4 Reasons Your Build-to-Rent Project Might Get Delayed - EP07

build-to-rent construction process multifamily new build new construction Oct 05, 2021
 

Whether you're building an apartment building or a single-family home, there are many reasons in 2021 why your project may need to be delayed. It could be a result of pandemic-induced material shortages, or setbacks from the cities. Today's hosts talk about these setbacks and more in episode 7 of the Build-to-Rent Podcast: "4 Causes of Delays in the Build-to-Rent Industry".

"Right now a lot of land sellers are not allowing for a long enough period of due diligence. Some of them your earnest money is going hard in 7-14 days, so you're not able to go in and figure out what you can do with this land. Can you make it multifamily? Does it have to stay single family, is it open to rezoning and stuff like that? They're not giving a lot of time. They're saying “Nope, buy it or I'll go to the next highest bidder and move on." - Sherida Zenger, B2R Show

Steve Olson: Welcome to the Build-to-Rent Podcast, the first-ever real estate show dedicated exclusively to helping investors go from raw dirt to a cash-flowing rental property.

Make sure you check us out on iTunes or on Spotify or anywhere where you listen to podcasts. We release new episodes every single week.

We try really hard on this podcast and in our personal business to be super transparent. I read a great book recently by Ray Dalio, who manages what I think is the biggest hedge fund in the world. The book was called "Principles". And one of the principles that he runs his company by is called radical transparency.

Whenever their company does something, they just own it. They just put it out in the open, and they figure that is the best way to generate trust, and put longevity into their business model. They just own it.

We want to own some stuff today about problems we're seeing in the build-to-rent space right now. We don't think they're insurmountable problems, but they've certainly given us plenty of headaches. And our clients too.

If you're considering a build for rent project, whether it's a house, fourplex, or an entire subdivision, you're probably aware of some of these already... but we're going to dive deeper and make you more aware. And if you weren't, then this will be a very educational episode.

There are four areas right now, where we're seeing delays, and headaches, and snags. And some of this is attributable to COVID. Some of it's just attributable to things that have been unfolding for a while, that COVID kind of accelerated. So share it, uh, let's start with you. Talk to us about land, you want to buy land, it's not like what it was a couple of years ago, is it now totally different?

Sherida Zenger: Right now a lot of land sellers are not allowing for a long enough period of due diligence. Some of them your earnest money is going hard in 7-14 days, so you're not able to go in and figure out what you can do with this land. Can you make it multifamily? Does it have to stay single family, is it open to rezoning and stuff like that? They're not giving a lot of time. They're saying “Nope, buy it or I'll go to the next highest bidder and move on.”

Chase Leavitt: Yeah, it's cuz lands in high demand. Yeah, that's why there's not a lot of lands out there, especially good land for multifamily apartments or townhomes or whatever the case is. So land is hard to find right now.

Sherida Zenger: Yeah, cuz again, it comes down to the location that we've spoken about before, right? You want to be in a good location. There's a land out there, but it's not like chasing that for multifamily.

Chase Leavitt: Yeah. And land sellers know this. There's a lot of competition for land. So if you're looking for land, you're most likely not going to find it on the MLS or loop net, and maybe, but it's most likely going to be off-market and start to find right now of the market through a good network broker.

Steve Olson: The land that is available, or that's readily available, I would say, and a lot of people have used a saying has some hair on it, right? There's no there are problems with that land that you're going to have to be, you know, tricky, you have to figure out how to navigate around it. So if that probably stems from the fact that we built a bunch of housing, through the bubble, and the burst of 2008. And I don't know about you, but a lot of people that were, and this will kind of go into some of what we're going to talk about later in the show.

A lot of people that were tile setters or framers or landscapers left the business then and they never came back. And since then, we've not been adding to that, that labor force, right. So housing has not been keeping up.

It goes off in my, my intro that you know, housing is a problem and I gotta get that intro, right? I say different every time we'll figure it out. And maybe Give me a script. Okay, Preston. But we'll figure that out. But with that lack of supply, now everybody's acknowledging that it needs to be there.

So yes, naturally, they're scrambling, they're getting whatever land they can. They're building in places that I would have been shocked. There was a project we did 300 doors in a city called Magna Utah. All right, my, our construction Superintendent lived in Magnus. So we like to make fun of it as much as we possibly can.

But Magna was never seen as one of the more desirable places in our home market and the Salt Lake City metro here. But so I remember when we did that one without I are we really doing this, the numbers told us to do it. Do the deal. But our prejudices don't do that deal. That one's turned out pretty well, hasn't it?

Chase Leavitt: Yeah, it's probably one of our best-performing projects. I, I got a duplex in there. And it's, it's doing great. There's great equity involved, their cash flow is performing. So whatever we projected in that pro forma at that time, it's exceeded that.

Sherida Zenger: I think the good thing with that one was, we only had one other real competition, right? There were some rentals in the area, but not like a community. There was one other project and that's what made us say, Okay, we'll go out on a limb here because we don't have a lot of competition. I think we blew that one out of the water.

Steve Olson: You're having to be basically a market maker. Right now. We weren't quite a market maker. And magnet because shared a pointed out there was that other apartment complex that had built, I think it was like five years old, maybe three years old. And the data that we saw from that was compelling.

But what would have been like to be those guys that did that deal? they had to go, they had to make that market happen. And in a market where land is just so scarce? That's really what we're seeing more and more of, is somebody having the courage to say, look, I think this is where it's going. I'm willing to take the risk.

The capital, certainly there to do it. But as you pointed out, farmer Bob doesn't care. Farmer Bob has 100 acres for sale in Boise. Right or, or in Goodyear, Arizona, I don't know somewhere. And he's not going to give you the time that you need, or the flexibility on your deposits that you need to make this thing be a slam dunk. You know, the phrase is entitlements, you can't get the entitlements are the approval from the city council that says yes, you can go build that type of product there at that density, and so on and so forth.

Farmer Bob is saying I have land, it's valuable, whether the city allows you to build exactly what you want or not is not my problem. Right? Close on the land. It's valuable. I'm sure you'll figure it out.

Sherida Zenger: The truth is I think from some of that, you can then flip it right? So if maybe if it didn't fit your model, hopefully, you're not buried too deep in it. And if you make it through the entitlements process, maybe you can flip it to a single-family home builder, or a multi-family home builder, whatever it is, whatever you're not in. However, you can get it zoned.

Chase Leavitt: And the other truth is, is you're taking on more risk too. So maybe it doesn't work out that way. But we're seeing a lot more competition--other buyers/builders looking to purchase the same land that is willing to take on that risk.

Steve Olson: They're willing to do it. Yeah.

Sherida Zenger: And I wonder, you know, we were just at a conference this last weekend, and they spoke about the years 2000 to 2010 and said that in that time period, they built 20 million homes, or 20 million homes brought to the market in from 2010 to 2020. We were at 6 million so there were 14 million homes behind. And I know a lot of that is because, you know, Gen X and their renters, they want to be renters for life and they're okay with that.

But I thought that was kind of interesting. I thought you know, not only did COVID propel some of this, but I also think building had slowed down and I think people are just starting to ramp up. They were also speaking about how a bunch of people is just buying land to hold on to it.

They're fine holding on to the land and just waiting to see what they can or can't do with it down the road. I know we talked about that, you know we did in a location here in Utah. Hey, what if we just bought a couple of 100-acres and sat for a while? Yeah, eventually it's just gonna move there.

Steve Olson: We went to one of our favorite places Din Tai Fung in Las Vegas and ate so many dumplings. And at the time talked about where some places we could just land bank, buy land, right. And yeah, it's crazy.

So when you're in the build-for-rent world, I've heard conflicting messages on this. What I believe, but I heard some contradictory information at this conference we were at, was that if you're going to build to rent, you're not going to be able to really compete very well with a retail home builder.

If Toll Brothers or Dr. Horton is bidding on the same piece of land that you are, you're not even in the fight, because you have to back into this from a rental yield. From a cap rate perspective, they're just saying what are the comps? What can I build?

A lot of these speakers at this conference we are at two, we're saying that many land sellers are now just selling to large institutional firms that are doing a build for rent, because they actually back into it a little different, not on a cap rate, but kind of more on that private equity model of a return holding it for five years.

So they can afford to pay a lot more. And then they're kind of squeezing out this typical homebuyer and they're saying you don't have a choice you're gonna be a renter now because we took all the houses, that's probably for a future episode, and kind of a polarizing topic right now.

The bottom line is that land is hard to get. sellers are not willing to give much due diligence, you can find the exceptions, we found a few but don't expect a 2-5 month process to be able to work through the city. And know that you've got to lay upon your hands, these things are more like deep jump shots right now. And you've got to be pretty confident.

Sherida Zenger: Which I think then takes us into the next subject about delays is cities.

Usually, you want a little bit of time to do your due diligence and walk through the whole city process. Right now, we're seeing major delays in the cities coming from COVID I guess... maybe some of them got laid off, I'm not sure.

Chase Leavitt: There was a moratorium in Caldwell, Idaho.

Steve Olson: Caldwell, Idaho. Yeah, they, they screwed up. The city screwed up on taxes, and they just weren't collecting enough revenue. They froze everything, right? I actually think it was the state that said that you can't raise property taxes more than a certain percentage.

And it kind of froze a bunch of the cities in their tracks. Because with all the new construction they had approved, they're like there's no way we can support this. If they're capping how much that we can raise property taxes. Caldwell, Idaho is one of them that said, well, no moss. We're not going to approve any new developments until we get our arms around this.

Chase Leavitt: And we could probably speak to Syracuse a little bit. Our project that got not denied, but it didn't go through. We're super bummed about it. It wasn't backed up from the city. But I guess the delay that we saw there is they weren't willing to approve it. Because they were going through a change or city council change. Right? They're having voting for that year, there was an election and I was looking for an election year. And so they weren't really well. They were delaying approving the project.

Steve Olson: Yeah, the city councilor doesn't want to approve a semi-controversial multifamily project right before an election. Yeah, let's do that right after the election.

Sherida Zenger: They were also looking at what was going on around us saying, Hey, we're thinking maybe this is the hospital going in? Do we really want this to be multifamily? So we kind of got blacklisted.

Chase Leavitt: We saw a very unique delay within that city to where we could move forward is very risky to move forward without getting that preliminary plat approval. Well, and

Steve Olson: Then it's important to note that not only are you going to get delays on whether you can move forward or not. But once you've been given the green light, you've got your approvals, these hoops that you have to jump through, it just takes longer, right. Part of that is the fact that the city of Phoenix has been driving me crazy. lately. We're waiting on a number of approvals.

And I'm talking not just the metro, the city of Phoenix, it's taking a long time to get anything done. These guys were understaffed as is and then COVID hit and there's this massive demand for new construction. asked me if they have hired anybody new. In fact, it's really hard. It's hard to hire anybody for anything right now. Let alone Hey, come work for the government.

Sherida Zenger: But they're working remotely too. And so that's even more difficult.

Steve Olson: That's another problem. Yeah. So not only are they understaffed, that city is still hiding from COVID. Right? Remember, when COVID first hit, I was filling up for gas one day, I thought, am I gonna get COVID at the gas pump? Right? The guy that pushed 85 octane ahead of me? Did he have COVID? Right.

So some people are still living that way. If you are, then that's your prerogative. But that's it's slowing down development massively and by not allowing people to be an office, that city workers who have to work with, with clients and other different apartment departments and engineers, it's just going to be slower. When you're working remotely like that.

Sherida Zenger: Yeah, when you're only communicating via zoom or phone calls or emails. It's, I mean, you understand how being face to face is so valuable, right? Yeah, you can get so much more done in that time. I know we have a project that we're waiting on. Final plat approval on. We were told originally we would have that in July and now it looks like it's gonna be pushed back to you know, the end of November.

Steve Olson: Yep. They just keep pushing back.

Chase Leavitt: And the last thing I'll say about city delays is that people want to build right now. So you have a lot of builders that are submitting these, these plans with these plants and they're wanting to get those approved. So just get in line, I guess.

Steve Olson: Less city staff, the staff that it is not as efficient. And there's as much demand as there has ever been for their service. Yeah, their backlog. You got to scale up.

Quick poll. True or false? If you're never on another zoom call again. It'll be too soon. Sure. True. True. True. Yeah, I say true. So unanimous. Yeah. Gosh, I'm sick of those things. Oh and the fake backdrops.

Sherida Zenger: I'm in Hawaii. You know what? Yeah.

Steve Olson: I said that sarcastically do it. Have you been to Hawaii? Well, yes, as a matter of fact, that he was already to talk about why that's why anybody puts up a big backdrop. Somebody should make a backdrop of the inside of a bathroom stall. That would be awesome. Yeah. And I just put that up on your zoom call.

Let me know how it goes. Email the show. Do we even have an email? I don't know if we do. It. We're working on that. That's complicated. Some guy in France apparently owns the domain. So here's another area for delays is building materials. If it's not one thing, it's another Chase. What's the big pinch point right now that you're hearing about?

Chase Leavitt: It was lumber but not just lumber. Trusses. Floor trusses, roof trusses. The little brackets that build or put the trusses together. Piping or plumbing. Paints.

Steve Olson: I had a flooded my basement. And I learned there's a massive baseboard and trim shortage.

In fact, our builder team has been mixing and matching between units, right? Obviously not within units. But in one property, you might have different sets of trim across the board. And paint is extremely difficult, difficult to get.

Hardy board, right. I was comparing it earlier hardy board is kind of like prescription drugs. There's the name brand, that's a bazillion dollar. And then the generic one that's like two cents a pill. And that's how hardy board is.

And right now we're only able to get the name brand already, but I don't know what the brand is. But that's more expensive. Right? So materials across the board. For a while, their OSB plywood was a big problem that seems to have loosened up. lumber has come down. It's still way high.

Sherida Zenger: But let's clarify that. So people have said, You know, I know in a couple of our projects, we had to have a price increase. And part of that was because of lumber. That was one of the major issues and others were like Jason said, you know, piping and conduit, all that fun stuff. But the trusses are lumber.

It's come down, but what's still on the lumber lots like what the yard still have, they're clearing through having to pay that price for it. So people are not seeing that price drop not in a meaningful way. You know, but people have said, Okay, well the numbers drop. So are you going to change your prices? No, because other things have gone up?

Steve Olson: Yeah, it's if it's not one thing, it's five others.

It's another that this supply chain disruption through the COVID lockdowns is astronomical. It's a problem. Right? So let's not do that, again. I got a little too opinionated there.

But I was recently up in Nampa, Idaho, and one of our projects and there was a particular multifamily building where I knew we were up against the deadlines on the contract to deliver a certificate of occupancy by and they didn't have any exterior on the building. And they had a lot of interior work done.

But why are they not putting the exterior and there's this hole cut out of the second floor towards the back of each of these units. What's with the whole guys, we can't get bathtubs got away, then we're gonna lift these bathtubs up on a crane, put them in, then we can seal up the unit. I'm like, why did you do that? Well, we couldn't just do the rest of the unit.

We had to move forward someway somehow. So these projects and these construction deals are moving in fits and starts, like when you're driving by a construction site and you're going why is that taking so long? There's a reason they can't get something. And that's typically what's going on. How have we not talked about appliances? I mean, that was nice for quite a while wasn't it?

Sherida Zenger: Yeah, well, I think we're still seeing delays. I know my kids just moved into some townhomes recently. We had to wait a month and a half for fridges, which is nothing at all. I mean, I know there were times where it was like four or five, six months or you couldn't even get a fridge.

Steve Olson: Yep, absolutely right. So not saying this to discourage you. We're just telling you this to be aware...

When you go into a build-to-rent project, you're going to need to bump that contingency up. You're going to need to lengthen that timeline because many of these delays are just beyond your or anyone's control.

The big, big, big, builders are getting fed. They're still getting what they need. But if you're not a giant account, you've got to scrap for some of this stuff to get it together. And you know, we're a pretty big account and we can pull some strings, right, but some cannot be pulled.

Sherida Zenger: We've done a good job also at buying in bulk or buying ahead of time. I know when we're in one of our projects in Idaho, we had just closed on them. And I got a call from an investor saying,

Hey, this is really weird on my draw, it shows garages, why would I be paying for garage doors, and I just closed, you know, a couple of weeks ago. So I called the builder and said, Hey, I don't know if this was an error, what's going on? And they said, No, actually, they're actually increasing prices.

And there's been a shortage, we just decided we would go ahead and bulk Order, order ahead and get this better pricing to kind of help save some money, which was a great explanation, right? And talk to the investor. And he said, Oh, that's awesome.

Knowing that stuff and having the right people in place that can preorder stuff, and they're aware of when increases are happening and whatnot. Yeah, I think it's helpful too.

Steve Olson: If you remember, at the beginning of the lockdown, there was a shipping problem coming out of China. And I got a lot of questions at the time. What what's this going to do? And I was very dismissive of it, and I'll stop worrying. Everything's fine.

It was door hardware and LVT flooring at the time. That's okay. Now, right now, it's lumber. This is a ripple effect. And we haven't it's always just it's not one thing. It's another.

Chase Leavitt: It was cement, not cement but the material inside the cement. The resin.

Steve Olson: Because some factories in Dallas froze during the Texas freeze.

Sherida Zenger: One of them burned down. So one of the factories burned down and then the one in Dallas froze. Yeah, it was it's called Sutton fly ash is what it's called fly ash.

Steve Olson: And then, you know, we got clobbered in Texas, too. We've done a fair amount of work in Houston when the big Texas freeze happened, right? All these water mains that come up out of the ground froze and the valve snapped. And the water was spraying everywhere.

There are some apartment complexes, I think in Texas that are still struggling with water because all of the sudden, everybody needed this one valve, right? So we had to get it. I think we shipped some down from Utah, we immediately went to the hardware, the plumbing supply place, got these valves, and sent them down in a suitcase with one of our developer team who was going down there anyway.

What you have to realize too, is a lot of builders are on an allocation right now they basically rationed some of these materials, we've gone so far as to put trusses on a truck from Utah and drive them up to Idaho, and use our builder allocation here to send it to another state. You got to be creative. Supplement wherever you can.

And the last one, Chase wants to do the transition, take it away.

Chase Leavitt: We have labor delays. We've talked with not just our main builder, but we've talked with other builders to see what they're seeing, and their delays and whatnot, not just materials, but labor, getting workers and people to show up consistently, and keep them on that job.

Either they don't work or show up, or they're doing something else. Or these guys are just hopping into different jobs, whoever's gonna pay them the most at that time.

Sherida Zenger: And it's often a very minimal amount. I know that we ended up hearing in one of the Idaho projects that they said "we'll pay you $1 more an hour" and all of a sudden we have people show up on the job site.

Steve Olson: All of a sudden that farmer was available. It's not a great long-term business plan to just leave job sites for this guy's gonna pay me more.

I remember after the housing crash, labor, they just got treated like garbage, everybody assumed that the tile setter was willing to work for free. And he was for a while, there was no work. And that's come full circle times three, by now, right?

And it's exacerbated by the fact that I tell people that hey, look, Millennials don't want to be framers or plumbers, they want to sit at Starbucks, and they want to code apps, or be influencers. Nobody's out there willing to hammer nails or shovel dirt anymore. And so it makes the fact that if you're willing to do that, you're a lot more valuable.

Sherida Zenger: It's a dying breed, that's for sure. People don't want to do manual labor.

Steve Olson: My daughter, she's 14. She's talking like, oh, what do I want to be when I grow up? You know, and she listed a whole bunch of white-collar stuff. As a sure, you don't want to own like nails or staple factory or an HVAC company, or something like that, that everybody needs that nobody can seem to supply right now?

So we'll see if the labor thing can get corrected. It's gonna take time but that's a perpetual price pressure.

Sherida Zenger: And I think it's kind of market-dependent as well. Arizona, we're not seeing a labor shortage.

Steve Olson: We don't have a labor problem in Houston, but Idaho and Utah is very difficult. Yeah. I know it's a crazy time, there's we're hiring signs everywhere. Listeners pay attention when you're out today.

How many hiring signs do you see? I think that does depend on your market. But in the markets that we operate in, there are just tons and you can't fill the jobs.

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