Last year, the Nowak Metro Finance Lab, Reinvestment Fund, and Accelerator for America published a report: Investor Home Purchases and the Rising Threat to Owners and Renters. The Lab’s report highlighted the disconcerting trends of investors large and small buying up residential properties, changing neighborhoods, and harming homeowners, homebuyers, and tenants.

In Philadelphia, Jacksonville, and Richmond — which was the scope of the study’s data collection efforts — the results indicated that investors were most active in distressed neighborhoods: areas with low mortgage lending, low incomes, and disproportionately large non-White populations. In December of last year, Bruce Katz presented these findings as part of a Housing and Urban Development event on Institutional Investors in Housing.

The significantly large amount of lost home wealth strongly suggests the need to better understand the informal housing market and the actors within it.

One of the key assertions in that report is that homeowners are being hurt by investor activity because some investors may pay homeowners less than the market value of their property. In transitioning neighborhoods with new investment and public assets, some long-time homeowners may not know how much their house has appreciated; flippers, wholesalers, and iBuyers can exploit that lack of knowledge by offering quick and easy cash offers for less than what they would receive if they listed their house with a real estate agent.

In order to better understand the impact of investor purchases on existing homebuyers, we have written a new report, “We Buy Houses”: You Lose Out. This report looks at the differences in price and geography between houses that sell on the Multiple Listing Service (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.

The results are striking

Even when comparing for characteristics like home size, condition, and amenities, homes sold from an owner-occupant to an investor off the MLS sold for 51 percent 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 a cumulative $500 million.

However, we urge caution in taking these numbers literally. 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 biased. This study is not causal, so we cannot say that this type of transaction is why the home sale prices are lower.

 It is the parts of Philadelphia that have large concentrations of communities of color and low-income communities — North and West Philadelphia — that see the highest concentrations of investor purchases.

Even if our estimates are off by 50 percent, however, 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 geography of Off-MLS and investor sales is also concerning. These purchases do not occur with equal spatial frequency across all neighborhoods. Instead, it is the parts of Philadelphia that have large concentrations of communities of color and low-income communities — North and West Philadelphia — that see the highest concentrations of investor purchases and Off-MLS purchases.

The significantly large amount of lost home wealth 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?

The National Association of Realtors estimates that approximately 90 percent of home sellers list their homes on the MLS, and studies have shown that approximately 85 percent 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, in particular neighborhoods and cities — those numbers add up fast.

Our study explores the relatively under-investigated world of “We Buy Houses,” — that is, the wholesale property market — as well as other types of informal home sales. Our solutions are offered in greater detail in the report, but they boil down to three key points:

1. Homeowners need better information

When a homeowner decides 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 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.

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 grey 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 the 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. Counties 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 come under 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.

Next steps

Our report is part of our ongoing work at the Nowak Metro Finance Lab and Accelerator for America for an inclusive recovery, and is the second report in our series. Over the next year, we are going to continue to publish data-driven reports on Housing Policy Futures, and highlighting strategies the federal government, states, and cities can implement to tackle this new paradigm.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Ben Preis is a Research Fellow with the Nowak Lab. Kevin Gillen is a Senior Research Fellow at the Lindy Institute for Urban Innovation at Drexel University.

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