Property Product-Market Fit: The Important Metric

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined today by James Dainard. James, what’s going on man?

James:
Just grinding it out in the Pacific Northwest right now. We’re dealing with the market, shaking out, so just pivoting, changing things and keeping our nose down and getting things done.

Dave:
I mean, I guess I’m pretending asking you what’s going on. We’ve spent the whole day together, so I’ve 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?

James:
A lot. We’ve made structural changes at every business. The way we’ve been doing the last 24 months we’ve thrown out the window, and we’ve replaced staff or reposition staff, and we’re 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’m seeing the market kind of slow down, I don’t 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’re going to be buying next.

Dave:
That’s 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’s going to be joining us in a little bit here?

James:
Yeah. I met Tommy actually two years ago, because we’re 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’s made us very easy to sell. But as an investor, it’s also made me be an admirer, because I’m like, “Hey, I need to kind of do what they’re doing because it’s working so well.”
But they’re 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’s not just a home builder, he’s an investor guy.
He understands the whole game, he gets the whole big picture. He’s not just putting up two by fours and citing. They’re financially planning and expanding through every market, so it’s just a really exciting company to know in general.

Dave:
Oh, absolutely. It’s great. And I think if you’re thinking, “Oh, I’m not a builder. I’m not a developer,” you’re still going to want to listen to this, because Tommy has an incredible way of explaining how he uses data to find opportunities that’s 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’re 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?

James:
Just understanding the trends. And what I really enjoyed about the conversation was just it’s a simple business when you’re looking at deals. We’re going from a seller’s to a buyer’s 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’s a good thing, and it allows you to actually grow your business a lot better.

Dave:
Right on. All right. We’re going to take a quick break, but after that we’re 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.

Tom:
Yeah, thanks for having me.

Dave:
Could you start by telling our audience a little bit about how you got into real estate in the first place?

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, “Buy real estate, get rich with no money out of your pocket.” 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’t 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, “I live for free. This is amazing. How do I buy more real estate?”
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 ’06 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.

Dave:
I got to ask you, do you remember how much that seminar cost you back in 2001?

Tom:
It was free actually.

Dave:
What?

Tom:
It was free. I’m convinced though what they told you was ask for more limits on your credit cards because on day two we’re going to sell you the next seminar. Right? I didn’t buy the next seminar. I was like, “Ah, you just told me how to do it.” So no, never spent a dollar on the seminars.

Dave:
Wow. I was thinking to myself, “I’ve never interviewed anyone who has walked out of one of those seminars better off for it.” Congratulations on being someone who did. That’s awesome. Can you tell us a little bit about what you’re doing now and what your construction company does?

Tom:
Well, yeah. Thomas James Holmes, we’re the country’s 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’re 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’re in the greater neighborhoods of Seattle and the Seattle Market, Kirkland, Bellevue, et cetera. And then we’re in the city of Denver and also in the city of Phoenix. And so we’ve grown a business that enables us to replace functionally obsolete old homes in the best neighborhoods where people want to live.

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?

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’s 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’s not permanent. Right? The mortgage business where we could make a bunch of money from ’01 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’s this period of time where there’s 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’s demand from a consumer for great homes in the neighborhoods where they want to live yet there’s 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’re doing is we’re 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’s 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’s 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’s 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’t dependent on a moment in time of a real estate market or an economic cycle, right? That there’s always a need or demand for high quality homes in the best neighborhoods and there’s 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.

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’re trying to scale their business, and it’s very difficult to scale a remodel flipping business because every house is so different and it’s 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’re much smaller than you guys it. But the reason we like building is it’s 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’re 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?

Tom:
I think ultimately what you’re 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’s 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’t 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’t 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’s 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’ll never forget one time we were talking about a property in Sherman Oaks and he said, “I’ll pay a million dollars for it.” And I said, “I can’t lay my money out for you because that house isn’t worth a million dollars. I’m going to be on the hook.” I asked him, “What are you doing? I have to understand why I should feel comfortable.” He said, “Well I’m not buying the house, Tommy, I’m buying the land sitting underneath it,” and this light bulb went off, like, “What do you mean you’re buying the land?”
Well, there’s 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’re talking about James on the fix and flip model is one 1950s home versus another 1950s home. I could say it’s a hundred bucks to remodel, but I don’t 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’s predictable, right? And predictable leads to scalability. And so when you can look at a math equation … 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’t 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 ’08 to 2012, you had wildly profitable deals and mediocre deals, and then some really bad apples that you didn’t 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’s how we really push to scale the business.

James:
Got it. Because that makes sense. For us, we’ve been able to scale our … We built town homes has been a lot easier for us to scale that out. And as we’re purchasing, it’s 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?

Tom:
Again, we look at supply and demand characteristics in a market on a macro basis. What’s the absorption of real estate? What’s 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’s 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’re 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’s 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’s 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’s 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’ve been able to really study how the business works in these different environments very predictably.

Dave:
Tommy, what about the specific markets that you invested in attracted you to them? You said you look at macroeconomic data, and that’s 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’re trying to expand to new markets?

Tom:
It depends on what you’re looking for. I’m looking to build a business long term that does this compared to investing in an asset today that’s going to have a yield tomorrow or in the next six months. Where am I going to place my capital? I’m 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’s a lot more factors that go into what’s 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’re 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’re going into, what is the supply and what’s 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’s basic simple economic function of supply and demand. And I think that it’s so key that sometimes people forget that if I’m going to place my money here, they’re looking at the deal and the economic terms of that deal, but they’re forgetting that there’s a broader market that they’re competing with on that deal. Right?
There’s a lot of times where people will look at, well, I’m going to be new so I’m 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’re 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’s a Mercedes, a BMW, an Audi or now a Tesla in that, and I’m trying to attract a customer that has $70,000 to spend on a car, I’m 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’m going to say, “Where does my million and a half dollars go best?” Right? If my work center is Downtown Seattle or Bellevue, what’s 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’s the demand for the dollars? The dollars that are out there that I’m trying to attract to the product, what’s the demand and what’s the supply that’s trying to attract those dollars?
And so many times we get very bead focused in a neighborhood and say, “Oh, well, yes, there’s nothing in this neighborhood. Okay, but there’s 10 things in the neighborhood next door, which is the same proximity to work centers as that.” And so again, Dave, I think it sounds more macro the way that I look at it.
We’re 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.

James:
When you guys are reviewing these trends, I mean, do you guys dig deep into the demographics? With each state there’s 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’s laid out, they’re so carefully laid out, they feel massive, which is what people are looking for.
They’re 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’s 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?

Tom:
Yeah, that’s one of the unique parts of only building new construction is we get to design something from scratch every time. We’re 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’re 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’s 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’re willing to pay more for or less for, where they’re 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’s 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’re 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.

James:
And so Tommy, how important do you think that is? Obviously we’re 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’t digging that deep into the demographics. They’re 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?

Tom:
Yeah, look, I think a big part of it depends on the volume you’re doing. If I had a few homes to sell at a certain price point, you’d price them correctly, move the inventory. We’ve 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’s 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’s 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’s 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, “They’re for everybody,” well, they’re 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.

Dave:
Tommy, I think this is a great lesson for everyone listening to this. I mean, what you’re describing really sounds like just making sure you find a good product market fit between the product that you’re 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’re not a builder like Tommy or James, but even if you are a buy and hold investor, it’s important to consider the properties that you’re buying and if the type of product that you’re buying in a particular market makes sense for the people who are living there. You don’t want to necessarily buy a huge single family really nice home in the middle of a young college town.
There’s 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’s 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’re investing in.

Tom:
Well, look, Dave, real estate is an inefficient business real estate. That’s why people can make money in it. Where you get up to these big, huge commercial multi-family type projects, that’s where the efficiencies are gained and you have all the large Wall Street type money going after those things, because there’s no inefficiencies.
What you’re really describing is find the inefficiencies, understand them and beat them. As you were saying that I thought of a rental property. It’s 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’s nothing nice and new in the market and there’s 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’s nice. And so that’s an inefficiency that’s found in the marketplace. And ultimately what I’ve 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’s 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’s really understanding those different inefficiencies and seeing if there’s an ability to capitalize on them.

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?

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’re tracking, is that a trend that’s going to continue or is that a trend that comes off?
Well, it’s 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’re really tracking is months of absorption or weeks of absorption in the marketplace.
If there’s 70 available homes at the price point you’re trying to sell, and there’s seven selling a week, there’s 10 weeks of absorption in that product. I think what it’s helped us do is really on the buying side as well is where you’re seeing more supply of the input.
The input for us is land. And so if we go into a marketplace saying we’re 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’re going to hold them for 18 months or longer. And so it’s really understanding how do we get in at the right basis. And what you really want to track is … I love a market that’s not a buyer’s market and it’s not a seller’s market but it’s just a market. And I feel like where we are right now is just a market.
Five months ago it was a seller’s market. We could demand anything. Through the middle of the summer, it was trending towards a buyer’s market, but that’s come off. And so I just want a normalized market where there’s 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’d love a seller’s market for my inventory, but I don’t want to buy inventory in a seller’s market to build new homes on. We just want a good constant market. And we track these trends by each neighborhood we’re 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.

James:
As you guys are tracking the data and the absorption rates, one thing that we’ve noticed, especially over the last 90 days or since June, is builders appetites have really backed out. They’re being very, very aggressive. The last 12 to 24 months they’ve calmed down. And then we’ve 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’re 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’s just not a lot to cover?
I know for us as investors, whether we’re flippers or developers or buy and hold, we’re 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’re getting exciting on?

Tom:
Look, the challenge with new construction is we’re buying something today that we’re not going to sell for another year and a half. You’re trying to predict what the absorption of real estate will be at the end of 2023 going into ’24 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’s demand for real estate in the markets. And I think it’s 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’s 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’s 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’m going to have less competition.
Because if I’m the one buying today, if six months ago we were buying five pieces of inventory to build new, and now I’m the one buying three pieces of inventory and the others have not bought the other two pieces, 18 months from now I’m going to own the only supply in the marketplace.
I kind of like that trend, but I also understand investors, right? I’m 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’s investing friends and family money personally guaranteed on loans. There’s a lot more market factors in play when you’re making those very close to home personal decisions.

James:
And are you guys tracking that in every market that you’re in, like how many building permits are going through? And have you seen any trends stick out more? Because again, you’re 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?

Tom:
Yeah, I’d 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’s not a good clean way to aggregate and track that data. Where we’re tracking it more is who’s buying the real estate that we’re not buying and what are they doing with it?
If we have a property that we don’t 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’re in are actually not other builders.
They’re homeowners buying the real estate to own and live in, or remodel and live in. There’s less development than there is I want that piece of property to own in the marketplace.

James:
Got it. I mean, that makes sense.

Dave:
One thing I wanted to ask you, Tommy, before we let you go is about material costs. It’s something that we’ve 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 … Well, I guess I should ask you, are you seeing rapid rises and sort of what are you seeing in the material costs?

Tom:
No, look, we’ve definitely seen a stabilization in materials. Lumber has come back down. We’re actually seeing a reduction in lumber costs across every market right now. You’re still have inflation. There’s certain cost codes that are inflating along with inflation trends, light fixtures, tile.
There’s 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’ve 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’re remodeling or building new is labor. And that labor is paying more for their rent, they’re paying more for their groceries, they’re paying more for the fuel and their car, for the clothes that they’re 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’re not seeing these drastic spikes anymore. I think we’ve gotten back to some sort of normalization, although now I hear that there’s 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’ll see if we really get cost reductions, I’m 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.

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’ve 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, “Hey, we got to account for this, build it into the proforma and put the plan in motion.”?

Tom:
Yeah, I think the biggest part for us is having the feedback loop of what it’s costing us to build today. We’re underwriting a new deal based upon our cost today. And so you’re 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’m buying that I’ll be putting HVAC in six, seven months from now.
We’re trying to constantly maintain that feedback loop of what’s the cost today and how’s that going to translate when we incur that cost down the road, because there’s a lag time when we buy a new project. The nice part is we don’t buy 400 lots, or buy a big master plan community and cut into foreign lots and locked into our land basis.
We’re always buying new land. And so we are always able to update our underwriting based upon what our current costs are. And so it’s really trying to maintain that feedback loop of different cost codes and where the changes are happening so that you don’t get surprised by them the next time you’re building that home.

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’d like to share?

Tom:
Yeah, no, look, it just takes taking a little bit of chance and hedging your risk as an investor. I mean, I’m 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’ll 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’re 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’re going to really build a business and invest capital and take risk, personal, professional, et cetera, why are you doing it? Right?
What’s the bigger, greater goal? If it’s just another dollar, that could be the greater goal. Right? But I love what Simon Sinek says, is, “Figure out your why and the what becomes way easier.” There’s 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’re doing it really helps kind of alleviate all the stress that comes along with the risk that you’re 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’t pay for real estate seminars at the LAX Airport.

Dave:
Just go to the first day.

Tom:
There you go. There you go.

Dave:
And Tommy, if people want to connect with you, where can they do that?

Tom:
You can message me through LinkedIn, Tommy Beadel, B-E-A-D-E-L. You guys have it spelled L-E, but it’s E-L at the top there. Appreciate any messages you want to send.

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.

Tom:
Thanks, James. Yes, no, we always like to buy new real estate deals. As a realtor asked me last week, “How do you feel about the market?” And I said, “I can’t find enough land to buy.” And they said, “No, no, but how do you feel about the market?” And I said, “I just said. I can’t find enough land to buy,” which means I feel good about the market. All right guys. Thanks so much. Thanks for having me. See you.

Dave:
All right, take care. All right, James, what’d you think?

James:
Oh, I thought that was awesome. For me as an investor, I’m always looking at how do you scale, how do you kind of move and grow and just … 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’s going on, and then you can build a business around those trends, not just about your gut feelings. I mean, he’s 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’s about having the right system, not just the right vision going, “Can I scale this and grow this down the road?” 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.

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’re 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’s 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’ve never seen anything like that.

James:
Yeah, there’s some cool stuff out there you can do with … We do it actually for off-market tracking, like when we’re more targeting sellers, like who is the demographic that is most likely to sell? You can do the same thing. There’s 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.

Dave:
Oh, really?

James:
Oh, yeah. It is not cheap. It’s 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’ve 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’s transitioning right now, the last thing you want is to be the odd man out property. You don’t want to be the weird rental. You don’t want to be the weird remodeled flip.

Dave:
Totally.

James:
You don’t want to be the new construction lot with a negative impact, and that’s what makes your deal move right now.

Dave:
Yeah, that’s really good advice. I mean, I don’t know if that’s something applicable to our audience if it’s super expensive to buy it, but I mean, maybe it’s 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, “People want ranches right now. People are really digging detached garages,” or, “Renters are looking for this.” 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’ll definitely have an advantage in the market.

James:
And there is one I do know of that’s not very expensive. It’s called NeighborhoodScout.

Dave:
Oh, yeah.

James:
Yeah. You can pull up every little neighborhood. And they show you the demographics moving in, the demographics moving out. And it’s actually super handy. It does not cost thousands of dollars. And you can buy it just for the little area that you’re in.

Dave:
Oh, perfect. That’s awesome. Thank you. Well, yeah, I’ve used that in the past. I’ve never used it for that purpose, but that’s great advice. Check out NeighborhoodScout if you want to get this kind of data. All right, James, thanks so much. I mean, it’s been a fun day. We’ve been together all day and hopefully I guess we’re going to be together in person real soon.

James:
I’m so excited for BPCON. I think it’s going to be a special one.

Dave:
Yeah. I mean, I feel like we’ve been talking about this for a really long time and now it’s finally here. I’m looking forward to seeing you in a week and a half.

James:
This is my first BiggerPockets conference too.

Dave:
Oh, really? You haven’t been?

James:
Yeah. No, I couldn’t make the last couple because of kids, kid commitment.

Dave:
Oh. Sweet man. Well, we’ll have a great time. And hopefully some of our listeners will be there. But if not, we’ll definitely be posting a lot. We’re 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’m @thedatadeli. You can also follow BPCON there. James, what’s your Instagram handle or where should people connect with you?

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’ll be around. And if you catch me at a conference, one thing you do know is I won’t stop talking. Come up, ask me questions, you will get answers. I’m very friendly.

Dave:
That’s a dangerous thing to start telling people.

James:
It’s terrible. I’ll go for eight hours straight. It’s bad.

Dave:
You’re going to be drinking those Rockstars and up till 5:00 in the morning.

James:
Sales juice. Sales juice.

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’ll 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.