Necessity is the mother of invention, and hardly can that old Latin-into-English proverb be so applicable as when home building land and lots become scarce, as they are now.
Inventive design has vastly expanded new possibilities around greater density in some areas, while futuristic autonomous transportation capability increases the potential radius of path-of-growth new residential development.
But, the question is, what role–if any–can highly efficient home building operators have in markets and submarkets whose land and lots are just about maxed out, fully-developed, except for a few well-known big tracts and a smattering of infill sites?
Think of Los Angeles and its near environs, the Bay Area’s Silicon Valley, and downtown and closer-in Seattle’s King County, where severe land constraint and an aging-home stock go with the turf, and new tracts of any size are fewer and farther between than any high volume builder has any business trying to buy land to build.
Now, consider a business and operating model suited to a T for those markets, one that competes with custom builders, remodelers, and buy-tear-down-and-spec builders, and yet achieves production builder-like efficiencies and outlying per-unit net-profitablity to boot.
You’d be thinking then of Thomas James Capital Homes, who like to think of themselves as “the biggest builder you’ve never heard of,” and one that solves its challenge of access to new dirt by buying up existing homes, tearing them down, and building new ones on those scattered, already-developed lots. All with a big builder’s mentality on efficiency, scale, and steady access to building trade subcontractors, as well as a steady stream of new properties coming on line, thanks to a unique win-win relationship with real estate brokers in their markets.
Here’s how it all works, and how Thomas James Capital Homes has quietly become one of the nation’s largest tear-down, scattered-lot, production builders in just over a decade since its founding as a distressed-home remodeling and rehab contractor in 2006.
Today, it’s a full-on, multi-segment, new home builder today, with a model that calls for keeping a steady inventory of aging resale properties in its development pipeline, and a highly efficient demolition and repermitting process with designs that match up to current code, as well as a disciplined reconstruction operation that yields higher value vertical development on existing home lots.
In 2016, the Thomas James Capital Homes business model generated a reported $203 million in revenue, with $425 million under construction in roughly 15 submarkets west of downtown Los Angeles.
“We’re modeling that we’ll finish 2017 with $250 million in sales, and projecting $400 million in sales in 2018,” co-founder and ceo Thomas Beadel tells me. “At $250 million, we’re currently doing about 2% of the 4,000 transactions in the 15 submarkets we’re in in the LA area. Our opportunity and comfort zone would be 7% to 10% of those submarkets’ $10 billion in annual trade.”
Beadle says that Thomas James Capital Homes draws from three tiers of pre-designed home plans–a kind of good, better, best spectrum–each of which correspond to a submarket location’s prevailing customer segmentation, resale comps, and relative affluence.
“Entry level” home designs range from 1,800 sq. ft. to 2,700 sq. ft. and sell for from $1.5 million to $2.9 million; an “executive-entrepreneurial” segment steps up to 3,000 sq. ft. to 4,000 sq. ft., in the $3 million to $5 million range, and a higher-end “affluent” series of designs range in square footage from 6,000 sq. ft. to 9,000 sq. ft., and list at the mid-$5 millions to the mid-$6 millions.
Like higher volume builders, the trick for Thomas James Capital Homes is in both smoothing out its access to “dirt”–i.e. an ongoing supply of existing home purchases in its submarket operating footprint–and securing a loyal and high-quality group of building trades to keep construction cycle times and costs both profitable and predictable.
Beadel and co-founding partner James Quandt, and a small team of senior management leverage expertise and a decade of relationship building on both fronts–with a network of real estate sales reps in the area who essentially provide the dirt–the opportunity to buy existing homes–and a network of subs who stay loyal because of the iterative 14-month start-to-completion cycle, the forward visibility of the project pipeline, and commitment they can count on with the TJCH model.
“We draw from a different labor pool than most of the volume builders,” says Beadel. “Ours are more of a high-quality, smaller, mom and pop company who benefit from knowing the work is going to be there, predictably, month after month. The other benefit to them is that the windshield time in our operating area is relatively short, given that the entire footprint is the area west of downtown Los Angeles.”
What’s more, the “lot” acquisition strategy, for what it is, bases itself on a double-benefit to real estate brokers. First, they win as representatives of property sellers who sell to TJCH, and then, as Beadel notes, they can net as much as a 400% increase on their commissions as they take the newly improved property back out to market to sell with the TJCH home on it.
“We have very deep relationships with both the brokers and a very discrete labor pool in the markets we work in,” says Beadel. “And the fact is, that makes it a high-barrier to entry business that we feel we could repeat in markets like Silicon Valley and King County Washington. That’s why we’re looking to raise capital right now, so that we can expand the model into other markets that have similar constraints on open land supply, and an aging stock of existing homes closer in to urban downtown areas.”
Assisting TJCH in its pursuit of growth and operating capital is Whelan Advisory Group’s Margaret Whelan, who sees opportunity for entity-level equity investment, as well as revolving debt aimed at construction-level finance.
“TJCH has quickly emerged as the only urban tear-down home builder to offer sustainable volume by merging production capability with custom home building on non-contiguous home sites,” Whelan says. “This unique and profitable business model has positioned them well for accelerated growth in the $10.4 billion LA market, and beyond. New investors have the opportunity to participate in that growth.”
