The 100-day home: Accelerating affordability in real estate and opening doors for investors
(Originally published on AgoraReal.com)
The dream of homeownership is out of reach for many Americans. With a median household income of $80,601 in 2023, many families likely still fall short of the $106,464 qualifying income needed to afford a starter home as of mid-2024.
At the same time, we’re in a housing deficit and need 7.2 million homes to meet demand.
There’s always an opportunity in any market. Right now, we see the biggest opportunity for real estate investors in the build-to-sell single-family home sector. By bringing single-family homes to market at price points buyers can afford, investors can build wealth while simultaneously helping combat the housing affordability crisis plaguing our country.
Opportunities across market cycles
During the Great Financial Crisis in 2010, there were many opportunities that other investors may have missed due to risk.
We started buying distressed assets from banks and turned them into performing assets. This approach led the Federal Reserve to reclassify these assets as performing during one bank’s audit. This reclassification freed up millions of dollars that the bank previously set aside as reserves.
Word spread about this success, other banks reached out and our portfolio expanded to 450 properties across various stages of development.
As markets evolve, so should a real estate investor’s strategy. Right now, the housing shortage is top of mind for all areas of the country. With this need comes an opportunity to create new communities and help families realize the dream of home ownership.
Understanding affordability challenges
The housing affordability crisis is at critical levels. In our local market of Minneapolis, the average home price of $388,500 is out of reach for most buyers. And, there’s no easy answer, especially with multiple production costs like:
A niche that stands out in this current environment is buyers who are excited and impatient to own a home. Opportunities exist to serve this niche by shrinking building costs and reducing the price of a single-family home. In our market, we’ve found a way to offer average pricing at $365,328 compared to the national median price of $420,600.
Methods to address affordability challenges
1. Construction process
Building new housing can take time. There are ways to address affordability and lengthy build times through standardization and lean inventory management.
Standardization
Starting with a standardized design process provides a way to build new homes in less time. We’ve used this approach to build homes in less than 4 months, compared to the national average of 10.1 months. Our buyers don’t customize their homes. Instead, we create complete design packages that include the current market trends.
Standardizing also allows you to negotiate bulk purchases with trade partners for flooring, paint, and bathroom fixtures. It also reduces construction errors, such as when someone accidentally orders the wrong finishes or installs the wrong carpet. All of these equal lower costs for buyers.
Total Control
Owning and controlling each development from start to finish also helps to increase affordability. By managing every aspect of the process, including:
You can concentrate purchasing power, control inventory, and make sure the sales cycle is aligned with market demand.
Lean inventory
Developing in alignment with the sales pace also helps to reduce costs. For example, if we sell three houses a month, we keep just nine houses under construction so that we have a three-month supply. This is different from other developers who might keep a year’s supply of 36 homes in progress.
It also means project managers can handle two to three times more homes than the industry standard. With fewer homes under construction, they can support higher quality and shorter timelines.
2. Simplified home buying
Our approach to home buying provides simplicity and increased customer satisfaction. A few years ago, we conducted a study that showed that 80% of our buyers chose interior finishes matching what they saw in our model homes.
The survey also showed that the more selections buyers made from catalogs without seeing the options in person, the less satisfied they were overall.
This information led us to eliminate the entire selection process. Instead, we offer a single set of finishes and options for each home. This “what you see is what you get” approach makes the buying process easier and faster.
Each buyer receives a complete package – the house, floor plan, and all color selections and finishes. They simply sign a purchase agreement and provide earnest money. We handle all parts of the construction process, and they don’t have to worry about construction loans or changes to building plans.
We’ve found this model to be so successful that we sell 80% of our homes before we complete construction.
Investor participation in single-family home developments
Our employees have always been able to buy homes at cost. When one of our employees turned their homes into rentals, we realized that team members could benefit even more if they could participate directly in the business.
We supported this, and it naturally evolved to include friends, family and outside parties to invest along with us. This led to the creation of Centra Capital Partners where investors join us in project-specific single-family home development.
Investors can pick investments on a project basis, which means there are varying hold times, returns, and risk profiles.
Final thoughts
Solving the overall housing affordability challenge requires a collective effort from multiple stakeholders. In the meantime, developers are finding ways to balance cost challenges with buyer needs. Industry participants should also keep an eye on other attainable living opportunities like rural housing and build-to-rent to help support market needs.