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Bill Fairman (00:00):
Have you guys ever wondered about different funds, smaller and larger, and how they recapitalize their loans? At the same time, we had a guest a couple of weeks ago with Hiatus Home that were tiny homes and wondering how you can scale that business as well. May I introduce Ryan Andrews.
Ryan Andrews (03:55):
I really enjoy having a lot of different things going on and I break it down into two halves in my business. One half is working with KYC and Phoenix, and managing that fund primarily which is what our relationship really started out on and is based on.
On the other half of my business I do a lot of sponsorship, basically development projects. I act as a CFO and sponsor for all kinds of development projects. Most of that is within the Hiatus Homes brand.
Bill Fairman (05:00):
As the smaller fund, we try to grow and we don't always have enough capital to make our loans with. What do you do? We have relationships with other funds that will come in and buy blocks of our loans. We still service them and keep the relationship but that allows our fund to continuously recapitalize and have enough money to lend with. At the same time, we still have a decent return for our investors. You guys are doing this in a lot of different areas of the country, aren't you?
Ryan Andrews (05:47):
Private loans originated by groups like you. So we've picked a bunch of different geographies around the US that we love because of lots of different momentum factors.
We have this really cool technology behind our fund. That's basically a big data algorithm that crunches 30 to 40 different data points in each zip code in the US and then spits out a bond rating of which codes do we like and which ones do we not like. The region you are lending in the Southeast, especially the Carolinas ranks just really high on our big data out rhythm.
Ryan Andrews (06:41):
We've been working together for about a year now. But before that, I'd been looking for lenders and your region, I was like, "All right, where are you guys?" We got to get some exposure to this market. We never originate loans. We can't because of our structure, we always partner with a local or regional originator that knows the market, knows the borrowers, knows the neighborhoods, and is able to really cultivate those close relationships with borrowers and then service the loans.
Folks locally are able to do that so much better than we are when we're trying to have this kind of national reach but we then act as hopefully a great partner and a capital partner to come in and provide capital and large, more institutional type chunks to allow funds like you to grow. You guys have been an awesome partner over the last year. We've probably bought 30 or 40 loans from you and we're working right now and finalizing a new structure.
Jonathan Davis (07:59):
You see so many funds come in and they create this credit box so that they can lend or buy nationally without knowing the localized market and not having boots on the ground or people who understand those markets because even inside of the zip code, you have good areas and you have bad areas inside that zip code. In neighborhoods, you have good streets and you do not have good streets so you need that local knowledge and more than most understand that and that's a great asset too.
Ryan Andrews (08:45):
Real estate is definitely local. It's hard to compete. If you're a national lender, you're trying to lend everywhere you go into a market, you might end up lending to lending on a project that all the local guys passed on because they're like, "Oh, that's a bad borrower, a bad street.: The momentum isn't going there. If you don't know, even if you fly in on a plane and spend an afternoon in the neighborhood, you're not going to learn everything so you risk making mistakes and making bad loans to bad borrowers if you don't know the region and you're not in the region. For us, it is always super important to partner with a local group that's way more efficient for us to have a national reach through local and regional lenders than it is to try and do it all ourselves.
Ryan Andrews (09:36):
Our software that kind of backs our platform just acts as a guide for us to be able to have a good idea of where we want to target and where we don't. It also gives a cool discussion point. It always matches up with what our lenders are seeing in the market but when it doesn't, it opens up a cool dialogue like, "Well, what's actually happening here on the ground where maybe the model doesn't capture everything."
I appreciate your guys' local knowledge. I was down there with you and what has this been a couple of months ago now. It was January this year and I spent a couple of days there. We drove 250 miles around the greater Charlotte area, looking at projects you've done. New existing stuff that was in our portfolio that just gave me an outstanding feel for the area and a lot of confidence in the deals and streets you guys were picking.
Bill Fairman (10:48):
There was a discussion last night about AI helping in the health field. One of the things that they pointed out as you always have to have that human factor in there, and this is what you're talking about. You have to have the boots on the ground, the people that know the area because your algorithms might say one thing, but I definitely don't want a computer saying or diagnosing me without having an actual human.
They're looking at it because you can have two pixels and make a completely different diagnosis. The same thing's going to work with your algorithm. It's not written in there.
Ryan let's go to the Hiatus Homes things that we talked about before, we love the concept of it. The tiny homes you can turn into apartment buildings. You can turn those into subdivisions. How do you scale that nationally? Do you have some ideas on that?
Ryan Andrews (12:16):
That's definitely the goal with that brand. Just a little bit of a recap on the Hiatus Homes business model, it is a fully vertically integrated land developer through construction. We acquire our own property. We entitle it. We're general contractors so we build our vertical construction and then we even handle all our marketing. We don't just throw our units up on an MLS and hope for the best. We handle all of our marketing to drive interest from a specific type of buyer that wants this home. These are small homes, a couple of different models between 400 and about 1200 square feet that go from studio loft to two bedroom models. We try to build basically high density detached or if we're doing multifamily do a really tasteful and efficient high density.
Ryan Andrews (13:16):
The other piece is energy efficiency. We built a net zero on our projects so super good installation. There are solar-ready electric vehicle charging in the garage, that's our ethos underneath it and that appeals to a lot of people in the new basically kind of emerging housing movement where people are looking for smaller homes. They're looking for good locations for energy, efficiency, and smartly designed houses instead of big sprawling homes in the suburbs.
It's been really successful in the Pacific Northwest. I live in Bend Oregon and this is where we pioneered the model. It required some code changes in the city building code initially for us to even be able to do this which we worked closely with the City of Bend to do.
Ryan Andrews (14:11):
Now the state of Oregon has picked up this flag and recently passed a bill to allow this type of small, higher density, detached housing, residential zoning, and all. This is definitely a growing movement across theUS. It was almost a perfect segue to talk about how the Phoenix debt funds gain by finding local partners because we recognize we can't be present in every single market and get that competitive advantage from having local knowledge. With homes, it's really the same business model in that we're building a fund here which we can talk about the structure of the unique structure for a capital or a development fund.
Ryan Andrews (15:03):
Basically, we have the plans, structure, and construction. We have project management who knows how to push things through entitlement, engineering, and layout design. We have the marketing piece so we know we can sell our homes to these huge waiting lists of people in different regions that are looking to buy our unique product. They're not just looking for any home.
We also have the capital backing. Because of the Hiatus Capital Fund, we brought a bunch of individual investors into our equity investment fund that acquires the land and entitles the properties we have the capital to be able to do these. What's missing if we're going to scale is a local partner. As we grow across Oregon, across the Pacific Northwest, and nationally, hopefully this is over the next five to seven years, I would say we want the same thing.
Ryan Andrews (15:59):
We want a local partner that is a local expert in zoning. The local planning commission knows the people on the city council and can grab coffee with them and talk about the value of this kind of housing.
We can set them up as like, "Okay, that's our local quarterback that's in the market," but they don't have to pioneer the model and market it and figure out how to do it and build it or raise capital for it. That's all done. We can provide all of that.
It can create a unique partnership to hopefully port this model all over, because one of the biggest things we're getting from our marketing that we initially geared our marketing toward people that want to buy our homes and are looking for this type of home well that marketing's gotten out to a lot of people that own land tracks Atlanta, Phoenix, Arizona, Texas, or Pennsylvania.
Ryan Andrews (16:54):
They call us now and are like, "Hey, I really want you guys to build your development product on my piece of land. How do we do this?" That gives us a unique way to access and acquire land parcels where landowners don't want to just sell to anybody. They're like, "Oh, I love your guys' unique Hiatus Homes product." That's what I want on my parcel.
How can we work something out where we partner with a landowner and a local developer? They become our local partner that knows the city council or we have some kind of terms that allows this to work. That's another unique part of this that really helps this thing scale. So again, we're not scratching our heads.
Jonathan Davis (17:45):
A couple of questions, who are you selling these homes to primarily?
Ryan Andrews (18:02):
It was funny that our first development called Hiatus Behnam here in Bend, Oregon was 22 small homes. We thought we were going to sell those to a lot of people. It is very much like a tourist community.
We've got a ski mountain 15 miles away, mountain biking, rivers, fishing, and everything. We thought we were going to sell them to service workers because these homes sold for between 230,000 and 330,000. The median home price in Bend at the time was about 500 so it was like half the median home price. We thought initially, "All right, we're going to sell these to people that work in the service industry, people that work at the mountain, bartenders, or whatever are finally going to be able to buy a home."
Ryan Andrews (18:55):
We probably would have been able to do more of that if we had 122 of them but with 22 of them, they got snapped up really quickly. It was a mix but it was mostly educated people with a professional career. At the beginning of their career but still wanting to buy a home or people that were in kind of like their fifties. They didn't have a lot of space requirements. They just wanted this cool model. And because they were single, the community aspect is a really important piece. The homes weren't built like row homes all next to each other, they were potted in like kind of semi-circles of five homes overlooking a community garden, or a little pond, or a fire pit.
Ryan Andrews (19:46):
It also attracted people that were like, "Hey, I'm single, but I want to meet other people and have almost like a community that I'm with in that environment." It attracted a couple of different genres of people.
We're about halfway through our second development called 'Roanoke,' which is 10 two bedroom models. They're 900 square feet plus a one-car garage and those have sold very well. Those have sold a little bit more to like couples, although some are single folks but one of the things that was funny is there were two of the people that had bought the small homes in the original Behnam community started dating and were like, "Well, we want to move in together. We want to be together. Like we need a little bigger home."
Ryan Andrews (20:37):
They moved out of that one and bought one of our two bedroom homes on the other side of town. It was just funny that the community aspect was actually in two couples and one of them actually upgraded into one of our other homes that was a little bigger but with the same philosophy.
It's definitely some older single professionals as well. There's been some couples that like to live in Portland, but use it as a second home in Bend. And because they're not here full-time, they're fine having a small home without a garage and storage and all like the larger things that we have. That's a couple of different profiles of who's been buying our homes.
Jonathan Davis (21:23):
That's awesome. How was the financing for a home like this? What does that look like? Can you get the same kind of financing as you would a regular single family home?
Ryan Andrews (21:42):
There are some interesting iterations on this. These are on foundation homes on their own tax laws. They own the land they're on foundation stick built homes. Now early on in the model, we were building tiny homes on wheels which are kind of your traditional tiny home. That's almost impossible to finance because it's not attached to land. It's not stick-built, it's permitted by the DMV, not the housing department. It was so hard to get financing so even though those are really affordable, it's really hard for folks to actually buy them unless they have $80,000 in cash. Then once they have them, it's really hard for them to find a piece of land to park them on because zoning inside most city limits around the United States says we can't do that.
Ryan Andrews (22:40):
You can't have a trailer, an RV, or whatever it is that you're living in. Those were unfinanceable. The second iteration of this was on foundation but modularly built. We're having these things built in a factory and then shipped over to the factory over in Eugene. On the other side of the cascades from us then shipped over the mountains, backed onto the foundation attached. This sounded really smart and efficient because you build it in the factory but it ended up being a nightmare.
The transportation cost was excessive, getting it on the foundations was really hard. Then it put height limits on us where the loft was then only four and a half feet. You're ducking down, nobody would stand up on that. Once we started stick, building them on foundation on their own tax parcel we're able to just qualify for a regular mortgage and it removed so many burdens but the hurdle we had to cross to get there was we needed city building to adapt to two things. Basically, one being the really small lot sizes that we use to put these small homes on.
Ryan Andrews (23:53):
To allow a small home, you could not have a 400 square foot footprint in the city code in Bend. They did not consider that a dwelling unit. So the city of Bend really pioneered this cottage code which lots of cities across the United States are starting to adopt versions of this cottage code which allow you to bold small units and meet this need. That's the evolution of finance, how the financing went and what we learned.
Now, the financing is easy but we had to change building codes to get there. It was that drastic in a business model and this thing has been six years in the making as the regulatory environment has had to catch up the market demand.
Bill Fairman (24:53):
That reminds me of the carriage house movement started back about five years ago where a lot of cities didn't allow to have a separate dwelling in the backyard and they're still trying to have affordable housing for the people that work in the cities and you can build a two-car or three-car garage and have a carriage house above it. Being separate dwelling a lot of the municipalities when it hadn't changed those rules and allowed that to happen as well.
Ryan Andrews (25:24):
Bend pioneered over here on the west coast, we call those AD use accessory dwelling units on the east coast, they get called carriage houses and they get called mother-in-law units a lot.
Our next development which is also here in Bend is a little 12 unit infill detached project is really cool but what we're doing on that is we have individual tax lots and on the back half of it, we have our two bedroom model. Then on the front of it, we have our little studio model that's of the loft at apartment what we call our loft.
Ryan Andrews (26:16):
You have a little 600 square foot ADU with a 900 square foot two bedroom home on the back. They're detached, separated by a cool little courtyard that they're both looking into. That housing type in Bend just sees so much demand because you can either live in one, work in the other, live in the small one, rent out the big one, live in the big one, rent out the small one. Have it as a guest house for families to come in, have multi-generational living where you have grandparents or your millennial children living on site with you and then do Airbnb as short-term rentals. So something like that might cost a little bit more. You can offset some of that mortgage costs at least initially by renting that out or having that extra space.
Ryan Andrews (27:13):
For us, it's going to be detached and that was a new change to the code on the ADU's. At one point they didn't consider if it was detached, it wasn't ADU, you weren't allowed to do that but now that change has taken place, we've been able to take advantage of that. So we look at our different types of buildings and we just plop them on land, like their Lego blocks.
We're like, "We want a little one here and a big one here. A big one here, a little in there." That's been a part of our evolution as well. It's a great way to create higher density housing in residential areas because all of a sudden you get residential units to little households on a little infill lot here instead of trying pushing those people further out into the suburbs or a bedroom community or something.
Jonathan Davis (28:28):
I'm curious what the lot size that you are doing on these tiny homes?
Ryan Andrews (28:37):
There's two other pieces that are kind of in flux right now. One is with this state bill house 2001 that's going through, it was actually just passed by Oregon a month ago. It allows building like our type of unit in residentially zoned areas. Instead of our home counting as one, our home counts as 0.25 so when you're doing your density calculation of seven units per acre, ours only counts as 0.25 and we can actually get 28 per acre.
Can you practically get that many? It really depends on your layout. That would be pretty tight but the ability to put 25 units, you could only put seven and it is a huge increase in density and yet you're doing it in this really cool, detached energy, efficient, attractive way, instead of getting that density through multi-family apartments or commercial development or mixed use which isn't a fit for every neighborhood. Technically, some of this coding of the building code has no minimum lot sizes but a lot of times we're at about a 1500 square foot lot on these homes.
Jonathan Davis (30:15):
I know just kind of dovetailing off that we’re involved in the development of not a tiny home thing but that's not townhome, it's homes. They're all about 500 square feet but it's all with an organic farm and it's built around the organic farm. I think 30% of the produce from that farm, the residents get to utilize the other 70% gets sold to local markets or stores. It is a community aspect that people are trying to build.
I think there's a big demand for a lot of people who want that and especially coming out of this whole social distancing isolation thing.
Ryan Andrews (31:06):
You're exactly right. Actually it's really cool that you bring that up. I'd say that's the number one thing I just hear anecdotally from people especially if they know I'm involved in real estate development and building communities and all, they're like, "Oh, you don't. My dream is to build a community around this theme and have all my best friends move into it." Literally everybody has that idea. Everybody wants that and yet nobody's actually developing that and building code isn't generally friendly to that kind of idea. So I would nickname that like thematic development communities. You build a community around a common theme that everybody loves. Everybody's into organic farming but nobody wants to run their own organic farm. Like you're talking about, say you build a big community garden, put 20 homes around it and they all share it and it attracts people that want that.
Ryan Andrews (32:04):
That's like the amenities that they're looking for. They're not looking for a gym amenity or a pool, they're looking for that organic garden that they can share and get in the dirt with their co-community members. I like people who have suggested the most bizarre hobbies that they want a community of all their best friends to live in.
Some of them are really cool ideas. The areas where I see these have actually happened are like tennis communities, even like pickleball communities and certainly golf. But to a little bit different than we're talking about because like living on a golf course and then like living in a community that's surrounded by one theme or two different themes. It's cool and you heard that anecdotal demand. Man, whoever pioneers that business model is gonna make a buck or two.
Jonathan Davis (33:07):
It's great because actually what they're doing is there's an HOA for those homes and that HOA pays for the maintenance of the organic farm so that the people there don't have to. Actually if they want to, they can but they don't have to do the work, they hire out people to come in and pull weeds, guard, and garden it. I'm a big gardener and do all that stuff.
Ryan Andrews (33:34):
I was in Utah just a couple of weeks ago, looking at some huge master plan communities that are starting to be under horizontal construction there and have some different themes. One of them had a series of ponds in it that they'd filled with water and they were like, "Oh, we're going to stock these with trout and people can come and fish, and I'm a big fly fisherman. I love fishing." As soon as I heard that, I was like, “That's my community. That's my fishing community that has creeks, rivers, and a bunch of little ponds full of trout that you can just go fly fish in all the time. I don't necessarily want to play pickleball or garden, but man, I'd fish for an hour after work every night.” We all have our own little hobby and it would be very cool if the evolution of development moved toward almost trying to be up around those shared hobbies and passions that people have.
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