"We Buy Houses": You Lose Out
Accelerator for America’s foundational report, Averting a Lost Decade: Rethinking an Inclusive Recovery for Disadvantaged Neighborhoods, published in June 2022, issued a rallying cry and actionable steps for policymaking that advances an inclusive recovery.
To provide additional analysis and continue the momentum within policy circles, in partnership with Drexel University’s Nowak Metro Finance Lab and Reinvestment Fund, the Accelerator has launched a series of reports taking deep dives into the unprecedented real estate market that has evolved through the pandemic.
Our new report, “We Buy Houses”: You Lose Out, authored by Bruce Katz, Ben Preis, and Kevin Gillen, reveals striking findings – homes sold from an owner-occupant to an investor off the Multiple Listing Service (MLS) sold for 51% less than comparable homes sold on the MLS to an individual. This analysis reinforces a key assertion of our first report in this series – Investor Home Purchases and the Rising Threat to Owners and Renters: Tales from 3 Cities – that homeowners are being hurt by investor activity.
With national investor activity having slowed in recent months, investor purchases remain at elevated levels relative to the start of the pandemic, and homeowners are facing new hurdles in the housing market with elevated mortgage rates. Cities would do well to prepare policy interventions now, while investors might be looking to exit from some markets and housing prices have begun to cool.
Tales from 3 Cities highlights the disconcerting trends of investors buying up residential properties, changing neighborhoods, and harming homeowners, homebuyers, and tenants. In Philadelphia, Jacksonville, and Richmond — cities that were the focus of the original study — the results clearly showed that investors were most active in distressed neighborhoods: areas with low mortgage lending, low-incomes, and disproportionately large non-white populations.
In January, the nation’s mayors gathered in Washington, D.C. for the annual U.S. Conference of Mayors Winter Meeting. Our national housing crisis was a key topic throughout the Conference’s hearings and events, including a hearing dedicated to solving the challenges of affordable housing, in which Mayor Levar Stoney of Richmond discussed the impact of housing issues on his upbringing and urged his fellow mayors to be a part of the solution:
"Growing up, my family lived paycheck to paycheck. My father had to work long hours as a custodian to keep a roof over our heads. And, while owning a home was always something we aspired for, the support for that opportunity was not there. The opportunity to create generational wealth was not there” Mayor Stoney said. “We as mayors have the power to change that. To help families achieve that part of the American dream. So, let’s dive into defining the challenge and how we can be about the fix."
Mayor Stoney’s remarks, along with that of his peers, such as Mayor London Breed of San Francisco and Mayor Tim Keller of Albuquerque, caught the attention of Politico, focusing a spotlight on one of our most urgent growing national crises.
Our newest report, “We Buy Houses”: You Lose Out, looks at the differences in price and geography between houses that sell on the MLS and those that sell off the MLS, to investors and to individuals, in Philadelphia between January 2018 and June 2022. It differentiates each transaction by whether the buyer or the seller was an owner-occupant, or an investor. This study’s hypothesis is that homes sold to individuals on the MLS would transact at a higher sale price than homes sold to investors without ever being listed on the MLS.
Homes sold from an owner-occupant to an investor off the MLS sold for 51% less than comparable homes sold on the MLS to an individual. Considering the average sale price in Philadelphia for off-MLS, individual-to-investor transactions was $120,000 during the time period of this study, if homeowners had been able to sell their house without the relative discount, we would have expected home sale prices to be $126,000 higher, on average. Across the 3,900 off-MLS transactions from individuals to investors in the scope of this study, that comes to nearly $500 million in potential lost value or wealth to individual home sellers.
The geography of off-MLS and investor sales is also concerning. These purchases do not occur with equal spatial frequency across all neighborhoods. Instead, neighborhoods of Philadelphia that have large concentrations of communities of color and low-income communities — North and West Philadelphia — see the highest concentrations of investor purchases and off-MLS purchases.
The National Association of Realtors estimates that approximately 90% of home sellers list their homes on the MLS, while studies have shown that approximately 85% of homes sold in Philadelphia are listed on the MLS. With approximately 5.6 million home sales in 2020, that means that off-MLS transactions may account for approximately 500,000 sales per year, nationwide. While a small part of the overall market, when concentrated, in particular neighborhoods and cities — those numbers add up fast.
There are important caveats to consider. Homes purchased off-MLS do not incur brokerage fees and closing costs, reducing transaction costs to both buyers and sellers. Additionally, wholesalers may offer speed and privacy that sellers value. Homeowners may not want to work with a real estate agent, and even some homeowners who sell their house without the aid of a real estate agent may list it on the MLS. Additionally, assessor information about house conditions may be incorrect, leaving our estimated results potentially incomplete or partially inaccurate.
This study is not causal, so we cannot say that this type of transaction is why the home sale prices are lower. Still, even if our estimates are off by 50%, the differences would still add up to tens of thousands of dollars in a given transaction and hundreds of millions of dollars city-wide.
The significantly large amount of lost home wealth we found strongly suggests the need to better understand the informal housing market and the actors within it. In particular:
Who is buying homes off the MLS?
Where are these homes located?
How is it that they are acquired for so little money?
Our report also offers solutions that are presented in greater detail in the report, but they boil down to three key points:
1. Homeowners need better information.
When homeowners decide to sell their house to a wholesaler or an investor, they should know the potential costs and benefits of doing so. Homeowners should know that wholesalers may resell their contract for a substantial profit, and that the offer may be substantially different (i.e., lower) from what they could get on the open market. Homeowners should be provided with information about alternative ways to sell their house, as well as ways to remain in their home if they are at risk of losing it because of foreclosure, need for repairs, or inability to pay property taxes. Homeowners should also be able to obtain an independent appraisal of their house before choosing to sell it to a wholesaler. Some homeowners, considering the pros and cons of working with a real estate agent and a wholesaler, may choose a wholesaler, because of the speed, efficiency, and privacy associated with this type of sale. But such a choice should be an informed choice, and city leaders and their community-based housing partners need to engage in aggressive education and engagement efforts in target neighborhoods to ensure homeowners know what services and resources are available to help support them either to stay safely in their home or to sell their home for its best value.
2. Wholesaling should be subject to higher legal scrutiny.
Wholesaling is a largely unregulated industry in the United States. Only a handful of states directly regulate wholesalers, and the approaches to wholesaling regulation range from simple disclosures to outright bans. In most other states, the business practice of reselling contracts falls into a legal gray area, and it’s up to the discretion of Attorneys General on how and whether to crack down on the worst offenders.
The wholesaling industry should be more broadly regulated, though there are different approaches that states and local governments can take, as is outlined in the solution section of this report. A range of wholesaling business practices should be considered, from the practice of assigning contracts, the generation of leads, and disclosure of intent to resell. Owners should be able to opt-out of the incessant phone calls, text messages, mailers, and advertising that they receive today. States may wish to tax the assignment of a real estate contract as a property transaction.
3. Local governments should be tracking the informal housing market more closely.
The data contained in this study is merely a best approximation of the informal property market. Without better information on which properties had same-day double-closings, or contracts assigned to a different buyer, it is impossible to say which transactions specifically involved a wholesaler. Additionally, wholesaling is just one part of the informal housing market. Recently, a real estate company has gotten into hot water for offering homeowners small-dollar loans, in exchange for the exclusive right to sell their house for the next 40 years. County recorders of deeds see these transactions as they happen, and they should be equipped with the resources to flag transactions that have been sold via a wholesaler. Providing greater transparency and reporting around property transactions can lead to better policy solutions and more actionable information for local housing support agencies to use to support homeowners.
Our Next Steps
“We Buy Houses”: You Lose Out is part of our ongoing work at Accelerator for America to support our local leaders in building a more inclusive recovery for their communities. Over the next year, we are going to continue to publish data-driven reports on wealth building, economic and community development, and housing, highlighting strategies the federal government, states, and cities can implement to tackle these current day challenges.
Until then, please help us expand the impact of this work by sharing this email with your networks – and please contact us with any feedback or insights that you have from your work.
Thank you for all you do.
Mary Ellen Wiederwohl
President & CEO | Accelerator for America