Executive Summary:
Sundae is an online real estate platform that allows homeowners to sell distressed properties to investors in its network.
Sundae makes money from subscriptions, fees charged to investors, interest on loans, and by flipping homes for a profit. It operates under a marketplace business model.
Founded in 2018, the platform has managed to revolutionize the process of selling distressed properties. Its founders have managed to raise over $135 million in funding since.
What Is Sundae?
Sundae is an online real estate platform that allows homeowners to sell distressed properties to investors in its network.
Traditionally, when selling a distressed property, property owners got taken advantage of because they need to offload their home fast.
Buyers, who often just renovate the property and then flip it for a profit, are thus able to purchase those homes far below their actual market rate.
Sundae hopes to eliminate those predatory practices by connecting sellers with thousands of investors instead of just a few they would normally deal with.
In some instances, Sundae directly purchases the home from the sellers themselves. It also offers cash advances of up to $10,000 for qualified sellers.
Here’s how Sundae works. First, you connect with a customer advisor by calling the firm or submitting your info on its website.
A selected expert will then pay the property a visit to confirm that the information you provided was indeed correct. Once the property passes all of Sundae’s check marks, it is listed on its marketplace (granted you signed on).
Sundae states that you will receive multiple cash offers days after the property was listed. Homeowners can close the sale within as little as 10 days. Alternatively, if time isn’t of the essence, they can take up to 60 days to move out after accepting the offer.
One of the key advantages, especially when comparing Sundae to iBuyers like Opendoor, is the fact that customers don’t pay any fees when selling via the platform. Another advantage is that sellers can offload their homes as is, meaning no clean-ups or repairs are mandated.
Sundae is currently available in over 25 cities across California, Florida, Georgia, and more. However, it continues to expand at a rapid pace, so new regions are constantly launched.
Detailing The Founding Story of Sundae
Sundae, which is headquartered in San Francisco, California, was founded in 2018 by Josh Stech and Andrew Swain.
To say that Stech, who graduated from Stanford with a degree in Economics and Spanish, lives and breathes real estate is probably an understatement.
“I did my honors thesis on the subprime lending crisis—not just what was happening economically to the country, but specifically how that was impacting some of the underserved segments of the population,” Stech said in an interview with Think Realty.
He would go on to move to Las Vegas, a market particularly devasted by the financial crisis, to revitalize the dilapidated, bank-owned homes that were tearing down neighborhoods.
So, he did what any sensible college grad would do: purchasing hoes from bank auctions, managing the construction process, and then flipping those very same homes for a profit. The business itself was started together with his dad who likely contributed most of the capital.
After over 4 years of flipping homes, he moved to the venture-backed side and became a founding member of LendingHome (now Kiavi), a startup that offered short-term residential bridge loans to property investors like Stech.
LendingHome also became the place where he met his future co-founder Andrew Swain who served as the start-up’s CFO. Swain had previously been the CFO of Airbnb. The two founders helped scale LendingHome to over 350 employees and more than $150 million in venture funding prior to their departure.
While many aspects of real estate would soon be tackled by venture-backed startups, distressed property selling remained a largely unregulated and predatory industry.
“After being in this business for 10 years and getting to know thousands of property investors and real estate agents, I realized that sellers of dated or damaged homes needed a platform, marketplace, and an ally to help them broadcast their property to a wider audience,” Stech recalled during the same interview. “They needed someone to package it as an investment, in a way that only property investors would understand, in order to get the most offers, best terms, and highest price.”
But before branching out on his own, he was still missing one of the most important things when starting a business: a proper name. Here’s a video of Stech reminiscing about how he landed on the Sundae name.
With a co-founder and a proper name in place, it was time to get to work. And because the founders possessed decades of experience in real estate, finding willing backers was the least of their problems.
In March 2019, Stech and Swain raised a first seed round of $3.2 million from renowned investors such as Founders Fund and Crossover. Sundae itself was launched two months earlier in January.
The first 1.5 years of being in business were mostly spent on refining the concept and making sure that everything works as intended before expanding into new markets.
Initially, Sundae was only available in the Southern California area, namely San Diego County, Riverside County, San Bernardino County, and Los Angeles County.
However, that all changed in 2020. The Covid-19 pandemic, as unfortunate as it was, became the perfect tailwind. “Seller home urgency has increased and unfortunately at the same time, flippers are smelling more blood in the water,” Stech told HousingWire.
They consequently went on the offense to take advantage of this once-in-a-lifetime opportunity. First, the founders raised $16.55 million in Series A funding in June. Then, six months later, they followed that up with another $36 million in Series B funding.
Throughout 2020, over $400 million in real estate value would be transacted via the platform. Furthermore, the founders used that cash to aggressively expand into new markets while adding thousands of new investors to the platform.
As a result, they were able to raise yet another round of funding. In July 2021, Fifth Wall and General Global Capital, alongside existing backers, poured another $80 million in Series C funding into Sundae.
Once again, market expansion became a key theme. Sundae also began to hire like crazy and even introduced new software tools that allowed investors to find suitable properties and assess their quality.
The cash injection even enabled Sundae to finance some investor purchases of distressed properties by itself (called Sundae Funding).
Interestingly, though, an even bigger boost to its business wasn’t the tens of millions in funding it raised but an appearance on Dr. Phil.
Unfortunately, the boosted awareness couldn’t free Sundae from outside market forces that started to affect the whole real estate market. As a result of the heightened interest rate environment, Sundae was forced to lay off 15 percent of its workforce back in June 2022.
How Does Sundae Make Money?
Sundae makes money from fees charged to investors, subscriptions, interest on loans, and by flipping homes for a profit.
The business model of Sundae is that of an online marketplace. More precisely, it operates a three-sided marketplace in which it connects buyers (investors) and sellers as well as participates itself.
One of the biggest advantages of a marketplace, which is particularly evident in the case of Sundae, is the ability to cross-sell participants into different offerings.
Sundae simply started out as an intermediary between sellers and investors. But, as the marketplace grew, it was able to add ancillary offerings such as loans or subscriptions.
Going forward, it wouldn’t be impossible to assume that other revenue streams could be added. For example, Sundae could also offer renovation services or issue mortgages to sellers who want to purchase a new property after they sell their existing one.
So, without further ado, let’s take a closer look at each of Sundae’s revenue streams in the section below.
Buyer Fees
The largest source of revenue is the buyer fees that Sundae charges whenever a property is successfully sold via its platform.
As previously stated, Sundae does not impose fees on sellers, which is one of the reasons it has managed to grow that fast.
In return, investors on its platform profit from greater choice, which prompts more of them to join. This then allows Sundae to make money on ancillary products and services, which we’ll detail in a bit.
The fees that Sundae charges are in line with traditional real estate transactions. They include:
- A fee of 5 percent to 7 percent, which is dependent on the value of the property and the market it was sold in
- Closing costs including those that are normally paid by the seller (such as transfer taxes)
- Expenses related to the removal of existing items, cleaning, and eventual repairs
Sundae claims that sellers normally receive around 10 offers within 3 days of listing their property. Furthermore, sellers have the option to set a price themselves. Investors can then purchase said home at a set price, thus allowing both parties to move faster.
Subscriptions
Another growing revenue stream of Sundae is the subscription fees it charges to investors for its premium membership program Edge.
There are 3 different plans that Sundae offers, namely the Free tier, Edge, and Edge+. Edge costs $159 per month (when paid upfront for the whole year) or $199 per month. Edge+ comes in at $399 and $499 per month, respectively.
The difference between the two plans is that while Edge grants investors access to deals from 3 markets, Edge+ enables them to scour for distressed properties nationwide.
Additionally, customers benefit from a variety of other features, namely receiving dedicated investor advisors, access to historical sales data as well as exclusive Q&A sessions with the firm’s leadership team, a dedicated mobile app, and much more.
One of the biggest advantages of charging subscriptions on an annual basis is the predictability that comes with it.
Sundae can utilize the revenue from the yearly plans and invest it into other aspects of its business (such as R&D or growing the number of markets).
Meanwhile, venture backers benefit from greater predictability, which in turn enables Sundae to raise funding on better terms.
Interest
In February 2022, Sundae officially unveiled a service called Sundae Funding. In essence, it provides financing options to investors wanting to purchase properties on its platform.
This includes issuing pre-approvals and underwriting the actual loan. Sundae will then make money on the interest that it charges its investors. Additionally, the company also charges late fees.
Once again, its marketplace advantages come into play. Sundae has likely facilitated thousands of transactions at this point and thus collected data on how much each investor purchases, where their expertise lies, and so forth.
Additionally, since it purchases homes itself (more on that in the next chapter), Sundae can somewhat reliably assess how good or bad a given property is that the loan is issued for.
As a result, it is technically able to minimize risk by issuing loans to the most sophisticated investors purchasing the best types of properties.
Flipping Homes
Lastly, Sundae also makes money from purchasing distressed properties, fixing them up, and then flipping them for a profit. That division is called Sundae Homes.
Many experts in the industry have thus begun to classify the firm as an iBuyer. However, there are a few counter-arguments to be made here.
First, iBuyers like Opendoor or Offerpad do not purchase distressed properties. Instead, they go after properties with more or less the below characteristics:
- Single-family homes in suburban areas
- Has been built in the 1960s or later
- Valued between $125,000 and $500,000
- No major damages
As a result, they do not have to conduct any or sometimes just very minor repairs. Sundae, on the other hand, often has to completely redo the house, which requires a totally different skill.
Another difference is that most iBuyers provide an offer without seeing the property. Instead, they rely on the information and photos/videos that the seller provides.
Therefore, iBuyers rely on proprietary algorithms that determine a given property’s price, which allows them to flip homes at a much faster pace.
Sundae, as stated above, always has one of its own experts visit and inspect the property thoroughly to correctly assess the price.
Having multiple real people involved in the process does make sense from a financial perspective. After all, the average U.S. house flip in 2022 yielded investors $67,000 in profits and a 26-percent return on investment.
On the other hand, some iBuyers have managed to burn through significant amounts of cash. Zillow, in late 2021, had to shut down its Home division after losing billions of dollars.
One aspect that Sundae needs to be aware of is the potential of cannibalizing its own business and turning away investors. If it begins to keep the best properties to itself, it may alienate the investors on its platform, which would result in a loss in buyer fees and subscription revenue.
Sundae Funding, Revenue & Valuation
Sundae, according to Crunchbase, has raised a total of $135.7 million across 4 rounds of venture funding.
Notable investors are Fifth Wall, Founders Fund, QED Investors, and General Globe Capital. Actors such as Will Smith or pro athletes like DK Metcalf have also poured money into the business.
Unfortunately, as a company in private ownership (more on that in the next chapter), Sundae is not obligated to disclose its revenue or valuation to the public.
However, when Sundae raised its Series C in June 2021, it told TechCrunch that its revenue had grown 600 percent year-over-year.
Who Owns Sundae?
Sundae founders Josh Stech and Andrew Swain likely remain the biggest shareholders of the company.
Unfortunately, and as previously stated, Sundae is privately owned, which means that its shareholding structure (plus revenue and valuation) is not freely accessible to the public.
Moreover, the founders have refrained from disclosing valuation figures during any of its funding rounds.
With 4 total rounds of funding, it can be assumed that they continue to retain a significant stake in the firm – especially considering their vast experience in the real estate industry, which probably allowed them to raise on more favorable terms.
On the venture side, Founders Fund and Susa Ventures are likely the biggest shareholders. They led the firm’s seed round, which is normally where investors capture the greatest amount of equity (due to the greater risk of early-stage companies).
They also participated in Sundae’s two subsequent funding rounds, namely its Series A and Series B. While they might have sold off some equity during the Series C round, it wouldn’t be unfathomable to assume that they remain the largest institutional shareholders.
Founders Fund, the investment arm of controversial figure Peter Thiel, was launched with the premise of enabling founders to build the businesses they want (and not be kicked out of their own company as it was common back in the day).
For example, it held onto its Facebook shares, in spite of all the backlash the social network was subjected to, up until 2019 when it sold its remaining stake.
