Episode 18 - Patrick Quinton, Dweller
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Transcript
Prefab Review
Hi, my name is Michael Frank, and this is The Prefab Pod presented by Prefab Review, where we interview leading people and companies in the prefab housing industry. Today, we're speaking with Patrick Quinton, the founder and CEO of Dweller, out of, I think, Portland, Oregon. Welcome, Patrick.
Dweller
Thanks, Michael. It's good to be here.
Prefab Review
So definitely excited to learn about your company, but first I wanted to learn a little bit more about you and how did you get into this business?
Dweller
Yeah, no, happy to share the story. So, yeah, we are based in Portland, Oregon. And prior to founding Dweller, I served as the executive director of what's now known as Prosper Portland. But it is the development authority for the city of Portland. So an arm of city government. And I have a career that's been primarily in government, a little bit on the commercial finance side, but I really spent the time prior to starting Dweller in city government, working on a whole range of of issues, but really on this intersection between business development, commercial real estate development and housing, and I left there mid 2016, looking to take on new adventures. I did not think I was going to be working in the ADU industry, but I actually have a co-founder, business partner, who approached me about this idea. And then yeah, in 2017 we took the leap to see if we could, you know, help get more ADUs built both here and around the country.
Prefab Review
Cool. Can you just go through a little bit of like what exactly Dweller does. We cover a lot of ADU companies on our site and also even within the ADU companies, it's always kind of interesting what parts companies decide to do themselves versus rely on other partners.
Dweller
Yeah. I think there's some similarities and some differences with what we do and some other companies do. But we started off to try and address what we see as the primary challenges for homeowners in acquiring an ADU. And we felt like those were three things; price, just overall kind of hassle factor, and financing. And on the first two, we really felt like the best way to address that was to embrace prefab construction and offer a turnkey service, meaning you buy an ADU like you buy some other major consumer product. And I think that can have different connotations. We think it's a good thing. We think that homeowners should have options and shouldn't have to learn what goes on under the hood to get an ADU. We think they should be able to pick a solution. And if they choose not to have to roll their sleeves up, we do the full process from beginning to end. And we work with a third party builder. So we don't operate a factory. We're more of a developer, kind of solutions provider. And then we source our prefab ADUs from a third party builder. So in that respect, I think there's other folks doing that, like you said, there's companies that do different parts of the full solution. But I do think that increasingly we're seeing more and more companies that are stepping up to say, "we sell a new solution" and homeowners should be looking at different options rather than trying to learn how to build an ADU themselves. And then the other thing that we did, which we can get into in a minute, but just quickly I'll say is that we wanted to address the financing issue. We wanted to be able to serve homeowners who didn't have immediate access to financing, which is primarily home equity financing. And so we've developed a portfolio of ADUs under a ground lease model, like I said, we'll talk about in a second. But we build it for them and we own it. So in that respect, when we're doing that, there are very few companies anywhere in the US that are doing that. And so that's certainly a unique offering of ours and one that we hope to do more of.
Prefab Review
That makes sense are you actually offering? You talked about having like a limited number of options? Are you like a one SKU company where it's like, OK, everyone gets the same thing? Do you have a few options? How does that work?
Dweller
Yeah, we started off with the one ADU model. But we now offer six different floor plans from our builder. And it's mostly one bedroom units, but we also offer two bedroom units. And so yeah, we've embraced the standardization as part of our business model in order to bring costs down, make costs more predictable for the homeowner and for us. We wanted to take away as much kind of customization as possible. All these terms are loaded when I say that, but we don't think it's a bad thing. We think it's like buying a car. Right. You don't get to add another window, but you can change the color of the upholstery. Right. So we think of it that way. So we have six different different floor plans. And in the markets, out here in the West Coast, you can have bigger ADUs legally than we sell. You can have two story ADUs, obviously you can do all sorts of things. And so we've intentionally chosen not to be operating in those parts of the market. Once again, just because we think the way we do business is best. If we keep our options to a narrow range of single story ADUs of a certain dimension, it makes installation predictable and affordable once again.
Prefab Review
That makes a lot of sense, I forget how many customers we helped last month, but yeah, there's a heterogeneous set of customers, as you said. Right. Some want to work with a custom architect and design everything from scratch. And a lot say, like, how quickly can you get this box on my lawn?
Dweller
And those decisions also have price tradeoffs. And so not that everybody would love to have fully customized, but once again, I think people get this, that if they're on a budget and they have a very kind of you know,
Prefab Review
We see a lot of people who are just like, this is not something I want to spend a lot of time considering which faucet is better. I want someone who's thoughtful to have made these decisions for me and for them to get done. So, yeah, I think that makes sense. So are you one hundred percent in Portland right now?
Dweller
We're a hundred percent in Portland, yes.
Prefab Review
And I think at some point, correct me if I'm wrong, I think we covered you, were you using champion homes or using a different one?
Dweller
Yes, we were. We've been working almost exclusively with what's now called Skyline Champion,
Prefab Review
It's just like the entity that's like private companies doing mergers and stuff, right?
Dweller
Yeah they have like 30 plus factories across the country. And we work out of their factory in western Idaho.
Prefab Review
Cool. And tell me a little bit about that because like in terms of the let's just call it the partner process, sort of figuring out what company or set of companies do you want to partner with? Who handles the sort of manufacturing of the home? How did you choose them and what was that process like?
Dweller
Yeah, I mean, some of it was trying to look for a certain type of builder, but some of it's just the fit in the relationships. So we wanted to actually be more local than with Champion's Idaho Factory , we wanted to be somewhere in Oregon. And we had a relationship with a local builder. But, you know, prefab, as you know, probably more than anyone else, it covers a wide range of things. And you have a lot of custom prefab buildings. And so we were working with a very reputable builder, but he wasn't getting into the standardization piece. And so we were increasingly realizing that we weren't going to be able to offer the kind of solution we wanted. And so we went looking for other solutions. And just a relationship that my business partner, Brian, had with somebody in the lumber industry put us in touch with the plant manager at this Champion factory and presented it to us. And we were the first, to my knowledge, were the first company to work with Champion on building ADUs. Champion is a manufactured housing builder. They've focused primarily on single family houses and they now have an ADU offering and they now work with a number of ADU builders. But we brought the concept to them and it was a fit, obviously, capacity wise, they had more than enough capacity for us, but they also fit the desire we had, which was they already had a standardized process for building them. So they were like, sure, we could build ten, fifteen, one hundred of yours in the same exact way. And so immediately we were like, this works. And I have to say, they didn't have to work with us. We're a tiny little and they're a big, massive company. But they're good people at this Idaho plant who were really curious about this market. And so they kind of went along with us. And it's been a great relationship. I don't know that we will exclusively sell from Champion going forward just because there's other builders now. And so we would like to be able to offer different designs. But so far it's been a good relationship.
Prefab Review
That's great.
Prefab Review
So obviously that's one part of the process. How are you going about figuring out the local builder part? Right. Because Champion is only the factory.
Dweller
I mean, that's been part of the challenge, I think it's certainly probably the hardest part of the overall process for companies like ours is to have some consistency on what I call the last mile, but what happens on every individual property, and so we partnered with a variety of contractors and our goal all along has been to work with the same exact contractors every time so that we do once again have the same process and that the learnings from one project carry over to the next and so on. And so we've done that for some of our contractors. But we don't control what happens in their business. And so we've had one of our main contractors decide that they no longer wanted to be in the business. And so we've had to find others. So, you know, you're always juggling different contractors. But, you know, we view that as our job. That's partly what we're taking away from the homeowner, is you don't have to go find contractors in markets like ours where there is high demand for having a group of contractors that you're hired.
Prefab Review
They're also very hard to evaluate.
Dweller
And so what we sell is, "look, we have relationships with folks that may not otherwise be available to you or another builder." So, but every backyard is unique. So I really think that one of the hurdles to overcome in the ADU market is how do you scale this, and build thousands of units knowing that every single backyard is going to present a particular challenge and do that in a predictable, cost effective way.
Prefab Review
That makes sense. And then to the extent that you can share this, what scale are you at right now? However, you can quantify that.
Dweller
Yeah. So we've built 15 units and we build a couple of units a month. Now that's really kind of the pace we're on. But that fluctuates based on, you know, once again, financing and homeowner financing. Part of what we're going to talk about is this ground lease product which is meant to be a new portfolio of ADUs. So if we ever finance that, then we'll do that. We'll do 8 ADUs all at one time.
Dweller
So our volume is based in part on our ability to finance this ground lease product.
Prefab Review
So what you're saying though is the premise behind that, is that you have demand from homeowners who essentially can't afford the upfront cost of this but want to do this. That's that's the assumption, right?
Dweller
We probably get 30 to 40 inquiries from homeowners every month. We probably end up with, I don't know, 10 of those who have both real interest and properties that work for our product. And then most of them get hung up on the financing challenge. So that's really where I think most of the ADU industry is, is that every builder is dealing with, you know, it's a black box. Somebody else is over there making decisions about how much money they can lend to a homeowner. And in most cases, it comes back short of what homeowners need. And also because we sell a standardized product that's meant to be affordable for homeowners our target market are people who aren't sitting on a ton of money.
Prefab Review
What's your price point for the actual
Dweller
Our units range between on a small unit $115,000 fully installed to our two bedroom units can go, it can be over $160,000.
Prefab Review
That's for what? Like a thousand square feet?
Dweller
No, the smallest one is just under 400 square feet. The largest is 660 square feet.
Prefab Review
So it's like $160. OK, and that includes installation?
Dweller
Yeah. That's everything. So we always quote prices that way, meaning we don't leave a chunk of work for the homeowner.
Prefab Review
That's pretty good. $250 per square foot is pretty competitive. OK, so let's dive into this. So for everyone listening, who is just interested in the prefab part of this and doesn't care about the investment part, maybe you'll like this, maybe you won't. But I started as a real estate investor and I recognize that what Patrick, and there's a couple other companies, United Dwelling in LA is one and there are a couple of other people who are taking on some version of this, which is addressing this affordability issue. What Patrick's doing, which I don't know very much about so we can all learn together, is they're doing this through, what was it, 506-C? They're doing it through a general solicitation, which means retail investors can put money into this, which is super cool. also an interesting decision that I'm interested in why you decided to go that way. But it means that, like, basically investors can potentially help get a return by helping Patrick's company build these things and helping homeowners afford these things. And I guess ideally, this is a good thing for the world, because, as Patrick said, there are people who want to do this but don't necessarily have the best financing solution to figure this out.
Dweller
And provide more affordable housing as well.
Prefab Review
All right. So anyway, so that's about all I know about this. So it'd be great to understand exactly what your offering is. Like sort of this has to be a win-win for the homeowner, for you and for me or whoever the investor is. So can you sort of just run us through the basics?
Dweller
Yeah. Let me go back real quick again and just kind of talk about how we end up developing ADUs that we own, because that's what we're asking people to invest in. So once again, as I just described, many homeowners end up not having the financing to buy an ADU. And so if you're not in a position to make them alone and there's a whole another discussion about why it's so hard to to finance ADUs, then you kind of have to pursue a different route. And so what we've chosen to do is, is to basically build the ADU ourselves with our own capital one someone's property. And then we own the ADU. So we own it, we manage it, we rent it out. And then we share a percentage of the rent back to the homeowner. And then the homeowner can buy us out at some point in the future. And in legal terms, what we're doing is we're leasing a part of their property. It's called ground-lease. So we're basically saying we're going to lease the back third of your property that you're not using. And then by doing so, we then have the ability to do this ADU. And every month you're going to get a check from us. That's three, four hundred dollars. And that's based on how much rent we collect. But it's really our lease payment to you. And then when you're ready, three, five, whatever, 10 years from now, when the financing works for you, you can buy the ADU from us and then you own it and then we go away. So, very different kind of concept. But it basically ends up solving this problem for homeowners in that they can't finance it now, but they can probably finance it later. We get a bill, they begin to make money on it and then can solve it later. Obviously, for us, that then means that we need to finance it on our end because we're the ones who are paying to build it. And so we've done that with a part of our portfolio here in Portland. And we now want to do another round of these units. And so we're raising money through what people generally think of as a crowdfunding campaign. But as you mention regulated offerings, so the federal government agency that regulates these things has put forth in the past few years regulations that allow for everyday people to be investors in these kinds of things. Before that, it was only allowed for accredited investors. They called high net worth folks. So now you have a series of regulations that allow companies like ours to put out an offering and anyone over the age of 18 can invest. And so we're utilizing this mechanism to raise money to develop eight more ADUs that will be built here in Portland, will provide affordable rental housing for people here and provide income to homeowners. And the reason why we've gone this route, which is what you asked, is we think this is a fairly straightforward type of development deal. We think that it makes sense. ADUs have value. They rent out all the stuff. But when you go to traditional lenders or you go to traditional investors and say, hey, here's what we're doing, it just it looks different and then what they're used to seeing, whether it be in a bank or whether it be a kind of real estate investors who invest in apartment buildings or office buildings. And so we've had a hard time convincing traditional lenders to do this. But we know that there's strong support for this from all different corners. And we've had actually a fair number of people reach out to us over the past few years saying, "hey, how do we invest in this? This is a great idea. I really like the concept of ADUs." So, we just said, hey, this is probably the right time to make use of this new tool. And we're working with an established crowdfunding platform that focuses on impact real estate deals. It's called small change.
Prefab Review
For those at home, this meant to be interesting for people who are interested. What's the URL to check your stuff out?
Dweller
It's smallchange.co. If you go to the small change website, they have a projects tab and you can find it, the name of our project is affordable ADUs. So you can see there. But you can also see kind of generally what they do. They have a whole portfolio projects that they support and anyone who goes to that website can go and click on our project. They can read all about our project and then they can download what's called a disclosure packet. But it really is this document that the federal government requires for you to pay for these things to say here's what we're offering and all the different economics there. But it also outlines all the risks and anything, like any other investment offering would do, so that it is treated in a way that people can fully understand the risks and rewards of that. We think it's powerful. We think that that for every high net worth individual out there who people go after, there are hundreds of thousands of regular people who have smaller amounts of money to invest that share the same values or maybe even have values that are more aligned with their communities. And up until now, they haven't been able to put their money to work in these kind of projects. And now they can. And we really do think that's one of the main appeals to this is it's a project with financial return. But it's absolutely something that is tangible and visible in your community. And obviously on the West Coast, here ADUs are a big deal. It's hard to talk to anybody who doesn't know somebody who has an ADU or sees one on their block. And so we really do feel like it's it's that classic thing. Invest in what you know or what you care about. And I think this is,
Prefab Review
Yeah, it makes a lot of sense. I think it's very cool. So I want to get into this a bit and get a little deeper. So structure wise, I'm gonna ask questions, please interrupt me when I'm wrong. But like, I'm like whatever you want to call it, limited partner in a couple of real estate funds. And it looks like the structure of your offering is very similar, like a preferred return. You get X percent back per year before management, quote unquote gets anything. And then right. There's some kind of split of the excess proceeds. That seemed like very similar to these other investments that are pretty common, what I sort of had a question of is, if we wanted to walk through like an individual property, and I think it said twenty five percent of proceeds go to the homeowner, so let's say we put one of these boxes on, you can name the price, on someone's lawn in Portland. Do you think you can kind of walk us through like what happens from there? Like how much revenue you expect to collect, sort of what goes to property management and then kind of the waterfall, if that is the right word, but then how those distributions end up getting split up.
Dweller
So there's certain things you can and can't do. And part of being a regulated offering is you can't, I can't sit here now and talk about the returns on a project, so people can go and download the disclosure packet and they can see all that. Some of this is to make sure that I don't sit here and selectively share information whether it's intentional or unintentional. So the disclosure package is meant to be all encompassing. So somebody who sees the returns projected on that sees all the other risks. But I can walk you through the economics of a unit so I can do that, because that has nothing to do with the offering. So when we put a unit in the ground and let's set aside the cost of it, but once again we aim for a predictable cost on these. We are targeting rents and we achieve these rents here in Portland. We're targeting rents that are affordable for households at 80 percent of average median income. It's a definition of affordable housing, but it basically means that it's not deeply affordable. But it's affordable for somebody who makes less than the average income. And here in Portland, for a one bedroom unit, that's thirteen hundred dollars a month. So, we put a unit in the ground and it's a relatively strong rental market. So at $1,300 a month, there's a good chance that this will get rented at that. And that's like I said, it's meant to be an affordable rent. And so when we share, so we get $1,300 dollars a month, that money comes in and we do share twenty five percent of that with the homeowner. So in that case that's$325. So, that homeowner gets that check every month from us. And then in addition, if we have shared utilities, things like that, we could spend a long time talking about that topic. But sometimes you can have separately metered utilities, sometimes you're sharing utilities with the house, but we'll reimburse them for any cost associated with that. And then the rest of that money flows back to us. So that's a little under a thousand dollars. And then, yeah, we pay a property manager, typically property managers between eight and 10 percent is a pretty standard number. We have to pay for our own maintenance repairs. Anybody who's owned any kind of rental housing, there's a certain formula around it. You're setting aside reserves for long term repairs, you have expenses whenever a unit turns over, people who don't pay rent, all that kind of stuff. And then the last thing is we pay property taxes as well. So another interesting feature of this is that we break out the property tax bill on the property because we own this unit. And so if we own it and we assume the property tax liability associated with that improvement, the rest of the property, that bill goes to the homeowner. So we pay that as well. And so in most cases, we end up with about fifty five percent of the overall rent dropping to us to the bottom line, and that's how we then have money to pay back any debt or whatever, that's the pot of money that's available for how we finance any one of our deals. So that's basic economics. And so you can imagine that the the more rent you earn, the more money there is, the less rent in there is
Prefab Review
In this offering is essentially what's happening, that you have some kind of terms or whatever from your manufacturer or you're just loaning money to yourself from your balance sheet and you're essentially paying that back with the money from the investors. Is that how the structure works or?
Dweller
The way it's set up is that investment dollars are coming in and creating equity and paying for the units.
Prefab Review
OK so the units don't get started until.
Dweller
No, no, there's no debt on this. And then, as you mentioned, there is a preferred return paid and then there's a distribution of the excess after that.
Prefab Review
So that makes sense. I've actually seen, I'll try to be helpful on this. I've seen a few companies like yours starting to raise debt capital to do similar types of things. I would call them alternative or specialized lenders. I'm sure I had conversations with some of those, I do see, I think, the cost of capital being kind of high, right? I'd probably say like 10 to 13, 10, 15 percent range, meaning that's the sort of annualized return that the investors are getting on this. So I think a lot of those deals are happening in California, where you might get a little bit more rent from the building, which might enable that. I'm not positive if you could afford to do that just based on Portland having slightly lower rents than like San Jose, you might get three thousand dollars for a similar kind of unit in the Bay Area. Part of the question is, is the reason that you primarily, and I'm sure all the stuff is sort of on the roadmap, did this now just because this made more sense for your market.
Dweller
I think anybody who's trying to do this groundless or some similar structure is trying to find their way in the finance world. And so I think everybody's trying something to see if it works. I would hesitate to say that anyone's figured out a solution for the financing side. But you're exactly right. So if you're sitting in California and for the same unit and maybe the cost of building the unit is a little higher, it's coming from the same factory just for the simplicity of conversation. Right. You can have the same same unit earning different amounts. You have a different kind of return to play with. I think that when we looked at our portfolio that we had developed here in Portland, we saw how they were performing and we saw, most importantly, the rents that we were naturally achieving, which ended up being affordable, for us, we said, you know, actually what we're doing here is we're creating a portfolio of affordable housing. So it's the kind of thing where if there were investors out there looking for this double digit return, then that may not be the best fit for where we are. And looking at the flip side, as we said, we think there probably are a lot of people who are interested. And once again, without getting into specifics on the returns and the offering, but it's kind of in a range where we're having an impact. We're building affordable housing. Like this is really contributing to the solution here. But at the same time, it's not a charity. Right. So I think that's the balance we're striking. But it all starts from, as you said, we were creating a portfolio like this anyway. So let's take that and use it as a way to try to attract the best investment from folks who care about this.
Prefab Review
So I want to get into one more part of this and then I'll stop getting so dorky. But I find this really interesting. So one of the things that I think is different about this and very similar to other real estate deals, but potentially different to a lot of other alternative stuff, assuming this is actually valid. Right. Is this is essentially a secured investment, meaning theoretically if the person on the property dies or the person who owns the whole thing dies, theoretically, you you own this box on their property. But that's actually the area where when I've talked to other investors, they've had the most legal wariness about this, I'm sure you've had a lot more conversations about this than I have. So can you just walk me through the sort of catastrophic scenario where the homeowner of the piece of land that's getting leased to you for whatever reason, I mean, I think death is obviously a very realistic one in terms of like, oh, wow, now what do we do? But or goes bankrupt or whatever. And all of a sudden they have a bank who is potentially foreclosing on their property. How does that work with your interest?
Dweller
Yeah we don't think about it in such dramatic terms,
Prefab Review
Apologies for the morbidity, but through some financial stress event.
Dweller
Yeah, so a certain percentage of homeowners will default on their mortgages and things can go into different stages. Some of them get worked out, some of them go into foreclosure. Right. So that's the scenario that you need to account for. And in that situation, we are like other second mortgage holders. We don't have a second mortgage on the property. But the first mortgage holder drives the train on that. So if a homeowner defaults, what we're really saying is that they're defaulting on the first mortgage, the mortgage holder then is going to exercise their rights and try to collect. And they can do that in a variety of ways. We will go along with whatever that process is and what we say to homeowners in particular, is, look, you know, without this ADU on your property and without the income that we're providing, whatever trouble you're in, it's worse because you don't have this extra income. And if we're in a situation in which this homeowner needs extra income to help get current or to correct some kind of deficiency, we've got rental income to work with here. So we say we're part of the solution in these situations. And so, we see those scenarios being more like those of us with a little bit of a lending background, workouts rather than defaults or foreclosures. Our situation is somewhat similar to the solar industry. I'm not sure if you've ever gotten into this topic, but the solar industry grew primarily because the solar companies figured out that they could install panels on people's properties without selling them the panels, that they would actually own the panels and they would have a kind of a power sharing arrangement. But essentially, the homeowner was sharing revenue from the power that was generated there. And that's how the solar companies pay themselves back. Those companies had to defend the rights to their collateral if a homeowner went to foreclosure and they successfully did that. So that's where we would be in a worst case scenario, is we would have to go in and say, look, we own this ADU and we understand the property has to be sold or whatever. And we're willing to work through that. But the ADU is still ours. And we're going to work with you and the next homeowner to keep this going. Or so if you sell the property, you can buy us out and then the whole property is free.
Prefab Review
So does that mean you have some kind of financial underwriting of the borrower. Because I totally understand if they're even if they're at an LTV that a bank might not love. Right. Let's say they're like a loan to value meaning for all of us at home, like the value of the mortgage on their home is close to a hundred percent. I understand that, like, theoretically, you're adding equity to their home. Your income is a positive thing and potentially having this arrangement is a positive thing because you're driving income to the property, right? If someone is at like a 120 percent, which I guess we'll see what happens in this sort of current cycle, but I'm sure there are areas that are going to be negatively affected. I have no idea if Portland or wherever is going to be one of them. If someone for whatever reason is at like LTV that's greater than one hundred percent or greater than 90 percent, will you still work with that person or is there some kind of like underwriting on the properties?
Dweller
We don't underwrite homeowners the way that a bank would. We actually don't want to do that, that's part of why we're offering this is to get homeowners out of that process. But we do want to make sure we're not entering into or installing into a foreclosure situation. So we look for delinquencies and delinquent property taxes, things like that, and we do some kind of credit history check. But it's not meant to be like you have to have a minimum score. It's more about do we see any warning signs on there that would predict some kind of foreclosure or default scenario in which we're immediately working in that kind of environment? You know, we understand that homeowners, you know, if you hear the stories that homeowners have about getting home equity loans for ADUs, the gauntlet that they have to run is significant. And so part of the reason why we're not seeing more ADUs built is because this window is so tight. And so we're trying to expand that window on very solid properties with great income potential and just kind of your average homeowners. Most cases, the issues that we have with homeowners that we work with, they're financing challenges that they're not one hundred twenty percent, but they're at 85 or 90 percent LTV, which is a typical kind of first time or early homebuyer who didn't have a lot to put down. And they're kind of working their way. Typically our profile there, it's not somebody who's massively over.
Prefab Review
Because banks will typically, from my understanding, give you home equity up to like 70 percent of the cost of the property, maybe a little higher.
Dweller
Some banks, some creditors will lend you one hundred percent. But the problem is that the ADU, unless you are sitting on a lot of equity, the ADU still costs more than that. So. Right. So the big challenge and just to quickly dive in, the big challenge with home equity lending for ADUs is that lenders should be giving the homeowner full credit for at least the cost of the ADU, building when they make them a loan and they don't. And it's not the lenders. Appraisers can't do it. There's a whole chain of things that are preventing the lender from doing that. But essentially a homeowner who's trying to put a $150,000 ADU on their property might be getting half credit for that. And so unless they're sitting on a big chunk of equity to start, they're just not going to get there. And so, aggressive home equity lenders are going to say, look, we're making you a very attractive home equity loan and it's only $100,000. So the lender thinks they're doing their job, but it just doesn't get the homeowner to the finish line on the ADU. And so they're stuck. And so this is a homeowner who's got equity in their property to qualify for the loan, but they just can't get to the dollar amount they need to get an ADU project done. That makes sense.
Prefab Review
That's interesting. It almost makes me feel like and I guess there's a need for financing. I honestly haven't thought about this solution before. If you can get part way there but not all the way.
Dweller
It is a form of messy financing. I mean, and I don't want to scare people away from this. I think it's a very conservative form of messy finance in that somebody's putting money into an asset that generates income. Right. So we do think ADU financing in general has a lot of really solid kinds of risk characteristics to it. It just structurally doesn't match the way that other lenders have done business. And so I think that's why we're not seeing the type of products that we need. I mean, we'll get there, I'm convinced the market's too big and and like I said, the economics are there.
Prefab Review
It seems like legally there's a bunch of stuff brewing that also will enable this. Yeah. I mean, at least we've done some stuff in California where you can kind of hack it with, like tenancy in common arrangements that basically sort of subdivide without technically subdividing, which I guess kind of you guys are doing. Yeah, you can create a condominium on a property, there are other ways to get around it. At the end of the day a homeowner should be able to get an ADU loan based on the characteristics of the property and the ADU project and the rental income. And that should be the driving force. OK, so we usually do a fire round, but I think we're going to skip that because we've gone so deep on this one. One other question sort of related to this, which is, we had a Portland expert on the podcast recently, named Kol Peterson, I think. And he was talking about Portland's new ADU laws that will hopefully be passing soon, which sound really interesting, which it sounds like include the ability to build bigger units. So I guess when we're sort of thinking through right, like what is your objective as a company. It sounds like you know, it creates affordable housing opportunities, but also enables returns for a bunch of other sorts of different parts of this ecosystem, like the capital side of the ecosystem.To enable these alternative financing mechanisms. Does that move the needle for you on this? And is that something you're exploring?
Dweller
Yeah, I mean, I think it's all good. I, I think creates more of a continuum of different housing types that can be added and so more properties come into play. So when we would go to a property originally, we would look for a number of things to make it eligible and so if I went to a property that was already a duplex, then we couldn't do it. Or if I went to a property where they had the basement as an apartment, you couldn't do anything. And so you just bring in more properties into play and then with the ability to do one to four units on a property, it just creates more combinations that can work. We're still going to be doing the same ADU projects that we do. So it'll add incrementally for us. It won't fundamentally change what we do, but I do believe that it creates a whole set of market opportunities for builders. I mean, I just think about the single family homes and duplexes. The economics are just going to be there. But we have all these single family homes in neighborhoods in Portland and even on my own land I think, can I make this a duplex. So I think you're going to see that. I think you're just going to be the infill housing market going to be far more robust. And I think you're going to see both more builders come into it. And I think you're going to probably see more standardized solutions. I'm not sure what that looks like, but not every job should be a custom job. How do you have standardized solutions for homeowners who want to add an extra unit on their property without it being like a detached ADU? So it's all obviously very positive, I think, for us. You know, instead of thinking about how much more deeply we can go in the Portland market, we really want to be able to offer our ground lease product in other markets. So I'd like to see us offering this product in Seattle or parts of California or other other markets. We get inquiries all the time for that kind of a solution. And so that's really where we see ourselves going, as other markets will always be able to take us to have demand here in Portland. But the demand in some respects is greater, is greater elsewhere. And that's why you and I mentioned working with other builders. We could easily work with other builders, other markets, and really just be bringing the ground solution to those markets.
Prefab Review
That makes total sense. Well, Patrick, thank you so much for being on the podcast. Thanks for indulging in my my dumb questions. I think what you're doing is really cool and yeah, I'm with you that the more ways we can make it for people to afford these types of projects, the better. So for everyone, if you want to learn more Dweller.com is a good place to learn more, smallchange.co is another good place to learn more. And you can always visit us at PrefabReview.com.
Dweller
Thank you, Michael.