Sundae snags $36M to build out its distressed property marketplace

Opendoor has opened the door, so to speak, for startups to apply their technical expertise in search, marketplaces and audience segmentation to rethink the very antiquated and analogue world of property. Today, a startup that is doing this in the specific area of distressed property is announcing a round of growth funding to ramp up its team and expand its business.

Sundae — which has built a marketplace for homeowners to list and sell dated or damaged homes, or homes that they may need to shift faster for financial reasons; for property investors/developers seeking to buy, fix up and then sell or rent out those properties; and for itself potentially to buy in a property and do the same — is today announcing that it has raised a Series B of $36 million.

The funding is being led by QED Investors; Founders Fund, Susa Ventures, Navitas Capital, and Prudence Holdings also participated. All are previous investors from the startup’s last round, a $16.55 million Series A also led by QED.

In an interview, CEO and co-founder Josh Stech, who describes the business he is in as the “homes that need love segment”, declined to talk about the company’s valuation, and he also declined to give specifics on a number of other points: Sundae is not disclosing how many homeowners and developers have used its service (“thousands”); the average selling price for a property; the number of properties it’s shifted; and how many of those it’s bought it versus sold to a third party (the “vast majority”, more than 50% but less than 100%, are purchased by investors, not Sundae itself, he said).

He did note that in the four markets where the company has gone live since launching its business in January 2019 — San Diego, Los Angeles, the Inland Empire, and Sacramento — has yielded an annualized revenue run rate of over $400 million in gross merchandise value (the total value of home sales transacted on its platform). That also speaks to the vast and interesting quantity of data that the startup is amassing on home sales, and how it can use that to power its platform in the future.

And as another measure of its momentum, that this latest round comes less than six months after its Series A.

With those two funding rounds all equity-based, to buy up property itself and provide $10,000 cash advances to all sellers, Sundae previously also raised a debt fund from high net worth individuals, and it has a “very large” debt facility from Goldman Sachs that it also non-dilutive, Stech said.

The opportunity that Sundae is tackling is one that has been a persistent cornerstone of the housing market, but one that might have become an even more keen factor in the last year.

In the US, there has long been a relentless push, both in newer cities with more room for geographical expansion and older cities where you have legacy buildings that get demolished, a drive for new-build homes. Interestingly, that demand has grown a lot during the pandemic, with demand for new homes as much as four times higher than demand for buying “existing” homes.

But at the same time, there has been a quickly dwindling supply of any housing stock, going down to as low as one month in terms of sales pace. As Stech puts it, that means that “In 30 days, if no homes get listed, there are no homes for sale.” That subsequently has put more of an emphasis on the sale of older homes to meet demand.

The issue with distressed property is that typically these days, people are not as interested in buying fixer-uppers as they may have been in the past. Those selling property want to present ready-to-inhabit homes for a quicker turnaround and to lower the barrier to sales. This means that usually distressed homes, where the owner either doesn’t want to or can’t make improvements before listing, are rejected for sale.

That’s presented an opportunity for developers (or as they are more commonly called in the US, property investors) who buy up those properties and put in the work themselves to make them more sales-friendly. They operate on the principle of five F’s: “find, finance, fix, fill or flip” as Stech puts it.

Sundae basically removes the friction both for the homeowners and the developers: those who want to sell their homes only have to deal with one entity, Sundae itself, which comes in to photograph (using Matterport) the property, provide some guidance on how to sell it and at what price, offer an advance on the sale in case the owner needs the money even faster, and ultimately bring in a number of interested prospects, including itself.

Those who are looking for investment properties can use the service to widen the funnel of homes that they can discover, buy and work on.

Stech said he had a brainwave about the opportunity when he finished graduate school at Stanford and moved to Las Vegas, which at the time was at the epicenter of the housing market crash of 2009. He bought a one-bedroom condo that sold for $267,000 in 2007 for $19,000 in cash and realized that the market was ripe for the taking.

It was a brainwave that came in part because of his experience. Stech has spent his whole professional life in property. Before Sundae, he and co-founder Andrew Swain were executives at LendingHome, providing loans to property investors; and before that Stech built a property business in Vegas.

There is admittedly something a little unsettling about any kind of business that focuses on distress: the implication is that those building services for people who are in difficult circumstances can take advantage of them and essentially operate in a predatory way.

Stech said that his intention is in fact to prevent that very situation, by creating a more transparent process where sellers are given the option of considering offers from multiple developers rather than just one that is not going to be operating with the seller’s interests in mind, but his own.

“It’s shameful what property developers have become,” Stech said. “The idea has become glamorized, and they make a ridiculous amount of money. Everyone forgets who lost in the process: the homeowner who is probably being forced to sell.”

That’s not to say that selling on a marketplace will remove that self-interest but it creates the option for more balanced dynamics where a seller might at least have more competition to consider. If especially tight markets like London’s are any example, in the best case scenarios sellers sitting in a property might even make an excellent turnaround on their homes, compared to the sums they initially paid to buy them, even if the home might still need a lot of “love” to become habitable by gentrified comparisons.

All of this is especially interesting in light of the bigger forces at play, which have brought us all closer to staying put in one place more than being nomadic, heightening the bigger urge to buy property rather than rent if we can manage it financially.

“The concept of homeownership is fundamentally changing. This is particularly true given COVID-19 which has caused more uncertainty and forced people to rethink their real estate decisions. Homeowners are looking for solutions that make the selling process more efficient, transparent, and reliable, particularly for the distressed property segment,” said Frank Rotman, founding partner at QED Investors, in a statement. “Sundae’s rapid growth is a testament to their differentiated offering and the trusted brand they’ve created through a customer-centric approach to the market.”