\n
Dave:
Hey, everyone. Welcome to On The Market. I\u2019m your host, Dave Meyer, joined today by James Dainard. James, what\u2019s going on man?<\/p>\n
James:
Just grinding it out in the Pacific Northwest right now. We\u2019re dealing with the market, shaking out, so just pivoting, changing things and keeping our nose down and getting things done.<\/p>\n
Dave:
I mean, I guess I\u2019m pretending asking you what\u2019s going on. We\u2019ve spent the whole day together, so I\u2019ve talked to you a little bit. But maybe before we jump into the awesome interview we have today, what are you focusing on up there in the Pacific Northwest to keep your business moving during this very strange economic climate?<\/p>\n
James:
A lot. We\u2019ve made structural changes at every business. The way we\u2019ve been doing the last 24 months we\u2019ve thrown out the window, and we\u2019ve replaced staff or reposition staff, and we\u2019re just rebuilding the companies, because at the end of the day, every market is a different business and you just have to pivot, change and get things moving.
And as I\u2019m seeing the market kind of slow down, I don\u2019t want to wait until the very end, I want to do it right now. And so make your pivots, build your infrastructure out, and then start looking at the deals you\u2019re going to be buying next.<\/p>\n
Dave:
That\u2019s great advice. We also have a great interview today that you dreamed up. This is someone you know. Can you tell us a little bit about Tommy, who\u2019s going to be joining us in a little bit here?<\/p>\n
James:
Yeah. I met Tommy actually two years ago, because we\u2019re real estate brokers as sources investment properties. And they came to our town, Seattle, and they changed everything for a while. They came in heavily funded, very good clients, very good builders.
And the cool thing is they built a very high quality home and they spent a lot of time perfecting the layouts for the demographics that want to come in. And for us as brokers, it\u2019s made us very easy to sell. But as an investor, it\u2019s also made me be an admirer, because I\u2019m like, \u201cHey, I need to kind of do what they\u2019re doing because it\u2019s working so well.\u201d
But they\u2019re a very sharp company, very great organization. They have very good systems in play. Their team is amazing. They build a great product. And the thing I like about him, he\u2019s not just a home builder, he\u2019s an investor guy.
He understands the whole game, he gets the whole big picture. He\u2019s not just putting up two by fours and citing. They\u2019re financially planning and expanding through every market, so it\u2019s just a really exciting company to know in general.<\/p>\n
Dave:
Oh, absolutely. It\u2019s great. And I think if you\u2019re thinking, \u201cOh, I\u2019m not a builder. I\u2019m not a developer,\u201d you\u2019re still going to want to listen to this, because Tommy has an incredible way of explaining how he uses data to find opportunities that\u2019s applicable to people who invest pretty much in anything, particularly in real estate.
We get into a great conversation about how to find product market fit that is applicable to people who invest in any type of asset class. You\u2019re definitely going to want to stick around and hear what Tommy has to say. Anything else you think our audience should listen out for in this interview?<\/p>\n
James:
Just understanding the trends. And what I really enjoyed about the conversation was just it\u2019s a simple business when you\u2019re looking at deals. We\u2019re going from a seller\u2019s to a buyer\u2019s market. The true investors like stable. And he wants a stable market, just like I want a stable market. And most of us just this transition is not a bad thing, it\u2019s a good thing, and it allows you to actually grow your business a lot better.<\/p>\n
Dave:
Right on. All right. We\u2019re going to take a quick break, but after that we\u2019re going to welcome Tommy Beadel, the CEO of Thomas James Holmes to On The Market. Tommy, welcome to On The Market. Thank you so much for joining us today.<\/p>\n
Tom:
Yeah, thanks for having me.<\/p>\n
Dave:
Could you start by telling our audience a little bit about how you got into real estate in the first place?<\/p>\n
Tom:
How I got in real estate in the first place. Ah, gosh. How deep do you want me to go? I mean, I was sitting on my couch after a late night in college watching an infomercial about a guy who said, \u201cBuy real estate, get rich with no money out of your pocket.\u201d I ended up at a seminar at LAX Airport where they taught you how to leverage up your credit cards or ask for more balance on your credit card so you can go out and buy a home.
And I ended up buying my first home in Long Beach in 2001, 100% financing back when you could get that. I was a full income documentation earner at the time, so it wasn\u2019t one of those crazy stated income loans. But bought a condo, rented one of the rooms out to my brother and my roommate, which functionally paid the entire mortgage payment, I was like, \u201cI live for free. This is amazing. How do I buy more real estate?\u201d
That was my first foray into real estate back then. Then I got into the mortgage business, did mortgages during the mortgage boom from 2001 till 2008. Had started Thomas James Capital, a mortgage company in \u201906 was my first kind of foray of starting my own business. And started as a mortgage business and then have had to adapt over the last 16 years to where you can make money doing real estate, and have found myself into the new construction, single lot infill development business.<\/p>\n
Dave:
I got to ask you, do you remember how much that seminar cost you back in 2001?<\/p>\n
Tom:
It was free actually.<\/p>\n
Dave:
What?<\/p>\n
Tom:
It was free. I\u2019m convinced though what they told you was ask for more limits on your credit cards because on day two we\u2019re going to sell you the next seminar. Right? I didn\u2019t buy the next seminar. I was like, \u201cAh, you just told me how to do it.\u201d So no, never spent a dollar on the seminars.<\/p>\n
Dave:
Wow. I was thinking to myself, \u201cI\u2019ve never interviewed anyone who has walked out of one of those seminars better off for it.\u201d Congratulations on being someone who did. That\u2019s awesome. Can you tell us a little bit about what you\u2019re doing now and what your construction company does?<\/p>\n
Tom:
Well, yeah. Thomas James Holmes, we\u2019re the country\u2019s largest single lot tear down home builder, where what we do is we go into a market and buy a old home in the best neighborhoods to live in. We call it the right home right where people want it. The neighborhoods where people want to live have really old homes.
And so we go and buy that home, tear it down and build a new home in its place. We\u2019re currently operating in Southern California, both in Orange County, Newport Beach area and the west side of Los Angeles, as well as the Silicon Valley.
We\u2019re in the greater neighborhoods of Seattle and the Seattle Market, Kirkland, Bellevue, et cetera. And then we\u2019re in the city of Denver and also in the city of Phoenix. And so we\u2019ve grown a business that enables us to replace functionally obsolete old homes in the best neighborhoods where people want to live.<\/p>\n
Dave:
I want to get more into the specific markets that you operate in. But how did you come to settle on that niche of tear down homes, single lot building? What drew you to that niche of new construction?<\/p>\n
Tom:
Listen, I would describe myself 16 years ago as a opportunistic real estate investor. Right? 16 years ago I was in the mortgage business because you could make a lot of money doing mortgages. And then in 2008 mortgages stopped and I started buying foreclosures. We were one of the larger foreclosure buyers at the LA County Auctions from 2008 to 2012.
But it\u2019s opportunistic, because that was a finite period of time where there were inefficiencies in the foreclosure market that you could leverage and have an advantage from, but it\u2019s not permanent. Right? The mortgage business where we could make a bunch of money from \u201901 to 2006 was not a permanent stable business. The foreclosure business was again a moment in time. And what I found through all of this is businesses have cycles that exist, again, mortgages or foreclosures.
And even fixing and flipping homes, it\u2019s this period of time where there\u2019s a disparity between what you can buy and what you can sell for. What I saw in new construction was a permanent business. It was a business that there is supply of hundreds of thousands of old homes that ultimately need to be torn down. And there\u2019s demand from a consumer for great homes in the neighborhoods where they want to live yet there\u2019s no supply of that home stock in the market.
And when I look at the macro dynamics of the market, the big public builders can never play in those markets because there is no land. If you correlate what we do versus a Toll Brothers, or a NAR, or D.R. Horton, they develop land and they monetize that land through home building efforts. Right?
And what we do in the markets where we are, there is no land to then monetize. What we\u2019re doing is we\u2019re really playing on the arbitrage of square footage that is there and what can be there.
The housing stock that was built in this country in these prime neighborhoods 80 years ago on average was underbuilt for how today\u2019s consumer lives. 80 years ago the consumer lived in a two bedroom, one bath, three bedroom, two bath, ranch style home with a detached garage, single story living, across the country at single story living.
And that you look at these major public master plan builders and they build on smaller lots, they build two story homes where today\u2019s modern family lives in a call it a 2,500, 3000 square foot home with an attached garage in the front and your downstairs comes out to your backyard. It\u2019s just very different the way construction is now 80 years later.
And so what I saw in this business was a resilient business that wasn\u2019t dependent on a moment in time of a real estate market or an economic cycle, right? That there\u2019s always a need or demand for high quality homes in the best neighborhoods and there\u2019s always a supply of these old homes that ultimately need to be torn down in those markets. And so saw this real ability to scale a different type of business to meet the consumer demand in these marketplaces.<\/p>\n
James:
Tommy, part of the reason that you went from trustee, or would you say that part of the reason you went from trustee sales to new construction was also the scalability factor? Because I know a lot of people that listen are the smaller flippers and they\u2019re trying to scale their business, and it\u2019s very difficult to scale a remodel flipping business because every house is so different and it\u2019s harder to systemize the construction.
Is that kind of how you guys pivoted? Because I know we went from flipping to now we flip and build. We\u2019re much smaller than you guys it. But the reason we like building is it\u2019s so much easier to actually build a business around, whereas flipping every house is different no matter what systems you have in line. Was it just like the next step?
Because kind of what you described is you are the paperclip investor. You started with a seminar, you essentially did something the BiggerPockets called house hacking, getting your first deal, renting that out, growing it, going in a flipping and now you\u2019re running a extremely large new construction company. I mean, do you think you did that just because you targeted more of the scaling or was it more the investment engine that grew up faster?<\/p>\n
Tom:
I think ultimately what you\u2019re saying I describe with the word predictable. And the difference between the different models is predictability. If I go back to how I got into new construction, because I think it\u2019s kind of interesting, Dave, which answers your question, James, is that we were a conduit at the foreclosure sales for other wholesale investors. Right?
Most buyers during the foreclosure boom weren\u2019t able to go to an auction regularly, understand the dynamics happening at the auction guarantee title, all of the things that go along with buying at a foreclosure auction. And so we were a conduit for the smaller investors at these auctions back then.
And I had a partner of ours that was utilizing our services to get access to the foreclosure market and he was buying in neighborhoods that I didn\u2019t understand the value of the real estate. And I looked at only the improvement as the value. Right?
I would look at the property and say it\u2019s a whatever, 2000 square foot home on an 8,000 square foot lot, was built in 1950. And how much will that 2000 foot home be worth if we fixed it up, a typical fix and flip type model? And this gentleman was buying in the valley of Los Angeles in the San Fernando Valley, like in Chino, Sherman Oaks, et cetera.
And I\u2019ll never forget one time we were talking about a property in Sherman Oaks and he said, \u201cI\u2019ll pay a million dollars for it.\u201d And I said, \u201cI can\u2019t lay my money out for you because that house isn\u2019t worth a million dollars. I\u2019m going to be on the hook.\u201d I asked him, \u201cWhat are you doing? I have to understand why I should feel comfortable.\u201d He said, \u201cWell I\u2019m not buying the house, Tommy, I\u2019m buying the land sitting underneath it,\u201d and this light bulb went off, like, \u201cWhat do you mean you\u2019re buying the land?\u201d
Well, there\u2019s a math problem that exists to build a home on that lot. The math problem is how much square footage can I build an FAR over the lot area, and then how much does it cost to build that square foot, right? What you\u2019re talking about James on the fix and flip model is one 1950s home versus another 1950s home. I could say it\u2019s a hundred bucks to remodel, but I don\u2019t know until I get in and do I see the foundation and the HVAC and all of these things.
But building a new home on a 10,000 foot lot in this neighborhood on a flat pad versus building a home on this one is the same. It\u2019s predictable, right? And predictable leads to scalability. And so when you can look at a math equation \u2026 I mean, I look at real estate as a math equation, right? And when that math equation is simple, pay X scholars for the dirt, pay X dollars for construction, have revenue of Y dollars, that math translates everywhere.
It doesn\u2019t translate to the actual piece of property, which is where you find scalable challenges. Right? When we were doing fix and flip, and we did hundreds and hundreds of these things from \u201908 to 2012, you had wildly profitable deals and mediocre deals, and then some really bad apples that you didn\u2019t know what the construction was going to be and they kind of all had a weighted average that was acceptable.
When you go into new construction, we think of it as every deal should be predictable because you go in knowing your cost of construction and knowing if you build that this is the value of what you will be building against. I think scale requires predictability. Scale requires capital. Capital wants predictable returns on their capital, and so that\u2019s how we really push to scale the business.<\/p>\n
James:
Got it. Because that makes sense. For us, we\u2019ve been able to scale our \u2026 We built town homes has been a lot easier for us to scale that out. And as we\u2019re purchasing, it\u2019s just a simple math equation, which every house is a lot different.
But as you guys are expanding into different markets, how have you guys been able to predict those markets? Because every market is so different. The climate is different, how you build. The cost are different each market. And then also just the value of the market conditions can swing.
You guys are in a desert state, a rainy state in the Pacific Northwest, you get the sunshine in SoCal, and then you get both the perfect climate in Colorado in my opinion. What made you guys want to move into those markets and then whatever you guys had to change to scale around that?<\/p>\n
Tom:
Again, we look at supply and demand characteristics in a market on a macro basis. What\u2019s the absorption of real estate? What\u2019s the supply of the land or the old real estate that we can build on? And do the macro trends provide for a market to build in? I can tell you we thought years ago that building homes between the different markets was drastically different in building costs. It\u2019s really not. Right?
Building a home in Arizona is very similar to Seattle, is very similar to Denver. Like as I described to my teams, a two by four in Arizona is the same cost as a two by four in Denver is the same cost as in Seattle. The labor cost of building a home in those markets is also very similar. The labor force in this country is very similar. I mean, you\u2019re going to get slight swings, but the cost of building homes is very similar.
Yes, you have to build different. Every house we build in Denver, the majority of the homes we build in Denver, they have basements because of the climate. The majority of homes we build in Arizona or Phoenix are single story. There\u2019s nuances market to market, but in general the cost of construction is very similar as you build homes in each one of those markets.
And so it\u2019s really then extrapolating that same math problem across into these different regions and looking at where the math equation works. What I love about real estate is the data is so rich. Right? I can see where is land selling at a price that I can pay, because I know what it\u2019s going to cost to build and I know what I then can sell because the data tells me what you can sell homes for in that same zip code. And so we\u2019ve been able to really study how the business works in these different environments very predictably.<\/p>\n
Dave:
Tommy, what about the specific markets that you invested in attracted you to them? You said you look at macroeconomic data, and that\u2019s something we focus a lot on this show. You mentioned absorption rates. Are there any other key data points that you look at that you recommend to other investors they look at if they\u2019re trying to expand to new markets?<\/p>\n
Tom:
It depends on what you\u2019re looking for. I\u2019m looking to build a business long term that does this compared to investing in an asset today that\u2019s going to have a yield tomorrow or in the next six months. Where am I going to place my capital? I\u2019m making a bet that these markets long term have the financial viability to be in.
It just depends on which investor you are. Right? If you are looking to grow your business into multiple markets, there\u2019s a lot more factors that go into what\u2019s the scalability of that marketplace. What are the job trends happening in that marketplace? What are the regulatory trends happening around densification or additional ability to grow and scale the model?
I think if you\u2019re an investor looking at how do I place my money today, to me it all comes down to supply and demand. Right? I think, and we track this in every one of our markets and markets we\u2019re going into, what is the supply and what\u2019s the demand, right? How many months of inventory are there? How many weeks of inventory are there in these marketplaces?
And where you see supply, outpacing demand and supply growing, you have caution, right? It\u2019s basic simple economic function of supply and demand. And I think that it\u2019s so key that sometimes people forget that if I\u2019m going to place my money here, they\u2019re looking at the deal and the economic terms of that deal, but they\u2019re forgetting that there\u2019s a broader market that they\u2019re competing with on that deal. Right?
There\u2019s a lot of times where people will look at, well, I\u2019m going to be new so I\u2019m only going to compare to new. I think we forget so many times that what is the consumer? Who are we trying to attract? We\u2019re trying to attract a dollar to buy our home. I mean, I correlate it to a car as an example. Take the luxury segment, say it\u2019s a Mercedes, a BMW, an Audi or now a Tesla in that, and I\u2019m trying to attract a customer that has $70,000 to spend on a car, I\u2019m going to look at all my options, right?
Real estate is no different. If I have a million and a half dollars in Seattle, I\u2019m going to say, \u201cWhere does my million and a half dollars go best?\u201d Right? If my work center is Downtown Seattle or Bellevue, what\u2019s my pattern to work? Where does the spouse work? And where does my million a half dollars go furthest? Do I get a great town? Do I get an old single family? Do I get a new single family in a more up and coming neighborhood?
Where does my million and a half dollars spend best? And so when you look at supply and demand, I have to say as an investor, what\u2019s the demand for the dollars? The dollars that are out there that I\u2019m trying to attract to the product, what\u2019s the demand and what\u2019s the supply that\u2019s trying to attract those dollars?
And so many times we get very bead focused in a neighborhood and say, \u201cOh, well, yes, there\u2019s nothing in this neighborhood. Okay, but there\u2019s 10 things in the neighborhood next door, which is the same proximity to work centers as that.\u201d And so again, Dave, I think it sounds more macro the way that I look at it.
We\u2019re managing over a billion dollars worth of real estate in these markets, and so we have to look at these major trends compared to did I buy this singular deal correct? And where do I want to do that singular deal? It really depends on which investor you are and how you want to place that investment of capital into the marketplace.<\/p>\n
James:
When you guys are reviewing these trends, I mean, do you guys dig deep into the demographics? With each state there\u2019s a different demand for each type of buyer pool. I was telling Dave before is that you guys spend so much time. You can walk into one of your homes and it could be an 800 to 900 square foot house, but how it\u2019s laid out, they\u2019re so carefully laid out, they feel massive, which is what people are looking for.
They\u2019re looking for space, especially in tight size units. Besides just the normal trends, which are absorption rates, days on market, a median home price, how deep with you guys scaling out are you going into the demographics and going to that next layer of data so you can plan accordingly? Because on a build too, it\u2019s a 12 to 24 month plan a lot of times. How far are you going down the line by digging into even deeper into the data?<\/p>\n
Tom:
Yeah, that\u2019s one of the unique parts of only building new construction is we get to design something from scratch every time. We\u2019re not limited by the existing house that we have to remodel. We get to really say what is it that consumers want? Who is our target profile that we\u2019re looking at? Yes, absolutely, James.
We go very deep with that volume of real estate that we own of who are the buyers? What is the life stage of the buyers? Are they empty nesters? Are they young couples? Are they singles? Are they divorcees? What\u2019s the ethnicity of a buyer? Because different ethnicities in different markets want different characteristics of a home, and the layouts of a home, the things that are important to those people.
We do consumer surveys to understand what they\u2019re willing to pay more for or less for, where they\u2019re valuing things that are in excess of the cost to build them. Is yard space more important than a rooftop deck, or just different characteristics of a home that a buyer wants? And really understanding who the consumer is in the market and then how you design the product for the consumer.
And it\u2019s very similar across five markets. You get nuances of demographics, age and ethnicity depending on which market you are in. But the consumer profile is actually very similar. And so then the design to meet that consumer profile is very consistent.
So then once you know who the consumer is, what they value and what they\u2019re willing to spend money on, then we use that data to engage our architects to really design the best home for the market. And so, yes, we definitely go that next step when we get into buying homes.<\/p>\n
James:
And so Tommy, how important do you think that is? Obviously we\u2019re going through a market transition right now. Cost of money has gone up, things are slowing down. And one thing that I know Thomas James Homes been able to do is still move a lot of units compared to a lot of builders that are sitting there.
And I do know most local home builders aren\u2019t digging that deep into the demographics. They\u2019re going for that surface level data. And our show is about going to that next level to where you can mitigate risk, protect yourself. Do you think that the extra layer of research on demographics and what people want is helping you guys move the product a little bit better than a lot of different builders?
At least in our local Pacific Northwest market You guys have been able to do that. How important do you think that is for investors to be digging to the extra layer right now as we kind of transition into different types of pricing across the board?<\/p>\n
Tom:
Yeah, look, I think a big part of it depends on the volume you\u2019re doing. If I had a few homes to sell at a certain price point, you\u2019d price them correctly, move the inventory. We\u2019ve taken market positions, like in Seattle where we developed those cottages. The cottages were developed very purposely for a very specific part of the market.
We knew that. That\u2019s why we designed them for those. Right? We knew people wanted to not be in towns. The people that are buying our thousand square foot cottages are not town home buyers, because there\u2019s plenty of town homes for those people to buy, but they want to live actually in smaller space, but on two stories compared to three or four stories.
And so we knew that was a void in the market, which is why we developed a product to meet that void. And then knowing that, knowing who we built it for, marketing to that customer, telling them why we built it, telling them what\u2019s great about it for them really helps us be able to move that inventory.
If we went in and built these cottages and just said, \u201cThey\u2019re for everybody,\u201d well, they\u2019re not. They were built very purposefully. And so yes, I think understanding our consumer segment is important because it allows us who to focus on to market the product and really tailor our message to the people correctly to show them why we built those homes for them.<\/p>\n
Dave:
Tommy, I think this is a great lesson for everyone listening to this. I mean, what you\u2019re describing really sounds like just making sure you find a good product market fit between the product that you\u2019re building and what the demand is. And this is true of obviously pretty much every business out there, and real estate investing is no different.
Even if you\u2019re not a builder like Tommy or James, but even if you are a buy and hold investor, it\u2019s important to consider the properties that you\u2019re buying and if the type of product that you\u2019re buying in a particular market makes sense for the people who are living there. You don\u2019t want to necessarily buy a huge single family really nice home in the middle of a young college town.
There\u2019s just different products that are meant for different types of people. And I think Tommy you did a great job articulating that, but I want to make sure everyone understands that it\u2019s not just for builders here, this is for every type of investor should be thinking about who ultimately is going to be either renting or buying the property that you\u2019re investing in.<\/p>\n
Tom:
Well, look, Dave, real estate is an inefficient business real estate. That\u2019s why people can make money in it. Where you get up to these big, huge commercial multi-family type projects, that\u2019s where the efficiencies are gained and you have all the large Wall Street type money going after those things, because there\u2019s no inefficiencies.
What you\u2019re really describing is find the inefficiencies, understand them and beat them. As you were saying that I thought of a rental property. It\u2019s funny, my wife and I actually bought a rental property here in Orange County a few months ago because I saw inefficiencies. I saw that there\u2019s nothing nice and new in the market and there\u2019s demand for somebody to have a nice new single family home and where the disparity of rent people will pay to have something new is.
And so we bought this home, remodeled it, made it beautiful and rented it in 10 days for $5 per square foot when the average in the market is like 350 a foot, because people will pay for that something that\u2019s nice. And so that\u2019s an inefficiency that\u2019s found in the marketplace. And ultimately what I\u2019ve done with new construction is found the largest inefficiency that exists and then taken advantage of that inefficiency in the marketplace for single family new construction.
We actually build rentals in Los Angeles for the same reason. I have about a hundred rental properties with a venture where we build brand new construction rentals in the marketplace for this investor that wants to own that disparity of where there\u2019s demand for new construction living and people want out of a condo or out of a multi-family apartment building, they really want to live in a single family type home. It\u2019s really understanding those different inefficiencies and seeing if there\u2019s an ability to capitalize on them.<\/p>\n
Dave:
Tommy, you mentioned earlier that one of the things you look at is of course absorption rate and months of supply. Those have been going up a lot, especially in the new construction market. How is that impacting your outlook over the next couple of years?<\/p>\n
Tom:
Without getting into the specific data we track, we all saw what happened when the stock market kind of bottomed in the middle of June and interest rates started to run up, the supply started out pacing the demand for homes. And so what we\u2019re tracking, is that a trend that\u2019s going to continue or is that a trend that comes off?
Well, it\u2019s a trend that happened through July and that trend has come off slightly in terms of supply of new construction homes or the price points where people are selling. And what we\u2019re really tracking is months of absorption or weeks of absorption in the marketplace.
If there\u2019s 70 available homes at the price point you\u2019re trying to sell, and there\u2019s seven selling a week, there\u2019s 10 weeks of absorption in that product. I think what it\u2019s helped us do is really on the buying side as well is where you\u2019re seeing more supply of the input.
The input for us is land. And so if we go into a marketplace saying we\u2019re going to pay a million dollars in this market for land, if we see the weeks of supply going from three weeks to six weeks to 10 weeks, that tells me that land will be cheaper in the coming months. And so then you slow down and you buy correctly, because the land will come down. Right?
It may not come down today, but when we buy a property we\u2019re going to hold them for 18 months or longer. And so it\u2019s really understanding how do we get in at the right basis. And what you really want to track is \u2026 I love a market that\u2019s not a buyer\u2019s market and it\u2019s not a seller\u2019s market but it\u2019s just a market. And I feel like where we are right now is just a market.
Five months ago it was a seller\u2019s market. We could demand anything. Through the middle of the summer, it was trending towards a buyer\u2019s market, but that\u2019s come off. And so I just want a normalized market where there\u2019s constant supply of inventory and constant absorption of that same inventory.
The swings is what really causes in both ways. Look, as a seller, I\u2019d love a seller\u2019s market for my inventory, but I don\u2019t want to buy inventory in a seller\u2019s market to build new homes on. We just want a good constant market. And we track these trends by each neighborhood we\u2019re in, by the major metros and across all the metros simultaneously to really see how should we be making decisions on selling homes and then buying new inventory.<\/p>\n
James:
As you guys are tracking the data and the absorption rates, one thing that we\u2019ve noticed, especially over the last 90 days or since June, is builders appetites have really backed out. They\u2019re being very, very aggressive. The last 12 to 24 months they\u2019ve calmed down. And then we\u2019ve seen a dramatic drop in building permits and applications over the last 90 days.
I think nationally building permits are down 1.3%, or for single family housing they\u2019re down 5% from last year. Do you see that more is a concern that the builder market is pulling back or more a good opportunity because there is such low supply that there could be this void in the market to where new construction could become this premium product that is expensive just because there\u2019s just not a lot to cover?
I know for us as investors, whether we\u2019re flippers or developers or buy and hold, we\u2019re looking for the gaps. Where are people not kind of playing in? And as people pull back on permits, there is going to be less inventory coming, which for me, I like selling the product that nobody else has. Are you guys looking at that more as something to be cautious of or more something that you\u2019re getting exciting on?<\/p>\n
Tom:
Look, the challenge with new construction is we\u2019re buying something today that we\u2019re not going to sell for another year and a half. You\u2019re trying to predict what the absorption of real estate will be at the end of 2023 going into \u201924 with your buying patterns today. That you almost need a crystal ball for.
However, what we see is this demand that is not stopping. Right? Has the demand slowed slightly. Sure. But there\u2019s demand for real estate in the markets. And I think it\u2019s hard for me, James, because I have a very myopic view, because the only thing I understand is brand new homes in the best markets. When you look at flipping homes, it\u2019s very hard for me to tell you what that real estate trend will be doing or new construction.
I only look at new construction in the best neighborhoods of Seattle. Seattle versus Tacoma, very different real estate trends. Because the demand in the prime neighborhoods, Northeast Ballard, Queen Anne, et cetera, of Seattle, it\u2019s kind of hard to compare that to the overall global new construction building permits.
My view becomes very myopic in what is new construction in the best marketplaces. If permits in the markets where I am slows, investors are slowing down their buying, it provides more opportunities for me to buy and buy less expensively. But when I get to the back, 18 months from now I\u2019m going to have less competition.
Because if I\u2019m the one buying today, if six months ago we were buying five pieces of inventory to build new, and now I\u2019m the one buying three pieces of inventory and the others have not bought the other two pieces, 18 months from now I\u2019m going to own the only supply in the marketplace.
I kind of like that trend, but I also understand investors, right? I\u2019m a very different investor, more of an institutional investor, invest in capital that is here to play through all market cycles compared to the smaller guy who\u2019s investing friends and family money personally guaranteed on loans. There\u2019s a lot more market factors in play when you\u2019re making those very close to home personal decisions.<\/p>\n
James:
And are you guys tracking that in every market that you\u2019re in, like how many building permits are going through? And have you seen any trends stick out more? Because again, you\u2019re in four different types of market, all good markets but different. They have different types of business sectors. Have you seen any drop more than others?<\/p>\n
Tom:
Yeah, I\u2019d love if you could share with me the way to track building permits because we have a very hard time tracking new construction building permits. They kind of are all lumped together. And so there\u2019s not a good clean way to aggregate and track that data. Where we\u2019re tracking it more is who\u2019s buying the real estate that we\u2019re not buying and what are they doing with it?
If we have a property that we don\u2019t buy, are they remodeling it? Are they living in it or are they really going in and building a new home? Our number one competitor that we compete with across all five markets that we\u2019re in are actually not other builders.
They\u2019re homeowners buying the real estate to own and live in, or remodel and live in. There\u2019s less development than there is I want that piece of property to own in the marketplace.<\/p>\n
James:
Got it. I mean, that makes sense.<\/p>\n
Dave:
One thing I wanted to ask you, Tommy, before we let you go is about material costs. It\u2019s something that we\u2019ve been trying to keep track of and I know has scared away some people from flipping, or getting into new construction or development. Have you seen material costs stabilize over the last couple of months or are you still seeing rapid rise \u2026 Well, I guess I should ask you, are you seeing rapid rises and sort of what are you seeing in the material costs?<\/p>\n
Tom:
No, look, we\u2019ve definitely seen a stabilization in materials. Lumber has come back down. We\u2019re actually seeing a reduction in lumber costs across every market right now. You\u2019re still have inflation. There\u2019s certain cost codes that are inflating along with inflation trends, light fixtures, tile.
There\u2019s a lot of materials that go into building a home that are dependent on oil. And so as oil costs went up, you saw much larger increases in oil cost. The markets that we build in require the labor force to come from outside the area. As oil was up and gas prices were up, you saw a larger influx in your labor cost because the labor had to move themselves to these job sites.
We\u2019ve seen with fuel costs coming back down and lumber coming back down a stabilization, but we still have cost inflation pressures like anyone else does in the market. You got to keep in mind, 40, 50% of every cost to build, whether I think you\u2019re remodeling or building new is labor. And that labor is paying more for their rent, they\u2019re paying more for their groceries, they\u2019re paying more for the fuel and their car, for the clothes that they\u2019re wearing.
And so how do they pay for that? They have to charge more for their labor cost. And so 50% of the cost of construction is really affected by labor. And as a general term, the labor is being affected by CPI index like anybody else. Only about half of it is material cost and that material cost can be all over the place.
But the other major influence is really on labor. What I do think is good is we\u2019re not seeing these drastic spikes anymore. I think we\u2019ve gotten back to some sort of normalization, although now I hear that there\u2019s so many products sitting in warehouses in the US that maybe some of the materials will actually come down over time because we overreacted to the short supply of supply chain issues and filled a bunch of warehouses with stuff here in the US that we need.
We\u2019ll see if we really get cost reductions, I\u2019m not counting on it. And we expect constant inflation due to labor. We just would hope it gets back more normalized than high 8% CPI or inflation index ,and gets back down into the threes and fours, which is pretty normal in construction costs.<\/p>\n
James:
Are you guys accounting for more of this in your upfront underwriting, or what have you guys had to do over the last 12 months to kind of battle that labor? I know for us we\u2019ve had to bring in people on staff. We just brought our labor in-house, because it was a way for us to control the cost more. Have you guys had to pivot that way at all or change your systems, or is it more just, \u201cHey, we got to account for this, build it into the proforma and put the plan in motion.\u201d?<\/p>\n
Tom:
Yeah, I think the biggest part for us is having the feedback loop of what it\u2019s costing us to build today. We\u2019re underwriting a new deal based upon our cost today. And so you\u2019re always trying to maintain that feedback loop. If my HVAC is going up today in September, then I know I need to start budgeting more for the jobs that I\u2019m buying that I\u2019ll be putting HVAC in six, seven months from now.
We\u2019re trying to constantly maintain that feedback loop of what\u2019s the cost today and how\u2019s that going to translate when we incur that cost down the road, because there\u2019s a lag time when we buy a new project. The nice part is we don\u2019t buy 400 lots, or buy a big master plan community and cut into foreign lots and locked into our land basis.
We\u2019re always buying new land. And so we are always able to update our underwriting based upon what our current costs are. And so it\u2019s really trying to maintain that feedback loop of different cost codes and where the changes are happening so that you don\u2019t get surprised by them the next time you\u2019re building that home.<\/p>\n
Dave:
All right, Tommy, thank you so much. This has been super helpful. Is there anything else you think our audience of new, aspiring and existing real estate investors should know about how to navigate current market conditions or anything else you\u2019d like to share?<\/p>\n
Tom:
Yeah, no, look, it just takes taking a little bit of chance and hedging your risk as an investor. I mean, I\u2019m sure some of your investors were like me 15 years ago when you were putting everything into a real estate deal and betting a lot on that.
Sometimes you have to make big bets to go to where you want, and you really have to figure out what it is you are doing. I\u2019ll just share the last thing with you, Dave and James, is that I think you got to figure out as an investor what your goals are and what you\u2019re ultimately trying to accomplish.
Are you trying to build a business? Are you trying to take advantage of a moment in time in a real estate arbitrage? And if you\u2019re going to really build a business and invest capital and take risk, personal, professional, et cetera, why are you doing it? Right?
What\u2019s the bigger, greater goal? If it\u2019s just another dollar, that could be the greater goal. Right? But I love what Simon Sinek says, is, \u201cFigure out your why and the what becomes way easier.\u201d There\u2019s a great YouTube video about it. But as these investors are out there taking risk, going out on a limb, doing deals, building businesses, why are you ultimately doing it at the end of the day?
And figuring out why you\u2019re doing it really helps kind of alleviate all the stress that comes along with the risk that you\u2019re taking in the marketplace. I hope that helps. But Dave and James, appreciate you guys having me on your show today. I really enjoy sharing with you, and hopefully your users learn something from me, and that is don\u2019t pay for real estate seminars at the LAX Airport.<\/p>\n
Dave:
Just go to the first day.<\/p>\n
Tom:
There you go. There you go.<\/p>\n
Dave:
And Tommy, if people want to connect with you, where can they do that?<\/p>\n
Tom:
You can message me through LinkedIn, Tommy Beadel, B-E-A-D-E-L. You guys have it spelled L-E, but it\u2019s E-L at the top there. Appreciate any messages you want to send.<\/p>\n
James:
If you guys are any deal guys in those markets, look them up. They are great people to work with, a great company to work with. If you got deals, Colorado, Phoenix, Seattle, SoCal, all the new wholesalers out there, reach out to them.<\/p>\n
Tom:
Thanks, James. Yes, no, we always like to buy new real estate deals. As a realtor asked me last week, \u201cHow do you feel about the market?\u201d And I said, \u201cI can\u2019t find enough land to buy.\u201d And they said, \u201cNo, no, but how do you feel about the market?\u201d And I said, \u201cI just said. I can\u2019t find enough land to buy,\u201d which means I feel good about the market. All right guys. Thanks so much. Thanks for having me. See you.<\/p>\n
Dave:
All right, take care. All right, James, what\u2019d you think?<\/p>\n
James:
Oh, I thought that was awesome. For me as an investor, I\u2019m always looking at how do you scale, how do you kind of move and grow and just \u2026 I mean, the fact that these guys can build on all four different areas pretty rapidly in a short amount of time, it really goes back to why people should watch our podcast.
Track the trends, learn what\u2019s going on, and then you can build a business around those trends, not just about your gut feelings. I mean, he\u2019s just taking data, analyzing it, and then putting his motion in play. And I did relate with a lot of what he said.
Scaling as an investor is just, it\u2019s about having the right system, not just the right vision going, \u201cCan I scale this and grow this down the road?\u201d Because that is the hardest part of our business. We start with a certain amount of capital. How do you grow as fast as possible? But it shows that all those house hackers out there, you can go from house hacking to being the largest spot lot builder in the whole nation.<\/p>\n
Dave:
Yeah, that was an incredible story. I loved his personal story. What he was talking about in terms of the data was fascinating to me, because we look at a lot of macroeconomic trends, looking at absorption rates, inventory, this sort of stuff makes a lot of sense to me.
What he talked about that I wish I was better at and could do more of is getting that data about what people want, what the consumer is buying. Because I love what he was saying about, generally speaking just about product market fit, and thinking about exactly who the intended buyer is.
But even if you\u2019re a buy and hold investor, think about who the renter is going to be. And is the product that you are buying going to be appealing to the people who live in that area and who want to live in that type of building?
I got to find a better way to find that data. I wonder if he\u2019s just doing like, I should have asked him, surveys or talking to agents. Or do you have any thoughts on how you get that kind of data about what layouts people want, what kind of architecture they want? I\u2019ve never seen anything like that.<\/p>\n
James:
Yeah, there\u2019s some cool stuff out there you can do with \u2026 We do it actually for off-market tracking, like when we\u2019re more targeting sellers, like who is the demographic that is most likely to sell? You can do the same thing. There\u2019s a lot of different data scientists and analytics companies out there that for us as a wholesaling company we actually hire them, they go through our data and they give us our top list to go off of, and I think they do the same thing.<\/p>\n
Dave:
Oh, really?<\/p>\n
James:
Oh, yeah. It is not cheap. It\u2019s expensive, but it makes your conversion rate substantially higher. And again, going back to his point, by them taking that extra layer of research and not going off your gut or just the surface to analytics, they\u2019ve been able to sell a lot of units too.
Just like we can get our conversion rate by going to that demographics likeliness to sell or likeliness to buy, you can really kind of plan ahead and not be the odd man out. Because as the market\u2019s transitioning right now, the last thing you want is to be the odd man out property. You don\u2019t want to be the weird rental. You don\u2019t want to be the weird remodeled flip.<\/p>\n
Dave:
Totally.<\/p>\n
James:
You don\u2019t want to be the new construction lot with a negative impact, and that\u2019s what makes your deal move right now.<\/p>\n
Dave:
Yeah, that\u2019s really good advice. I mean, I don\u2019t know if that\u2019s something applicable to our audience if it\u2019s super expensive to buy it, but I mean, maybe it\u2019s as simple as just talking to agents in your area too, just figuring out what type of things people want.
I know when I talk to my agent in Denver, he can always just tell me off the top of his head, \u201cPeople want ranches right now. People are really digging detached garages,\u201d or, \u201cRenters are looking for this.\u201d Try and gather that data some way. I wish I had some better advice from you other than paying a lot of money. But if you can get it, you\u2019ll definitely have an advantage in the market.<\/p>\n
James:
And there is one I do know of that\u2019s not very expensive. It\u2019s called NeighborhoodScout.<\/p>\n
Dave:
Oh, yeah.<\/p>\n
James:
Yeah. You can pull up every little neighborhood. And they show you the demographics moving in, the demographics moving out. And it\u2019s actually super handy. It does not cost thousands of dollars. And you can buy it just for the little area that you\u2019re in.<\/p>\n
Dave:
Oh, perfect. That\u2019s awesome. Thank you. Well, yeah, I\u2019ve used that in the past. I\u2019ve never used it for that purpose, but that\u2019s great advice. Check out NeighborhoodScout if you want to get this kind of data. All right, James, thanks so much. I mean, it\u2019s been a fun day. We\u2019ve been together all day and hopefully I guess we\u2019re going to be together in person real soon.<\/p>\n
James:
I\u2019m so excited for BPCON. I think it\u2019s going to be a special one.<\/p>\n
Dave:
Yeah. I mean, I feel like we\u2019ve been talking about this for a really long time and now it\u2019s finally here. I\u2019m looking forward to seeing you in a week and a half.<\/p>\n
James:
This is my first BiggerPockets conference too.<\/p>\n
Dave:
Oh, really? You haven\u2019t been?<\/p>\n
James:
Yeah. No, I couldn\u2019t make the last couple because of kids, kid commitment.<\/p>\n
Dave:
Oh. Sweet man. Well, we\u2019ll have a great time. And hopefully some of our listeners will be there. But if not, we\u2019ll definitely be posting a lot. We\u2019re going to do a podcast there that we will release so people can hear it.
And yeah, if you want to connect with me at any point about this episode or anything, you could do that on Instagram where I\u2019m @thedatadeli. You can also follow BPCON there. James, what\u2019s your Instagram handle or where should people connect with you?<\/p>\n
James:
Yeah, the easiest way to connect with me is definitely on Instagram @jdainflips or our YouTube channel at Project Re. And definitely reach out. I know I\u2019ll be around. And if you catch me at a conference, one thing you do know is I won\u2019t stop talking. Come up, ask me questions, you will get answers. I\u2019m very friendly.<\/p>\n
Dave:
That\u2019s a dangerous thing to start telling people.<\/p>\n
James:
It\u2019s terrible. I\u2019ll go for eight hours straight. It\u2019s bad.<\/p>\n
Dave:
You\u2019re going to be drinking those Rockstars and up till 5:00 in the morning.<\/p>\n
James:
Sales juice. Sales juice.<\/p>\n
Dave:
All right, thanks man, for being here. And everyone listening, thank you so much for being here and listening to us. Hope you learned a lot today like I did. We\u2019ll see you next time for On The Market. On The Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and OnyxMedia. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n
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Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
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