As the housing market and stock market have cooled in recent months, things have been tough for many of the relatively young Proptech, Fintech and iBuying firms, many of which rely heavily on venture capital funds. With experts predicting an even cooler 2023 housing market, many firms are preparing for the worst. However, Josh Stech, the CEO of Sundae, remains optimistic.
RealTrends recently sat down with Stech to discuss the 2023 housing market and what it means for Sundae and other proptech firms.
This interview has been edited for brevity and clarity.
Brooklee Han: Before we dive into where things are going in 2023, as the leader of a firm in the proptech space, what are your biggest takeaways from 2022?
Josh Stech: The beginning of the year was an incredible market. There was extremely strong transaction volume and things were very good, but it came to a halt thanks to the rising interest rate environment, creating a sort of a standoff between buyers and sellers who weren’t adjusting their prices to match the higher interest rates.
In the second half of the year, sellers started dropping prices, but it is hard because you still want to sell at yesterday’s prices, but buyers were no longer able to afford those prices. So, we started getting to a point where we were flipping from a sellers’ market to more of a buyers’ market. We are starting this year with the buyers having the power.
Also playing into things was this was a huge, sudden transformation for a market that has been on one long 12-plus year bull run. That change was certainly the Federal Reserve’s intention with raising the rates, but I think they impacted the real estate industry more dramatically than almost any other industry. I don’t think it was fully intentional, but it is definitely what happened.
Fortunately, we have yet to see major price drops or a big uptick in inventory from sellers in financial distress. Prices are dropping, but not like they were in the Great Recession.
Han: Looking ahead to 2023, what are you expecting to see from the housing market?
Stech: I expect to see it soften quite a bit. There is some silver lining in the fact that there is more supply than there was in late 2021 and 2022. But, we are seeing more job loss, especially in the tech sector, and inflation is still an issue and the international environment is not getting any more stable, so the overall economy in the U.S. will soften. This will then put some stress on people who were thinking about buying a home or buying a bigger home, because maybe they took a pay cut or someone in their household lost their job.
I also expect to see inventory continue to rise throughout the year. Overall, it will sort of be a prolonged correction in the housing market this year.
Han: As the housing market has slowed, firms in the proptech and fintech space have struggled. Why do you feel that is?
Stech: Almost all proptech companies rely on transaction volume, so when transaction volume decreases, your ability to generate revenue also decreases. In addition, your cost to acquire the same business increases, so they have been hit with lower volume and a higher cost to acquire customers.
The iBuyers have been hit worst because their business model is fundamentally flawed. There are three ways you can make money flipping homes. One is instant appreciation, where you buy the home for less than it is worth and resell it at market value. The second is forced appreciation, which means you put money into the home through renovations and the value goes up. And third is market appreciation, which is when you hold on to a property and the value goes up because the market goes up.
With iBuying, they were doing very little, if any, renovations to the homes they were buying, so they were relying on instant appreciation and a very fast pace of market appreciation. Basically, the market is doing the heavy lifting of generating revenue on these properties. But now the market has gone flat, and the only way for iBuyers to make money is to buy homes for less than they are worth. And the question is, if I am a homeowner, is the iBuying value proposition worth losing 12%-20% of my home’s value?
The business models that have been faring better are those that use a marketplace, and that is why our business uses a marketplace model. Unlike iBuyers, marketplaces have the consumers’ interest at heart, because we generate competition for their homes.
Finally, any early stage, venture-backed business, which most proptech businesses are, since proptech is such a new concept, only gets more venture fund investment when they produce results. If slower market conditions are cutting into revenue, the firms aren’t producing the results the venture funds want, so they receive less funding.
Han: You discussed how you feel the marketplace model used at Sundae has positioned it in a way to succeed — even in a slower market — but are there any other changes you are making to ensure your firm successfully weathers this storm?
Stech: So, even before the market started to turn last spring, we were in the process of building a platform so that real estate agents could interact with Sundae. So far, we have rolled it out to a handful of agents and brokerages, and it has been amazing.
The big initiative for Sundae in 2023 is embracing the agent community. If they have a homeowner who needs to sell quickly and wants a simple, easy process and multiple offers, but doesn’t want to list on the MLS, they can bring their clients to Sundae.
We do the inspection; we do 3D walkthroughs and photos and prepare the home to list it on the Sundae marketplace. The listing is then broadcast to about 20,000 investors across the country, and within four or five days, we auction the home off. We currently get an average of six offers per home, and within a handful of days, the sellers can close.
We can help agents help their clients have a better experience in selling their home, and we give agents who partner with us a portion of our fee as their commission.
At the moment, we are building the waitlist of agents who want to join our network and are looking to expand this through the areas we currently serve.