in the market that causes people to need to sell…. That actually ended up playing out more quickly than we thought.”