The International Association of Field Service Technicians (IAFST) has been actively recruiting firms for new home construction as well as rehab and restoration projects throughout Florida, Atlanta, and Birmingham. In fact, there has been an enormous flooding of capital into Florida as well as other Sun and Rust Belt areas to the tune of billions of dollars. Former Colony Executive and now ResiBuilt’s co founder Jay Byce is beating the streets looking for $1.2 Billion. And he will get it no questions asked. Here is how Bloomberg put it,
ResiBuilt is working with New York investment bank Whelan Advisory to raise $400 million in equity and $800 million in debt to build and manage rental houses as it looks to capitalize on demand for larger living spaces and investor appetite for ways to bet on the suburbs.
Now, it plans to build roughly 5,000 homes, targeting renters who want properties with three or four bedrooms and two-car garages at rents of about $1,850 a month.
Invitation Homes, the Blackstone darling and casino, is also out there. Currently coming in at the nation’s largest owner of rentals — roughly 80,000 total — they are looking to double that number and that is not a typo. In fact, Bloomberg went on to say that Blackstone Group Inc. took a minority stake in Tricon Residential Inc. while JPMorgan Chase bumped their holdings of a joint venture with American Homes 4 Rent, and Brookfield Asset Management Inc. got into the space with a $300 million fund.
The biggest problem investors are currently running into is qualified personnel. Labor, coupled with 135% increases in lumber pricing alone, appears to fall upon deaf ears, though. And the sharks are going to do their best to force you into a bad deal. You see, at the end of the day, the sharks have zero risk and rake in nothing but profits. Not ninety-six hours ago Fortune Magazine put out an article entitled, ‘Severe lumber shortage’ is adding $14,000 to the cost of a new home. Here is how they put it,
State lockdowns in the spring caused sawmills across the nation to close, leaving California redwoods and Southern yellow pine uncut and reducing lumber on the market. At the same time a surge in home renovations and do-it-yourself home projects during the pandemic—just look at the earnings of Home Depot and Lowe’s — and rebounding home construction have increased the demand for timber.
“This is a severe lumber shortage…Demand is hot and continues to be strong. In the next month or two it’s going to continue to be elevated,” Dustin Jalbert, senior economist at Fastmarkets RISI, told Fortune.
Added to this quagmire is the simple and salient fact that we have the most active hurricane season on record. Just days ago, Hurricane Laura hit the Louisiana – Texas coast bringing and estimated $9 Billion worth of damage. And much like the landing patterns at Chicago O’Hare, more are already building and heading for the Gulf. Pandemic, on top of political crisis, on top of civil unrest.
While there are profits to be made in this new frontier, contractors need to stay vigilant. First and foremost, contractors need to understand their contracts. Anything not reduced to a written document becomes a nightmare for enforcement.
You don’t need to be a lawyer to understand that the only way you can defend your right to be paid is through a contract. It is not simply being paid, though. Earlier, I mentioned the fact that lumber has skyrocketed an astonishing 135% YOY and that is equating to roughly $14,000 per home. That number may be substantially higher depending upon the size and area you are in. Your contract needs to reflect the volatility in the materials market. Additionally, timelines need to be spelled out which will accommodate for COVID related supply chain issues like we are experiencing with respect to appliances and assorted accouterments. If a Client is unwilling to allow variances, do not work with them.
There is what I refer to as dance before the contract is ever written. And understanding the choreography is critical to determining whether or not you should even work with a Client. What I mean is that if there are weeks of haggling over pricing, you may well expect problems down the road. Other red flags include a refusal to make known ownership composition, excessive requests to reduce price without reciprocity, and a continued cycle of ever changing requirements. Any legitimate Client wishing to engage contractors should already have a pre-conceived notion, reduced to paper, of that which they want. While a contractor may make suggestions with respect to issues raised by code, the contractor should not be the one required to create, fund, and kickback out profits from another Client’s deal. A contractor is not a developer although s/he could fill both roles. Generally speaking,
a contractor is hired to build or remodel an asset and they should be cautious about exceeding those parameters.
Second, contractors need to fully understand their product. What do you do; how much do you charge; and how long will it take to produce turn key results. I used to build in Kansas City years ago. We built four houses at a time because when you hit the fifth house prevailing wage was required to be paid. So, we had two sets of blueprints which we flopped left or right, 3 or 4 bedrooms. We had three grades: Economy, Good, and Excellent. Economy grade was just that: Formica, linoleum, and minimal features with low grade accouterments. I knew the price per square foot so if a Client requested an upgrade or even the addition of another room, the square foot price dictated and took minutes to calculate. We had two colors: Agreeable Grey and Desert Sand. Period. Anything not getting those colors got white. The appliance packages were either white or stainless steel. Period. And if there was to be haggling over adding a feature from say the Excellent grade onto the Economy grade — granite, for example — or vice versa, we added a charge to accommodate the change. This was because we had to go to our suppliers whom quoted us pricing for a certain amount of material. When that became less — say granite — then future purchases were in jeopardy of becoming more expensive.
Another example is Labor. Are you running in house personnel, subcontractors, or a hybrid of the two? Trades such as HVAC, Roofing, and Slab – Masonry are generally subbed out. In house crews are generally capable of performing the cabinetry, carpentry, drywall, flooring, and painting. Hybrids exist with respect, to say, electrical. Contractors should look to partner with an electrician to perform the rough in, but — if allowed by code — perform the final installs of say the lighting, outlets, etc. Ditto for plumbing. Contractors — if allowed by code — should use in house personnel to install the sinks and toilets.
If you are going to sub out everything, get a Labor and Materials bid. With a little bit of investment of time, you can almost always source materials cheaper as you are performing at a larger scale and there is no mark up from your side of the house. Additionally, you control the quality and price. Migrating from subcontractors to in house personnel is not rocket science. Simply pick a new home — or several remodels — and take notes on the materials sourced and time involved and build out your own schedule.
The devil is always in the details. Much consternation has come from contractors witnessing how much money is siphoned off as profit. The lingo used is, You will make up the money in volume, or, We will make sure you get this other work down the road. A contractor cannot be upset if they commit to Taking It For The Team, but forget to get it in writing. Additionally, contractors need to do the math and see how much volume is truly required to make up for the Client’s lining of their pockets.
As a contractor, the sooner you realize that your Client is not your friend, the better. No one is in the business to lose money; however, every Client you ever have will do their best to make sure that happens to you. This is capitalism 101 and they are not going to teach you this at Wharton. Your Client will attempt to rationalize why you should take a loss while they pocket that money as a profit. Ironically, this is a zero sum game. The price is static. The only question which presents is whom pockets what. Do not be swayed by statements that someone else will do it cheaper. If they would, the Client would have already hired them. And never be afraid to simply walk away from a deal.
I am going to delve a little bit deeper into the labyrinth of Real Estate Investment Trusts (REIT) as well as their hedge fund counterparts. There are all kinds of hidden expenses that no one will discuss with you initially, although they write off. Usually, there is a headhunter involved such as myself. I fill that role and I generally charge 1% for any new home construction and 3% for any rehab I bring as a commission. Next, REITs are generally not allowed to buy and develop land alone. And you need to understand that whether it be REITs or hedge funds, if there is a proverbially moving part, both of them are going to take a piece of the action. Generally speaking, the contractor is the facilitator — free of charge, naturally. What I mean is that when you are swimming with the sharks — REITs and hedge funds — they are generally going to attempt to have you create the deal, fund the deal, and then shoulder all of the liability of the deal. The sharks will then scoop their profits out immediately and leave you holding the bag. Granted, it is business as usual; however, a contractor needs to understand how it works.
Remember how earlier I said to focus on being a contractor? Here is why it is important: Tomorrow morning your Client brings you a set of lots. You drive out and say 10 of them will work. The Client is going to package a deal wherein the total price includes you paying for the Realtor, the profit for the Client, and their middlemen. This is a key component in calculating the Cap Rate — we will get to this in a minute. Other Cap Rate variable include insurance on the property after build, maintenance, management, etc. More problematic, though, is if you are financing the deal you are, in essence, paying interest upon all of this. And most negotiations about pricing rarely, if ever, focus on their profit, but instead, revolve around your cost to build.
Cap Rate is a pretty basic concept. In essence, Cap Rate is determined by the monthly rent total for a year divided by the all in price to purchase the land and asset. Familiarize yourself with the all in price as a few hundred dollars can make or break a deal. To this point, the sharks will hammer you to cut your pricing even more as opposed to they ever considering taking a hit on their profits. And this is tragic. I have seen countless deals shuffled wherein real contractors have told the sharks to shove a deal up their ass and the sharks simply shop it to unsuspecting others. There is no honor with the sharks so negotiate accordingly.
I want to talk about the financing side of these deals. Most 3 bedroom 2 bath homes will cost you around $5K to finance. You need to understand — from the beginning — if the Client wants you to self finance. To me, self financing should both set off alarm bells as well as should preclude any price haggling. If your Client requires you to self finance then you need to explicitly understand that, up front, and you would be wise to tell them to pound sand if they try to drive a lower price. If the Client is willing to finance, you need to have a draw schedule written up. Most builds require a 40% down payment. I would be hesitant to accept a penny less. Remember, the shark philosophy is to beat you up as much as possible and shoulder you with all the liability. If you are going to finance your own deal, make sure you are getting paid to do it!
A problem with self financing is that your money man is going to require a shit ton of information. Most of it you will have, but some only the Client will. Things like surveys, titles, and contracts all need to be presented before you go trawling out looking for cash. Additionally, most financing firms are going to require that you have all of these as well as the permits and blueprints up front.
There is no doubt that our Industry is rapidly changing. On a larger scale, the problem is that unscrupulous Clients abound at every corner. A contractor should never be required to do anything other than build. That is why they became a contractor. Don’t let the sharks sink your dreams to be what you set out to become. Maintain your navigational beacons, surf in groups to avoid the sharks, and most importantly Retain Foreclosurepedia to be on Speed Dial and you will do well!
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