Latest / Real Investor Radio Podcast / Ep 62 | Scaling Success: Navigating DSCR Rates, Market Trends, and Homebuilding with Danny Hirschberg

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Ep 62 | Scaling Success: Navigating DSCR Rates, Market Trends, and Homebuilding with Danny Hirschberg · Real Investor Radio Podcast

• Craig Fuhr (00:12) Hey, welcome back everyone to real investor radio. I'm Craig fewer. Again with Jack Bavier, Jack, good to see you again today. Jack BeVier (00:21) Absolutely. Good morning, sir. Good morning. Craig Fuhr (00:23) What's new in your world, Jack? What's what's topical? What can we cover for five minutes and our guest who will introduce in just a few seconds Danny Hirschberg? Danny, you can feel fear to jump in here on anything that Jack wants to pontificate about for the next five minutes. Jump in anywhere we will talk if you don't so jump on in. Jack, what's hot? Danny Hirschberg (00:43) Sounds great. Jack BeVier (00:45) man, I'm, I'm excited about the DSCR rates continuing to stay low. I spent, had a big inventory meeting yesterday with all of our staff. I do that like every two weeks on the real estate and property management side of things, just to kind of keep tabs on, on how things are going. Fortunately, I'm blessed with a very, very strong and talented team that we've been, that's been together for a long time. So it's usually more of just like an update as opposed to them presenting a bunch of problems. Mostly they're just given me, you know, keeping me tabs on what's been going on. And so one of the things we do is we go through this big inventory meeting, like our entire pipeline. And right now it's like 111 houses between stuff that we have under contract, stuff that's in renovation right now, or at some phase of, of, of being sold. And so like, as, as I'm going through that, at that list, we've got all the business plans for each of the properties. And so yesterday was really fun. because I probably switched about 15 houses over from selling to homeowners to keeping his rental properties, which is always like our, you know, behind the scenes goal. Like we like building the rental portfolio from a wealth creation point of view. And, because of where interest rates are at right now, I'm actually changing the business plan, changing the exit strategy rather, for a big chunk of our portfolio. So that was, that was fun. go ahead. Craig Fuhr (02:15) No, please keep going. Jack BeVier (02:16) I also got I also bought a two days ago, I bought a 28 unit multifamily property on an auction. And, you know, multifamily properties being auctioned. Yeah, in Baltimore in Maryland. Yeah. multifamily auction properties don't get auctioned very much. This was a partnership dissolution with a fairly large owner and property manager sponsor in the Baltimore metro area. Craig Fuhr (02:27) Here in Jack BeVier (02:45) They weren't getting along with their with their partner and they ended up auctioning the property auctioning three properties and I bid on all three but I only got one but I'm excited about it because I think I got it at a pretty good basis and I can't imagine having won that auction two years ago, three years ago. So I was excited about that as potentially a kind of a canary in the coal mine for additional multifamily opportunities. So that's what's going on here. Craig Fuhr (03:14) Will this be a property that needs some value add or? Jack BeVier (03:20) Yeah, it genuinely is like they it's they haven't put money into it for a while. I think the partnership has you know, is you know, no one's wanted to reach in their pockets because they didn't agree with how the other person was acting. So you can tell there's been some defer a fair amount of deferred maintenance a couple of capex projects vacancies way too high. It's like 25 % it's crazy. So yeah, there'll be an opportunity to add a little value just good. Danny Hirschberg (03:43) And Jack, when you're looking at something like that, are you solely basis focused? Are you looking at a stabilized return on cost? mean, how are you comfortable with that deal in that instance? Craig Fuhr (03:43) you've been. Jack BeVier (03:57) Yeah, I try to look at on look at it on an unlevered cap rate basis. You do I like the just the pure unlevered return versus the single family opportunities that we're getting? And so that's something that, you know, 15 years ago, you know, our whole thesis behind buying houses was that we were buying, you know, we were buying nine caps in the shadow of multifamily buildings that were trading at seven caps. And I'm like, it's the same real estate, it's the same tenant, this is just a mispriced asset, because the because you know, the the the brokers aren't giving it as much attention. It's kind of like the on the stepchild of an asset, right? Single family houses. And now I'm actually finding kind of the opposite where I'm seeing better multifamily unlevered cap rates versus the single family houses next door. And so I like that. But yeah, I'm focused on I'm focused on getting what I think is an appropriate cap rate unlevered cap rate. For us, leverage is like a secondary thing. It must be a creative, but we aren't going to buy just because of leverage. And then, and then just that service coverage, just making sure that there's enough of a spread there between my cost of capital and, and the return on asset that we can, you know, not have to put 50 % down in order to make our mortgage payments work. Craig Fuhr (05:16) So Jack, the phone is obviously ringing off the hook with folks interested in a six handle on their DSCR loan. We're hearing, and we've talked about this on previous episodes, but I really want to touch on it again because I think it's just so important. It's a lot of folks, smarter investors who are thinking, well, the Fed rate cut might be coming in September. Powell's signaling that there could be something. might even be more than 25 basis points. And we're getting guys that are like, I think I'm going to wait for that. You know, pretty sure we're going to wait for that. And our argument, obviously, I'll let you expound on it is, hey, it be time to take the win now. And it's something I've heard you say a few times. And maybe you could speak to that to the guys who are thinking something better is coming. I'm going to wait. Jack BeVier (06:10) Yeah, I think that the unless the Fed does something that really surprises the market, I think that that the drop that the Fed's most likely going to do in the September meeting is already priced in to mortgage rates. We've seen big, big drops in both mortgage rates and particularly the five year, which is what the DSCR trades off of most closely. And I'm in the I'm of the view that I think that that we have benefited a little bit too much here that the five years dropped quite, quite significantly and hasn't bounced back. I'm more nervous about a bounce back than I am that I'm leaving chips on the table by by taking the refi right now. So I'm eager to do the next refi. Also bear in mind the DSCR market right now is not a the best side. There's two different DSCR markets right now, right? There's a there's the DSCR market for like the center of the box, right? Like your your debt service coverage ratio is, you know, is higher. You're not looking for absolute max leverage. You've got strong FICO. And those rates are in the mid to high sixes. Then the Wall Street's bid, though, however, And it's because those rates in the high six is because those that paper is going to insurance companies. And so they are bidding for the center of the box, so to speak. And they're bidding the center of box down. If they weren't in the market, and if they leave the market, or if they change their appetite for the center of the box, then the Wall Street bid is 50, 50 basis points, 75 basis points of rate higher than that. And so while there's someone in here distorting the market and making it cheaper for me to borrow, I'm a, I'm a borrower and I'm, I'm not going to try to time the, you know, that, that gift horse, so to speak. So that's, that's my take on it. Craig Fuhr (08:17) Well, that's our quick take. We usually do about five to eight minutes. We nailed it today, Jack. 815. So let's move on and introduce our guest. Danny, thank you so much for your time today. Let me give a quick intro here. Danny Hershberg is the principal and co -founder of Wickenden Partners and Northway Home Builders, which we're excited to talk about. Danny and his partner Sirius are doing some really cool stuff. mainly in the southeastern region, part of the United States, North Carolina, you guys love a lot. Danny's primarily responsible for maintaining capital markets, relationships with Wickenden Partners, as well as operations day to day on the Northway Home Builders side. So Danny, welcome to the show. We'll talk a lot more about your bio, I'm sure. Jack will add what he already knows. Danny is also a member of the Real Investor Roundtable that Jack and Fred run here in Baltimore. So thanks so much for your time. Let's jump in. Danny Hirschberg (09:20) Yeah, thank you both for having me. It's a pleasure to be able to talk to both of you. Craig Fuhr (09:25) Good to have you. Jack BeVier (09:25) So I'm super, I was super excited to get Danny on. I met his partner serious much day. He 10, 15 years ago, he was working for an aggregator and he was traveling around city to city to city. He was running like, you know, seven or 10 different cities as the guy on the ground, the kid on the ground, right? At the time he's in his twenties and that they would be, they would fly around the country. to meet with local operators, to buy house, establish a buy box. And he'd be the one who'd sign off on those deals. And then he'd fly around keeping tabs on how the renovation schedule was going, how leasing was going. So he was the asset manager really from like A to Z for this institutional capital. And so I met him because he came to Baltimore and he was looking to buy assets. so we made friends and I cannot imagine like like I was like so impressed with that experience. One, the guy was freaking brilliant, right? And so like it was easy. It was easy to like him like from get from like, you know, minute one. He was obviously very street smart and in addition to being very book smart. And so eventually you guys teamed up. How did you two meet? How did you and serious me? Danny Hirschberg (10:40) We were actually introduced. So Siris Wall, after he worked for that aggregator, went to business school and got a job at a debt fund in New York City. And my neighbor growing up ended up working for Siris. We both went to school together, but didn't know each other. And he connected the two of us. And that person is now our right hand man here in Charlotte. We convinced him to move down here and he now runs our development business. day -to -day home building business. Jack BeVier (11:14) Just for the benefit of the listeners who don't have YouTube, how old are you two guys? Danny Hirschberg (11:19) I'm 31, Sirius is 34. Jack BeVier (11:22) And how many units do you guys own? Danny Hirschberg (11:24) We've bought about thousand multifamily units. We've built over 400 homes. Our current multifamily portfolio is about 600 units in the Charlotte MSA. Jack BeVier (11:36) And then you've also, and how many houses a year are you building right now in the Mecklenburg County area? Danny Hirschberg (11:42) Yeah, so this year we'll start about 225 homes and we'll actually sell primarily to retail buyers. We'll sell about 200 homes this year in one -off transactions. Craig Fuhr (11:54) I saw that you recently surpassed last month. and which which by the way, ranks them I think like number five in in Mecklenburg Jack against national home builders. Jack BeVier (11:55) many. Yeah, which is by the way, for those who don't know, Michael is Charlotte, like Charlotte, North Carolina, like not a, not a tertiary market. so I'm, it's, it's extremely, extremely impressive what you guys have done. Now you were, you guys got together and you guys were in New York and you started this really like remotely, right? You, you started buying in Charlotte from New York for awhile and then the business eventually grew, grew so much, so much that you, you guys moved down there full time. How were, how, how was that? Like, how did you pull that off? Craig Fuhr (12:11) There. Jack BeVier (12:37) Because you guys were doing some material volume remotely for a while. Danny Hirschberg (12:43) Yeah, you know, it really started as taking what Cirrus was already doing in business school. He was lending some money, trying to buy some multifamily properties, had just started thinking about building homes. And we took those three things and partnered and tried to grow them. And as we got to the point where it became clear that the scale was enough to be in business full time, we both gave notice at our jobs. in New York City. And really for me, I was still working for about six months or so before it became apparent that we needed to really focus on this, that there was a real opportunity here in Charlotte. I actually helped cover Charlotte as a market for the private equity firm I worked for in New York City. And Sirius, through his first job when he met you, Jack, had built up a lot of contacts in Charlotte, was already doing some lending, trying to build some homes and buy some multifamilies. We really were fortunate that Cirrus had a pretty strong base. So it wasn't like we started from zero cold day one. We had a nice base that we built off of which helped us scale this thing much faster than we would have had we not known any contractors or not known any brokers and things like that. the growth and we'll probably talk about this, but we built nine homes, built and sold nine homes in 2021. in 2024, we'll build and sell 200 homes. So that growth seems unrealistic, but it's primarily because we hit the ground running with a lot of great subcontractor base, local knowledge, things like that. We didn't just dive in and decide to build 200 homes. Jack BeVier (14:34) So yeah, let's let's talk about that journey, right? So like, how did you go from how did you go from nine? How did you go from nine to 220 in just a three year period operationally, right? Like humans, humans on the ground, people swinging hammers in the field deal flow like that's a ridiculous pipeline, right? So like, and you guys aren't private equity backed, right? They're your privately held company. So walk, walk, walk me through the logistics of that because it's that something. Danny Hirschberg (15:02) Yeah, yeah. know, I think from there's a couple things to touch on there because there's a couple pieces to the puzzle. The first piece is the subcontractor base that could build 200 homes in a market. Craig Fuhr (15:17) who might already be working for one of the nationals, right? Danny Hirschberg (15:20) Yeah, yeah. So the first thing we did was try to figure out how fast we can pay subcontractors to convince them to work for us. A lot of the nationals have certain payment terms or work with certain subs. We simply just tried to pay faster to convince people to work with us. And when we found a great sub who was like minded with us in terms of growth, we latched on. and tried to figure out a way in which that sub could just work for us. We would pay them as fast as possible so that they could continue to scale their business. And that allowed us in the actual operations of the home building business and, know, boots on the ground, actually getting the homes built. That allowed us to get a great base of subs. Many of those subs today just work for us. I can think of a... Craig Fuhr (16:14) What is considered fast, by the way, in terms of payment? Danny Hirschberg (16:19) if we get an invoice on a Sunday, the checks in their hand four days later. So it's, at least in our space, in our industry, that is really quick. And we, you know, maybe you're a little bit overstaffed or, you know, interning those invoices, but it's so valuable for us to have a captive sub base where if we went to all of our sub and say, hey, prepare for 350 next year or something like that, they're on board because they know that there's not going to be a capital lag and they can go and convince more people to come work for them, which would allow us to continue to scale our business. So it started really with paying subs quickly. Craig Fuhr (17:05) Jack, how does that compare with the way you guys handle subs on the property side of Dominion? Jack BeVier (17:12) Yeah, it's very similar. We're like we're in net five pay, you yeah, same thing invoices that come in on Monday morning get paid that same Friday. But that's always been, you know, because we've always talked about it because like, you know, we're working with city contractors and like these guys are hand to mouth and we want to we want the you know, the the company quality work, but at lower rates, right? So you got to pay, you know, for us, it's a service that we're providing them. And as a result, we get a better price because we're providing such a high level of service. it's, means, I think it's a very similar philosophy, but these guys, but Danny and serious have really scaled it up, right? To be doing, to do it on the whole home building side, at above market terms and at, you know, a much bigger dollars, right? Like 220 houses, 220 full builds. That's a lot of that's, don't know. What is that? Like 30 million, 30, 40 million going through you guys in the field. That's crazy. Danny Hirschberg (18:09) Yeah, mean, it can be million dollars a week in certain high weeks. it's operationally intensive to get bills paid that quickly, but it's what got us to be able to build 200 homes in a year. And so it's extremely important for us to continue that and keep doing that and would allow us to scale further if we wanted to scale further. Jack BeVier (18:37) What about on the deal sourcing side of things? Because again, you're in a primary market here and I would have thought that like you can't find land you're competing and you're competing with the publics who have just such a ridiculous cost of capital advantage that I would have and you know, and just overhead advantage. You know, there's a lot of talent at the public home builders on the land side of things specifically. So how would you how are you able to how are you guys able to carve out 200 to how you guys are refined 225 deals? that pencil in a primary market. Danny Hirschberg (19:10) Yeah, I think that that's a great point. I think the key for us is trying to operate in this space, know, in our space in Charlotte, which is still building entry level housing. But we're actually doing it in a way in which we're not necessarily competing with the nationals. We're competing from a scale perspective in building and selling 200 homes. But we're actually not doing it in large subdivisions. So, you know, our public competitors may not look at a site that's less than 50 homes, right? Or, you know, 15 acres in Charlotte. We are, because we're not private equity backed, we're owned by just ourselves. We can still do a one -off lot and we can do a, you know, 10 home minor subdivision or really any size deal we're looking for. And so, We figured out a way to just through organization, spending a lot of time, you know, working on our processes, to be able to build homes roughly as fast as the nationals can do in a subdivision, but we're doing it on a scattered or small subdivision type level and able to do that same kind of volume just by doing a ton of small deals, which we're perfectly happy and willing to put in the work to do. but it doesn't make sense for the largest home building in nation to set up shop for an eight home subdivision. Craig Fuhr (20:45) Yeah, but there has to be a significant amount of builders down there doing what you do, I would think. And so it's not as if there's no competition for that type of land. Danny Hirschberg (20:55) That's certainly the case. There are definitely a lot of smaller builders. I think from a deal flow perspective, and this is what Cirrus is phenomenally, incredibly talented in this aspect, he became, I think, just the perfect outlet for small land sales. And so we just said yes to everything for a long time. and took down as much land as we could that fit our box, closed quickly in terms of the surveyors we have that are able to get out to sites quickly so that we can close on land quickly. Just business created business in that sense. And so we just said yes to a lot of land and Sirius did a lot of cold calling and did what he said he was gonna do. in terms of closing and that built on itself. And so we became a great outlet for someone who was trying to sell a lot or a couple of lots. And that really helped us scale from an acquisitions perspective. Jack BeVier (22:08) Are you guys going direct to seller with this or is it through wholesalers? What's the, what's the predominant source? Danny Hirschberg (22:14) It's both. I would say it's probably slightly more towards the wholesaler side, but we do go direct or anytime we're buying lots, we're talking to neighbors and things like that. So with the number of people we have in the field and just the activity and the signs that we have on every single lot, we get a lot of inbound seller calls as well, but I would say it's maybe a little bit more than half wholesaler and the rest is. ends up being direct. Jack BeVier (22:46) What kind of like regulatory environment are you guys dealing with in terms of, in terms of one, terms of getting permits, but also just like, these well and septic or you public water and sewer, like the diligence process to buy lots and identify that this is a buildable lot I can do, you know, I can do my three, two and a half, you know, 1800 square foot here. w w like, what, does that environment look like that you guys have to go through to identify? Yes, this still works. Danny Hirschberg (23:14) Yeah. So 95 to 96 % of our lots are city water, city sewer. So that's a confirmation that we can get within an hour of seeing a piece of land. And then the second level analysis is, what are we allowed to build on this land? so just sheer number of deals has created a knowledge base of the zoning rules in Charlotte. or in Met County and even in some of the outlying counties as well, as to what we're allowed to build. And so those two things take a lot of the diligence out of, or the mystery out of buying land. Can you get utilities and what can you build? And then from there, we'll do a site visit or have someone on our team do a site visit to understand what the grading challenges may be like and Jack BeVier (24:08) Bye. Danny Hirschberg (24:10) build our budget from there. But we build the same six to eight plans primarily. And so our hard cost budgets are extremely dialed in. It's a formula at a certain point as to what we're going to build and what it's going to cost. And the mysteries are, what can you build on the land and how much does it take to get to a finish pad? And that's the entire analysis on these deals. Craig Fuhr (24:38) So to Jack's point, good. Good, Jack. Jack BeVier (24:38) the are the are the the just last thing that are the are the like because they're all city water and sewer is this like busted subdivisions from 20 years ago that you guys are buying or is it just happened to be or is it on a main road like how you know how is the infrastructure already all there Danny Hirschberg (24:57) Yeah, that's a really good question. Sirius and I have talked about how this strategy may not be all that repeatable or you can't really replicate it in a lot of other markets because there aren't all these lots with, scattered lots with city water, city sewer. there won't be that way forever in Charlotte either. But yeah, it's a lot of older subdivisions. There are some main roads. I don't have a great answer for you on why at this point in Charlotte, there are these infill scattered lots with city water and sewer. But I believe it's over time just busted subdivisions. Jack BeVier (25:41) They just didn't finish them out. Yeah. I mean, that's amazing. That's an amazing, you know, just like a go, you know, the county's a gold mine, right? You just like have to like get, you know, find, find all those sellers who are and get them at the right time. Right? Like that's, that's fun. It sounds fun, you know, Danny Hirschberg (25:43) Yeah, yeah. Yeah. Craig Fuhr (25:57) to Jack's point about regulation and sort of working with the county city municipality. I can only go on what I've noticed here in Maryland, Jack, that, you know, in fact, there was just a small five house subdivision built right next to my house. We, my wife and I sold a piece of land for access, did quite well with that, but it was two and a half years working with Howard County, Maryland to get this thing to plat and When I heard about the impact fees, permit fees per house, it was staggering. And so your flash to bang, we've identified a parcel that we want to take down, we like the price. What's the flash to bang on putting shovels in the ground? Danny Hirschberg (26:42) Yeah, so there was a big change in Charlotte in June of last year, June of 2023. A new UDO was enacted, which changed the permitting, changed a lot of different processes, for unified development ordinance. So basically the rules for development across different product types in different areas of the city were kind of combined into one and the city Jack BeVier (26:55) What's UDO stand for? Danny Hirschberg (27:11) got more organized in terms of planning and development across the city. And so with that, the permitting process for an infill single home became much more substantial, much more time consuming, much more expensive. Prior to the UDO, we could get permits in Met County or in Charlotte. Our average could have been two weeks to stick a shovel in the ground. And it's gone from two weeks to, it very much depends on how complicated the land is, how tough the lot is, how narrow it is, what we want to put there. You know, it could take 90 days or so to get a permit. But we feel just given the sheer number of times we go through the process, our team's knowledge of the process and going through it and actually having someone on our team who almost solely focuses on this. We get a lot of reps and we understand the system and processes of what the city is looking for and what we need to do. Whereas another builder who's doing this five or 10 or even 15 times a year, it can get lost and can seem much more complicated than it actually is. But I would say... Craig Fuhr (28:33) Jack, how would that 90 days compare to what you know in Maryland? Jack BeVier (28:38) I would pay a large sum of money to be able to get permits in 90 days. I'm getting, I've, so we've done a bunch of like infill new construction. you know, started looking at it and back in like 2020. And so we put some lots under contract and probably done, I don't know, probably done 20, probably done 30 projects. but I have really struggled to make it a business frankly, because the, the timeframe on, the predictability and The predictability is not there and what the time frame is going to be can be so long. Like six months would be like the inside, like the absolute inside. I've got, well, I've got one in Anne Arundel County that I'm 18 months in. There was nothing wrong. Like there's, it's a buildable lot. It's a buildable lot, public water and sewer. Craig Fuhr (29:28) Close to the Chesapeake Bay though, Jack. It could be 20 miles away, but it's still close. Jack BeVier (29:32) It's wild, dude. So like, just, can't count on, I can't count on when that permit's going to come in. So like, can't put, so I can't put funding behind it. I can't put people behind it. I can't build a business around it, right? Like the unpredictability makes it that I can't put a build a business around it. So like, as a result, ends up being that I just like their, projects that we do, we keep, we continue to buy lots, but it's like just stuff that we, know, it's kind of filler in the pipeline. that like, Hey, whenever the permit come, you know, I can't spend a lot of money on a lot because I don't know how long I'm going to carry it for, but, or at least I have to price in that I could be carrying it for a year and a half. But, I, I, you I don't know when the permit's going to come in. So I, know, it just ends up being like a thing that we just pop in and yeah, like, we got the permit on this one. All right, cool. Let's call, find that foundation contractors phone number and give them a call. so Danny Hirschberg (30:24) Right. Yeah. Well, that that time frame, you know, if you change our time frame to get a permit from 90 days to a year or nine months, it changes our business from a good business to a bad business. way the reason why we like our home building business and why we have not had the need to raise outside capital is because we can turn our money multiple times a year. So. our hold period from buying land to selling the home so far this year on average, I we sold about 120 homes so far this year. Our average hold period is nine months. So we're turning that capital, not quite two times a year, but it's more than once. And so our single dollar, our margin on a home is really a higher return on equity just because we're that money more than one time a year. But if you're turning that money half a time a year, three quarters of a time a year, it's It's a lot less attractive of a business. Jack BeVier (31:23) Yeah, yeah, exactly. And we're competing with home builder or sorry, homeowners on the lot purchases. So like to find a deal that's got enough margin to justify all that uncertainty and you're out competing a homeowner. Yeah, it's we get them from from time to time. Like once every couple, you know, once every other month we'll buy a lot. You know, and that's what it's ended up being for us. Yeah. What you you guys were a couple of years ago, you guys were selling a lot. as you ramped up, were selling, you were doing a lot of build to rent, right? Charlotte was a very, very, very hot build to rent market. Talk to me about the experience the past 24 months as it relates to the institutional build to rent, appetite, interest rates and homeowners and how those have competed with each other. Danny Hirschberg (32:13) Yeah. It's been a really interesting shift. know, my background and also really serious background was not in home building. So we entered this business and build to rent really heated up and we never, you know, from 21 and 22 really sold very few homes to retail buyers. And I think we were, I don't know if it was spoiled, but it was just learning a different process of what our buyer at the time was looking for. So at the time in 2022, we think we were selling homes to institutions that had implied, you know, they were buying them vacant at CO from us, but at an implied low forecap on stabilized rents. Yeah, low to maybe mid forecap, but it was, you know, couldn't be far off from that. And in our view, retail buyers were also pricing at a low to mid forecap, but they were looking at it from an end user perspective. The math was roughly the same and it didn't make sense to sell homes to retail buyers one off when we can sell 15 every month in one transaction. didn't have an in -house sales team. We had a lot less construction staff because there wasn't a buyer walk every day. And it was an interesting and I think fortunate way to get up to speed on how to build a home building business because it took out What I view as the hardest part is catering to each individual customer and creating a positive experience when buying what all of our buyers as their largest purchase. institutions were pricing it, when rates were zero, institutions were pricing it at, you know, low to mid four cap, it was roughly in line. When rates increased towards the middle to end of 22, institutions, their target yield, unlevered yield gapped out. like it should. and we actually expected home prices to fall because we thought, you know, end users would also have to pay less just mortgage rates rising, know, debt to income ratios being more strained. That didn't happen just due to lack of product, especially in Charlotte. But what it did create was a huge gap between what an institution can pay and what a retail buyer can pay because the retail buyers were still paying that in applied four and a half cap because the rents didn't move. But institutions were now pricing at a six cap and it was a 30 % delta between what an institution could pay and a retail buyer. we transitioned to the retail model, selling homes one off. We brought our sales team in -house and we staffed up our construction team and we transitioned to a more traditional home building company like our publicly traded peers in Charlotte and to make our business work and to maintain our margins, that's what we had to do. And so it took some time to ramp up and learn that space just because neither Sears nor I didn't come from a public home builder, didn't quite fully understand the space and had done it a few times, but not at the scale that we wanted to build our business. And so that took some time in early 2023 and we've since ramped up and I would say 90 % of our homes go to retail buyers today who are still, in our opinion, pricing homes or our homes are trading to retail buyers at an implied four and a half cap if they were to be held for rent. Jack BeVier (35:53) How's that staffing? What's staff look like now? Danny Hirschberg (35:58) We've got three people on our sales team. We have one person in marketing and we've got five pretty seasoned project managers in the field. And then we've got, you know, office staff for permitting. We've got an analyst underwriting deals for us. And then we've got a, what we call our development team. So making sure materials are on site. organizing subcontractors, helping the field team deal with site issues, neighbor issues, things come up. So that's how we're staffed in our home building business. And when we were selling institutions, we didn't need a good portion of that staff, but it's great to have because we need the flexibility to be able to exit our homes in multiple channels. Craig Fuhr (36:53) So are these folks like sort of died in the wool, been in the business or are they learning as quickly as you? Danny Hirschberg (36:59) We really haven't hired much from any public home builders or any seasoned home builders. We learned this business by building out a spreadsheet of the steps to build a home. And we feel fortunate that we learned it that way ourselves because we think we found some efficiencies doing it that way and also have learned from our own inefficiencies. But no, we have not hired anyone. from a public or national home builder, from our sales team to our construction team. Craig Fuhr (37:37) just curious when you're doing selling to institutional buyers B2R, do they find you or did you go out and find them to market the deals? Danny Hirschberg (37:48) So we always have a tape of our homes on hand. We get reached out to a decent amount from brokers or from buyers directly. And just through being in a market that is great for bill to rent, I think we've just had an outside share of outreach to us and created some relationships with some of these institutions that buy homes. So it's just, think, combination. We really didn't do a ton of outreach. was mostly inbound. And recently what I've learned in talking to some of these groups is there's been a real narrowing in on North and South Carolina and Tennessee for some reasons that make Florida, Texas, Atlanta, really tough bill to rent markets right now. And so we've seen an uptick in outreach, not to say that the pricing works for us necessarily, but we've seen a lot of outreach. Jack BeVier (38:48) What's the, what are those reasons? Why those three States versus the other three States. Danny Hirschberg (38:53) And, we don't operate in Florida, or really we don't operate in any state other than North Carolina for the most part. But what we've heard is, you know, real estate taxes in Texas make it challenging for BILT to rent to work or buy CO homes compared to retail. Florida is for insurance and Atlanta, I think there's a squatter collection issue in a lot of communities. And so Nashville has been a positive and strong performing market for a lot of these groups, Charlotte, Raleigh -Durham have been strong markets. So I think that's why we've seen, or at least I've been told we've seen a lot of outreach to us because of groups narrowing in on some of those markets that have performed well over the past couple of years. Jack BeVier (39:41) What are you guys seeing from a market activity right now? I'll tell you, we're recording this on August 29th. The past two weeks for showings for us have been like not great. Like it's just the, and everyone I talked to in, at least in our area, showing activity has come down like precipitously in the past couple of weeks. know, hopefully it's just weather and back to school, but it's got everybody a little bit on edge around here. What are you guys seeing from a showing activity and deep days on market perspective? Danny Hirschberg (40:14) Yeah, it's amazing how my mood changes based on the number of showings we have every weekend and how many contracts, so we try to get five sales contracts a week, which ultimately 30 to 45 days later results in five sales that week. And that's our goal that we have for our sales team. it's a little, obviously a little seasonal, but we had our, the week before interest rates Craig Fuhr (40:21) You Danny Hirschberg (40:43) came down, I guess it was three or four weeks ago. The week before that, we had our record retail sales contract week. I think we got nine retail sales contracts that week. And the week rates came down. And then the following week, we would have expected to have an unbelievable contract week. And everyone woke up and it was the exact opposite. We had, I think, two each of those weeks. It happened to coincide with back to school and Jack BeVier (40:55) Thanks. Danny Hirschberg (41:12) You know, some other things that I think people are trying to hang their hat on. But Sirius and I were talking about this yesterday. We don't know. We can't figure out why there was that dip after rates came down. So, you know, but we, but we also felt the same thing that you're feeling that showings have been down the last couple of weeks. We're having a little bit of a better week this week where we have four, four contracts in this week. But. Jack BeVier (41:41) Nice. Danny Hirschberg (41:42) but still, it was hot before rates came down. So it's an interesting thing that I don't have an explanation for and no one can really give us a real explanation. Craig Fuhr (41:54) I'll just add a couple, anecdotal points here is speaking to, were talking about a gentleman, who recently joined RIR prior to hitting the record button, mentioned that he does mostly buy and holds, but they also do quite a few flips a year as well. And, you know, perfectly fine houses in the neighborhoods where this guy, you know, operates in he's used to getting, you know, five contracts in a week. And he's had two houses, beautifully done. 37 showings on one 15 showings on the other, no offers. You know, you would say lower the price at that point, but that's not what he's used to doing. Spoke to another guy in a port Charlotte, Florida, their building houses. Jackie, you and I have talked to this guy and they just completed 10. Their net profit on these things is significant. Each one of them significant. We're talking six figures plus and he doesn't want to take the money off the table. So now they're looking at renting because these houses aren't selling and he's getting no bids. so, you know, we're sort of, you know, I think there's been a doubling of inventory and in some of the better parts of Florida, you know, feels like a little bit of a slowdown happening. I'd love to get your take on that as you as you too, Danny Hirschberg (43:14) I think that the inventory uptick is real. I think it's more pronounced in certain states, in certain areas. We've talked to builders in Florida and Texas that are experiencing much more of a slowdown than we are. Our homes are still moving, but we're also focused on moving them. We will take a $5 ,000 haircut to move a home. sort of inconsequential and allows us to keep moving. And, you know, we're not in the business of predicting where home prices are tomorrow or the next day, where you just, you know, take the spot rate and accept that as a spot rate. But we have certainly seen, you know, more supply than a year ago in our market. We don't think it's enough supply still, just with, you know, average days on market being well below, you know, sort of equilibrium of a 150 days or so. I think we're somewhere in the 60 to 70 range, at least in Charlotte specifically, but we've seen some other builders and heard from some other builders in some other markets where they've felt much more pain just with the amount of supply. And I think just the availability of land in some of those markets has created the ability for a lot of supply to come online. Jack BeVier (44:40) What's, if things don't go well and we start to see home price depreciation, like home prices start to go down, what are you selling house? What's your median? What's your median sale price right now? Craig Fuhr (44:51) Yeah, that's what I was gonna ask. Danny Hirschberg (44:51) Yeah, $3 .55 is our average. Jack BeVier (44:54) And what's your median lot purchase price? Danny Hirschberg (44:56) It really ranges. I would say it's got to be on average maybe 70 to 75, but I don't have that number offhand. Jack BeVier (45:09) If you had raw dirt, how much does it cost to develop to get it to finish lot? Danny Hirschberg (45:14) That is very, very dependent on if it's know, buying raw dirt to build a subdivision, right? Where we're bringing in utilities and building a road and building out pads or an infill lot, could, you know, infill lot that's flat and cleared, you know, can be Jack BeVier (45:32) See a flat infill, flat infill like you're playing vanilla. Danny Hirschberg (45:35) Plain vanilla, know, taps in Charlotte are 16 ,500 and to build a pad that on a perfectly flat lot that's cleared, you know, it only a couple thousand dollars. So it's only taken us 20 grand to go from flat cleared lot to pad with, you know, taps in place. Jack BeVier (45:54) Gotcha. So you got some room until like you get to like negative lot value. You've got you got 50 grand. got you have 15 % home price depreciation before you're worried that like you can't even get a lot for free and sell a house. You're you got some room. Danny Hirschberg (46:10) There's definitely some room in our space. Yeah, I think that's a fair statement. Jack BeVier (46:18) I mean, in the 350, the 350 home price, what's that house rent for? Danny Hirschberg (46:24) Probably 2150, 2100 to 2250, something like that. Comfortable rent. Jack BeVier (46:30) You guys, you guys talking about downside scenario, keeping them as rentals? Yep. Always. Danny Hirschberg (46:35) Always. Yeah. Well, we've always talked about that when we first started building homes. We wanted to build a large rental portfolio, keep them for rent and operate that kind of business. And the price that institutions were paying at the time made it such that we could grow our business quicker by selling homes and continuing to build homes. But we've always looked at our business as the downside is a rental and, you know, our development return on cost is well above a six. So we feel okay about that. mean, is it substantially, are we going to refine, take all of our money out and then some? No, not at a six to a seven. But there's enough downside protection there that we feel comfortable with Canadian developed homes. Jack BeVier (47:27) Yeah, gotcha. I've been a quick aside on the DSCR side of things like for my next refi, I'm going to buy it down because you can still get a buy down at like four to one. And I'm like, well, I'm keeping it for more than four years. And if you're doing a refi, it's got a five, four, three, two, one, buy down to get the best, sorry, five, four, three, two, one, prepay prepayment penalty to get the best rate. So I think the four to one, so at the end of four year, you're still in the two point prepay period. So I think it's a deal right now to, to do, to do buy downs. And so for my next refi, I'm going to buy down and I'm going to buy down to the fives. Like I'm going to sell, we're going to sell this paper at a loss to, get the rate down, just to help with that service coverage and downside protection. So that, that, that's my plan. Danny Hirschberg (48:14) sense. Jack BeVier (48:15) Hey Craig, why don't we, why don't we do a wrap and then hop into the next episode and jump into the multifamily opportunistic stuff that these guys have been doing, which is really cool. And also their lending business, which has been growing pretty significantly. And I'm a huge fan of, Craig Fuhr (48:32) Yeah, so I thought you were still talking there finishing up your point. But yeah, we're talking with Danny Hershberg today. We're going to wrap this episode of Real Investor Radio. Hope you guys join us on the next one. We'll see you then.