In Brief:
The “We Buy Houses” billboards are everywhere in Philadelphia — services offering quick cash for home sellers without the hassle and cost of finding a real estate agent and going through the formal selling process. For some homeowners, these services provide a fast way to cash in on an aging asset. But informal transactions like these — in which a wholesaler typically enters a contract with a seller and then sells the contract to an investor — often deprive homeowners of the full value of their houses.
According to a new report from the Nowak Metro Finance Lab at Drexel University, homes in Philadelphia sell to wholesale investors for an average of 51 percent or $126,000 less versus transactions between individual buyers and sellers on the formal market. That represents a potential $500 million in home equity captured by investors instead of homeowners between the beginning of 2018 and the middle of 2022, according to the report. Off-market transactions are concentrated in some of Philadelphia’s most marginalized neighborhoods. There is scant regulation of the industry in the United States.
Governing spoke with Benjamin Preis, a research fellow at the Nowak Metro Finance Lab and a lead author of the report, about the findings. The interview has been edited.
Governing: This report is part of a larger research project you’re doing on investor home-buying. How did you get interested in this topic and what are the big questions you’re exploring?
Benjamin Preis: Last September the Nowak Metro Finance Lab, Reinvestment Fund, and Accelerator for America put out a piece on investor home purchases generally. Throughout the pandemic, in 2020 and 2021, there was heightened concern about investors large and small buying single-family homes, making it more difficult for first-time homebuyers to buy houses. As we were diving into the data we noticed that not all investor purchases are the same.
There are investor purchases that focus on middle-class suburban houses for rent. But there are other investors who seem to prey on lower-income, longtime owner-occupants who might not know what their house is worth. We tried to figure out a way to identify the most parasitic of the investor purchases.
Governing: Did you do that by looking at transactions that take place off the Multiple Listing Service as the indicator of an informal market?
Benjamin Preis: Exactly. The “We Buy Houses” signs that are so emblematic of the more parasitic investors — and the text messages, the phone calls, the flyers, and the door-knocking that a lot of people have reported experiencing over the last few years — those are transactions that happen without ever being listed on the MLS, without ever hiring a real estate agent to list your house.
Historically it was also a type of transaction that targeted people who were in foreclosure. In the 2008 financial crisis there was talk of this being a foreclosure-rescue scam: You’re about to see a foreclosure on your house, so why don’t you sell to us so you don’t lose that equity? But you were still often losing a lot of equity because of the difference between what you might be able to get versus what an investor was offering.
Governing: What do they actually do? If you call the number on the "We Buy Houses" sign, who do you talk to and how do they proceed?
Benjamin Preis: You’re essentially talking to a middle man most of the time. It sounds funny but the way we started looking into this was by watching a whole bunch of YouTube videos. Early on in the pandemic a lot of TikTok and YouTube videos went viral about how to make a lot of money in real estate.
So maybe that house is worth $80,000 to them. So you say to the homeowner, I’ll buy your house for $60,000, you get a contract from the homeowner, and then you call investors: Maybe you have a Rolodex or you’re a contractor yourself and you know the market, or, what we’ve seen more recently, you’re connected to a tech firm that is trying to bring capital from outside the region into the local real estate investment market. You sell that contract to them for $80,000. They show up at the closing, buy the house for $60,000, and you, the wholesaler, walk away with $20,000.
Governing: You found that these transactions are concentrated in a handful of neighborhoods. What patterns did you see in the geography of where this is taking place?
Benjamin Preis: There’s a lot of this activity in North Philadelphia and in West Philadelphia. Those are neighborhoods that are historically marginalized, have large non-white populations, might have houses that are in worse condition, and it also seems like they have houses that generally transact off the MLS. We see this interesting pattern in North Philadelphia where the majority of transactions happen without ever being listed on the MLS at all.
This is concerning to us because we know from other studies that houses that are sold on the MLS to individuals sell for higher dollar amounts, even when accounting for different characteristics. And there’s a long history of real estate agents not serving non-white communities well, not serving low-income communities well, so it’s likely a combination of many factors as to why it’s showing up in these geographies. But we also know these are places where there’s a gap to be exploited: There’s flipping that can be done, there’s renovating that can be done. And that might ultimately lead to a heightened pace of gentrification and neighborhood change and ultimately a loss of equity and displacement of long-term owner-occupants.
(Tom Gralish/The Philadelphia Inquirer/TNS)
Benjamin Preis: There are lots of good reasons. You might not want to work with a real estate agent because you are skeptical of the industry or you’ve had negative experiences with agents in the past. Your house might not be worth enough to get an agent’s interest, because agents are paid on a percentage commission basis, so a low-value house isn’t worth much to them.
And then there are all of the transaction costs associated with working with an agent and listing it on the MLS. They might recommend you fix up the house, clean it up — do all of the things that an HGTV show has told us you need to do in order to sell a house. And if you are looking for quick cash with minimal investment, a wholesaler is there for you. They might offer to pay for some of your moving costs. They might offer to cover the cost of a dumpster to clean out your house. It can be a two-week turnaround, and you don’t have to deal with the large transaction costs associated with America’s housing market today.
Governing: Can you tell me about some of the approaches to regulating the industry that already exist?
Benjamin Preis: Atlanta and Philadelphia are, as far as we’re aware, the two localities that have regulated the wholesaling industry. They’ve both taken the approach that they have do-not-call lists. So those incessant text messages and phone calls that folks have reported getting over the last few years, now you can sign up and say you don’t want to be contacted by a wholesaler anymore.
Philadelphia has gone a step further in that they require residential wholesalers to actually get a license. They need to have insurance, they can’t have been convicted for fraud, and they need to be in tax compliance with the city. When they offer to buy a house, they have to disclose to the homeowner how they can get more information about what their house is worth and the other avenues to home selling.
At the state level there are only four states, as far as we’re aware, that have regulated wholesaling and they all take a different approach. Texas says you must disclose that you’re a wholesaler and not a real estate agent. Illinois and Oklahoma have made it basically impossible to wholesale property without also having a real estate license.
Behind that concept is, a real estate license comes with a set of ethics, a code, a professional association that is meant to mitigate some of the worst offenses of wholesaling. But as we just talked about, there are plenty of reasons that folks might not want to work with real estate agents. So it’s not clear to us that requiring a real estate license is the best regulatory path forward at the state level.
Governing: What do you think would help state and local governments get a handle on it, or at least prevent the most vulnerable residents from just throwing away equity?
Benjamin Preis: A large piece of this is homeowner information and education about what their house is worth, what other avenues they have to sell their house, especially insofar as wholesalers will target older occupants who might not be able to keep up with the maintenance on their homes. Repair programs and foreclosure-deferral programs are a huge part of this.
The other piece to look at is, how is it that a wholesaler is able to walk away with the possibility of such a big paycheck from a transaction? It gets taxed at normal income levels. It might make sense to tax it as a property transaction in the way that Philadelphia and a lot of other places have transfer taxes.
And there’s just a dearth of data about this. We don’t know how many wholesalers there are. So empowering local governments to track this data better and to start trying to understand how big the problem is would allow us to target regulatory solutions appropriately, allowing people to use wholesalers when it makes sense for them but making sure they aren’t harming vulnerable homeowners when they may have a better option.
