Flipping the Script: A Deep Dive into Tech-Driven Real Estate

Podcast
Fix-and-flippers seemingly litter the media landscape. If you are reading this instead of pitching a fix-and-flip show to every basic cable station, you need to think about your priorities. But where do flippers get the money to buy all those homes? One of those sources is Kiavi, a firm started a decade ago that uses a tech-centered approach to loan money to flippers across the country. They recently also entered the single-family market. Stephanie Casper, Chief Revenue Officer at Kiavi, joins me to discuss some of the following topics.

Featured guest

Stephanie Casper, Chief Revenue Officer, Kiavi

Stephanie Casper is the chief revenue officer at tech-enabled lender Kiavi, one of the nation’s largest private lenders to residential real estate investors (REIs) with over $13 billion in funded loans. In addition to leading all of Kiavi’s revenue-driving functions, including all sales, marketing, pricing and partnership teams, Casper is an accomplished real estate investor herself with a growing portfolio of rental properties. Her leadership and creative strategies have driven unprecedented levels of growth for Kiavi. Thanks to Casper, Kiavi has reached volume milestones never before seen in the private lending industry and continues to grow in market share despite a challenging macroeconomic environment.

Under Casper’s leadership, Kiavi funded a record $4.4 billion in loan volume to more than 5,600 customers in 2022, and it became the first and only private lender to real estate investors to fund over 50,000 bridge and fix-and-flip loans. She also played a leadership role in shepherding Kiavi through the most challenging and uncertain time period it has ever seen and creatively adjusted Kiavi’s pricing, sales, marketing and channel partner strategies to ensure the company not only survived the market downturn but thrived during it.

 

Transcript

Dean Wehrli:

Hi everyone. Welcome to the New Home Insights podcast. This is Dean Wehrli. The podcast of the John Burns Research and Consulting Company. Today we’re going to bring you something a little bit different, as we try to do, but still very much housing market related. We’re going to talk to Stephanie Casper, she’s the Chief Revenue Officer at Kiavi. Kiavi is a nationwide tech enabled lender for residential investors, it does both short-term and longer term loan packages and really, the bulk of their clientele is kind of your classic fix and flippers, but also your longer term single family rental investors. We’re going to get into that more with Stephanie right now. Stephanie, how are you?

Stephanie Casper:

Hi Dean. I’m great. Thanks for having me.

Dean Wehrli:

I’m glad you could be here. This is something a little bit different than we typically do, which is good, but we are going to talk a little bit about the market. We’re going to talk a lot about what you guys do and what what’s going on with that fix and flip space, which has become a huge space, as well as the single family investor space, also a major, major part of the housing world these days. Let’s start with the basics. Give us that classic elevator pitch of what Kiavi does and then give us a little bit of background on you and how you came to be where you are now.

Stephanie Casper:

So Kiavi’s a tech enabled lender, we’re almost 10 years old, and we have been lending to residential investor since inception in late 2013. We leverage our proprietary technology, as well as in-house data models and machine learning models and AI to make the process of borrowing money for the purposes of investing in residential real estate, simpler and faster for our customers, as well as making the process internally more streamlined to better enable our decision making throughout that origination process. We’ve originated over 50,000 loans since inception, getting closer and closer to 60,000 here now. So we have massive data sets that we’re able to use for the development and continued learning from those models. And even bigger sets of data for loans that maybe we didn’t actually complete or go through with, just for a variety of reasons. Things fall out of the process.

Dean Wehrli:

And I think you have a national footprint. Where are you?

Stephanie Casper:

We do.

Dean Wehrli:

Are you in almost every state? I mean, how many states are you in right now?

Stephanie Casper:

We are. We’re in 29 states and we’re probably going to expand to a couple more, but for the most part, we’re in 29 today.

Dean Wehrli:

All the big ones.

Stephanie Casper:

All the big ones, that’s right.

Dean Wehrli:

I looked at the map of where you are.

Stephanie Casper:

I would say our footprint covers, I think, 90% of all residential housing transactions.

Dean Wehrli:

Yeah. The places where people would expect it. Certainly those classic smile states for sure. The places where there’s lots of housing activity going on as you’d expect.

Stephanie Casper:

Correct. That’s correct.

Dean Wehrli:

Okay, so that’s Kiavi and, like I say, we’re going to get into lots more specifics about what you do and who you are and also the markets that you work in and what you’re seeing in those markets. But first of all, just give us a little bit about you, Stephanie. How did you get here to Kiavi in 2023?

Stephanie Casper:

Sure, so I took a little bit of a circuitous route in getting to the lending side of the real estate world. My first love from a real estate asset class is the hotel space. I went to the Cornell Hotel School for undergrad and started my career in the hotel industry, and then went back to school to get a graduate degree in real estate, in real estate development and finance. And so worked in a variety of areas, predominantly on the equity side and then through connections and relationships over time, had an opportunity to join a lender, one of our competitor lenders in 2015, to run the bridge lending business there. And so I joined there in 2015, it was Colony American Finance at the time, is now CoreVest, and helped grow the bridge lending platform there, launched a few products, including infill and build for rent construction and multifamily bridge there.

And then had the opportunity to join what was LendingHome at the time, in January of 2020. And so we rebranded in November of 2021, but I’ve been with Kiavi since then and have really loved the opportunity and the growth has been really interesting to see over the last three and a half years.

Dean Wehrli:

I meant to ask you a second ago, where does the name Kiavi come from? Is there some meaning of it?

Stephanie Casper:

Yeah, there actually is. It is the phonetic representation of the Italian word for key, which is chiave, spelled differently obviously, and so it has a little bit of a meaning even though I think sometimes people don’t understand where the word came from, but that’s where-

Dean Wehrli:

Does the actual Italian word have a Q, start with a Q?

Stephanie Casper:

No, it’s C-H-I-A-V-E, I believe. Yeah.

Dean Wehrli:

Because I think for a while there it was a law that all new companies had to have a Q and a Z, at least one of those two letters in their name, it’s a rule for a while.

Stephanie Casper:

Really?

Dean Wehrli:

I’m glad … Doesn’t it seem like it? So many Qs-

Stephanie Casper:

It does. This is a fair point, fair point, yeah.

Dean Wehrli:

And everything, it does have to be misspelled. That’s also a rule I think. I feel like.

Stephanie Casper:

It’s interesting that there’s a conference that I participate in and I was on a panel and they had Kiavi spelled wrong in my email address, so I never got any of the notifications. It’s like a little bit madness. But the rebranding is always an adventure, but it’s worked out quite well.

Dean Wehrli:

True. We’re going through that right now. Let’s start with the fix and flip part of it before we go on to the single family rental investor type. So the fix and flip has become just a massive part of the market. Do you have a sense, I mean, let’s start talking about the market before we go into the kind of services you provide there, but let’s start really basic. How do you define a flipper, what is the time horizon that you define what it means to be a fix and flip?

Stephanie Casper:

Well, I think there’s a lot of debate about what’s considered a flip transaction, but I will say the way that we tend to look at it is when the ownership changes hands within a 12-month period, from purchase to exit. So an owner occupant purchase is going to be much more longer term, so we look for the purchase transaction and then the exit transaction to be within a 12-month period. That’s the typical, I think that’s kind of customary way that the data is looked at.

Dean Wehrli:

I think that is how-

Stephanie Casper:

I’m pretty sure you all look at it that way too.

Dean Wehrli:

That’s exactly, I’m almost positive that that’s how it is. If I’m wrong, Devyn and Rick are going to strangle me, but I’m pretty sure that’s exactly how we measure it as well. You look for two purchases within a 12-month period. So what is your sense, do you have a sense, do you measure the total size of that, do you have a sense of what the market share is for fix and flippers in your markets?

Stephanie Casper:

The total addressable market, the way we see it for short-term financing in the residential space, in 2023 is about 35ish billion is our expectation in 2023, growing over the next few years to close to 40 billion.

Dean Wehrli:

Do you mean revenue within the sector as a whole, is that what you mean by that measure?

Stephanie Casper:

No, I’m talking about transaction, volume of transactions. So the total dollars of transactions.

Dean Wehrli:

That’s what I meant. Okay.

Stephanie Casper:

And Kiavi, in the markets in which we participate, because we’re not in every single market, but we have a little bit north of about 11% market share today.

Dean Wehrli:

Okay, so it’s a big chunk of your business and it’s a big chunk of the market too.

Stephanie Casper:

That’s right. That’s right. And depending on who you ask and whose research you follow, including the John Burns research, which I love, it’s typically, I just saw, I think, 2023 so far, 18% of existing home sales this year have been to investors. Now that doesn’t necessarily mean a flip, it could be somebody that’s buying for the purposes of holding as a rental, but 18% is pretty high, that’s higher than last year. I’m sorry it’s a little bit lower than last year, last year was about 20% higher than pre-pandemic levels, which was sort of in the 16% range.

Dean Wehrli:

Yeah. And that number can even go higher too. There are lots of markets with a quarter of the transactions being defined as some form of investor. But it’s important to say that because the flippers are a subset of that and a minority subset of that. Most of those folks are more traditional investors. Again, sticking with that flipper part of the market segment, are there geographic breakdowns of where your business for specifically flippers as opposed to longer term loans are higher and lower? In other words, I’m making this up but is the southeast kind of a hot bed for flippers, or Texas, do you see markets that are more flipper oriented than others?

Stephanie Casper:

It really depends. And to be truthful, I look at bridge lending or short-term loans, kind of as a whole, not just for the specific execution of a flip to an owner occupant. I think about purchase, rehab, reposition, so to speak, all kind of as the same. And then whatever the exit strategy, is it a flip or is it a refinance to a longer term hold rental. I would say rental investments are going to be better yielding in markets where home values are not quite as aggressive as they are in places like California. So that’s where I see some differences. It’s really going to depend. I think there’s a ton of flipping activity that happens in California, there’s tons in Florida, there’s tons in Texas, there’s tons. I mean, the East Coast corridor, call it like DC north, ripe for that opportunity.

And the reason I say that is the median home age or the median age of homes in the US is 40 plus years. It’s a Carter administration era home. And if you think about where the homes are more aged, is sort of in that kind of corridor up the East Coast, ripe for flipping activity because to reposition a home that’s that age is expensive. It’s not what an entry level or first time home buyer is equipped to do from a skillset perspective, much less financially. And so flipping in those markets is also very, very attractive because of the values that could be achieved on the exit, as well as just the age of the homes. There’s like a necessity to sort of reposition that aging housing stock.

Dean Wehrli:

That makes the fix part of the fix and flip all the more critical, doesn’t it?

Stephanie Casper:

It does. It does. And I think that’s a really important element of fixing and flipping. It’s this whole idea that we have this aging housing stock in the US, you have the millennials out as first time home buyers today, not necessarily wanting to take on a rehab project. I think there was an article last week or the week before that said, “Nobody wants to buy a fixer upper today,” was the headline on it, then saying, “Move in ready homes are very desirable and in many cases, seeing multiple offers at or above ask price in many markets across the US whereas homes that need some updating are sitting longer.” And that just speaks to, I think, what flippers can do in terms of delivering more move in ready housing stock to the next generation of home buyers, even in this interest rate environment.

Dean Wehrli:

Now here’s another part of the environment though that we have is a much more limited resale inventory landscape, existing homes that are listed because of all these golden handcuffs from low interest rates.

Stephanie Casper:

That’s right.

Dean Wehrli:

Are you finding, are your clients finding it harder to find homes they could buy, fix and flip?

Stephanie Casper:

It’s a very interesting dynamic, I would say. Existing home sale transaction volume is down 40, 41% in Q1, we’re waiting for the Q2 data to bake, I’m assuming it’s going to be relatively similar year over year. And that is because people are locked in their houses or locked into their mortgages, I would say. I think the statistic I just heard is that like 90% of all mortgages in the US are below 6%. Today rates are above that. And the other statistic is something like 62% of owner occupied mortgages are 4% or lower. So people are not moving unless they have to for some reason, there’s no trading up at the moment, and so that’s really driven down transaction volumes. What I think is very interesting is that yes, the supply of inventory has come down from a resale perspective, but there’s not as much competition on the buy side because interest rates are so much higher, people have been priced out potentially, so flippers aren’t necessarily competing as hard for the same homes.

And you’re also seeing that buyers are outnumbering sellers, that was in the agent survey from y’alls research. And so there is that sort of tension in the market. It’s a good thing for flippers though, assuming they can leverage their networks, which many of them do, to find those off market listings and so forth, they’re still able to get in, reposition that property and exit at really attractive levels even in this dynamic. And so while overall transaction volume is down, we are seeing a lot of strength from our customers across the spectrum of customer cohorts, after what was probably a pretty quiet Q4 for most people, there was a lot of waiting and seeing how things are going to translate and getting back in sort of in Q1. And so that’s really borne out, I think, for all of us in the competitive landscape here.

Dean Wehrli:

Tell me if this question is unfair, but I’ve always been fascinated by the who of who the flippers are. If I had a twin brother, I’d be the guy in the suit, not the guy in the, I think sometimes never before worn work shirt because I would hurt myself immediately on a work site, although I don’t like suits either. But still, I could never do it. Who is it? Is it all people with these skills, these labor skills and the ability or are they partnering with brokers who have those inside information that you just mentioned? What is the flavor of the people who are doing this?

Stephanie Casper:

Yeah. So I think about the customers or our customers as broken up into three buckets. The majority of them, well, I shouldn’t say the majority of them, two out of the three buckets are really small business owners and in some cases, very large business owners, as you move further up that food chain. So we have on one end kind of people like us, we’re tangentially in the real estate space and maybe it’s your brother that you mentioned, is a GC and his wife is a realtor and the house down the street from where you grew up, they’re selling the home, the neighbor was moved to a retirement home, whatever the case may be, it needs to be updated. You know the market, you know the area, there’s some expertise and so you opportunistically go ahead and do this.

That is what we consider first timers, people like us, very opportunistic. It’s almost an infinite customer base. Every day there’s a new person that’s going to go do that. They might not do more than one, but every day there’s somebody new assessing that opportunity. On the opposite end of the spectrum, I mentioned a small, maybe slightly large business owner, that’s this vertically integrated real estate company that has contractors on staff, construction in house, design in-house, they probably have a brokerage or agent realtor business. They might own a franchise or an office of one of the title and escrow companies. And so they’re really just kind of churning through this business model and they’re pivoting based on what’s happening in the markets and the economy, in terms of are they going to just flip, are they going to own rentals, are they going to do ground up construction opportunistically, because it makes more sense than competing with a whole bunch of potential home buyers during the frenzy of 2020, the second half of 2020 through kind of first half of last year. And so they’re able to pivot and their strategy goes along with that.

And then you have this middle sector or this middle group where they’ve quit their day jobs, they probably have some relationships with a couple, three GCs that they rely on in their market. They probably have a couple agents with whom they have very good relationships for the purposes of finding properties and selling their properties once they’re ready. And this is like a dream that they’re now living, because investing in real estate a little by little has now enabled them to no longer have an office job, but now they’re out there kind of managing the small business. So that’s really who the flipper landscape can look like, so it’s a little bit of everything.

Dean Wehrli:

They’re not all on television. Are any of your clients on TV?

Stephanie Casper:

Most of them are not on television.

Dean Wehrli:

Do you have any clients that have a TV show?

Stephanie Casper:

Yes.

Dean Wehrli:

And if so, why not? You do?

Stephanie Casper:

We have a few. Yeah. Nope, I’m not kidding you.

Dean Wehrli:

Okay. I was going to be angry if you didn’t because it’s kind of a low bar, I’m not going to lie.

Stephanie Casper:

I think what people … it’s great entertainment. As somebody that loves real estate and loves to see the before and afters and knows that all the things that actually are going to go wrong can go wrong. But what I think is hard is that it can often make it look really easy. And investing in real estate is not for the faint of heart, and you need to be expecting something to go wrong and being ready for that. And I think one of the things that I think we do really well is set up, especially first time flippers or first time investors for success because we have a pretty defined process. We help our customers understand the feasibility of whatever scope of work they’re proposing to do. We help them think through is that an over improvement, are they going to get the value for the home that they think they’re going to, and really try to help them down the path of a successful outcome.

Because the last thing I want to do is own real estate as a lender. I mean, personally I want to own real estate, but as a lender, that’s not my business. I want to see our customers succeed, and that is something we really focus on and I think do a very good job with all of the data resources that I mentioned earlier, to set them up for best outcomes because it’s not as simple as it looks on TV.

Dean Wehrli:

The best outcome though is getting a TV show, let’s be honest.

Stephanie Casper:

Yeah.

Dean Wehrli:

It pays well, and you just snap and suddenly the after shows up.

Stephanie Casper:

I know, I know.

Dean Wehrli:

It’s magical. There have been some not great articles in the media lately about some almost predatory behavior from some of these companies with fix and flip. Does that worry you? Do you have constraints within Kiavi that could not lead you down that road and not work with those folks?

Stephanie Casper:

Yeah, look, we’re always assessing how our customers are behaving. We don’t want to work with dirt bags. I don’t really know-

Dean Wehrli:

I’m glad to hear that.

Stephanie Casper:

There’s a more PC way of saying that, right?

Dean Wehrli:

That’s a good one. That’s fine.

Stephanie Casper:

We believe in the mission of helping people revitalize the aged housing stock, deliver move in ready condition homes, updating homes out to the market. And one thing that I think is important to note about Kiavi’s customers is our median exit price year to date is about $100,000 less than the median home price in the US. And so what our customers are doing are not all these luxury homes, they’re delivering entry level home prices to first time buyers. And I think that’s really something that motivates us and is part of our ethos in terms of company mission, is this sort of revitalizing America’s aged housing stock, helping solve the move in ready housing inventory problem, all of these things.

The predatory buyers and those stories around Main Street being swallowed up by Wall Street and all of that doesn’t help any of our cause. And so we take a good hard look at background, performance, we’ve banned customers for doctoring paperwork because we consider that to be fraud. And so there are mechanisms in place for us to try to avoid being in bed with unsavory characters. It’s not to say that it doesn’t sometimes happen, but we do our best to avoid that headline risk.

Dean Wehrli:

That’s good. That’s good news. Also that the entry level niche is that niche that needs to be most served, so that that’s great as well. Last question on fix and flip before we turn it over to single family investors, is what kind of return typically are your fix and flip clients looking for when they go into a deal?

Stephanie Casper:

Oh, I think it really depends and everybody has kind of a different hurdle. And part of it is a function of their cost of capital, what do they need to hit their preferred returns or pay their equity partners and pay their debts back? So I think it really depends. I will say that we want to see a minimum 10% when we are doing an underwrite of a deal for a prospective customer, but that’s very thin. All of that said, 10% on a million dollar deal versus 10% on $100,000 deal, it is wildly different, but that’s our base underwrite.

Dean Wehrli:

Okay. Actually I misspoke a second ago. Before we go on to single family investment and what you do there, let’s talk about what you do for the fix and flip. So what are the core services? We’ve kind of touched on it, but what are the core services that you bring to these potential customers in the fix and flip space?

Stephanie Casper:

Yeah, so we offer acquisition financing up to, in some cases up to 100% of purchase price, for certain very seasoned, super experienced customers that have a really solid track record with us, and we finance the renovation budget as well. We prefer to do 100% of the renovation budget and so a customer can come into our website and size and price their loan, right then get an instant quote. Of course that’s all subject to underwriting and diligence and confirmation of all the things that you would expect a lender to go through. But we don’t look at financial statements, tax returns, not W2s, not pay stubs. We are more interested in the potential value of the property and the project specifically, versus the sponsor and their financial capability, with the exception of we want to make sure that the customer has a good credit score because it’s the most predictive of performance. Like it or not, it just is.

And then we want to check backgrounds. We want to make sure, like I mentioned earlier, we’re not working with a dirt bag. So those things related to the sponsor themselves, but then everything else is very much focused on the property and the project. And so we leverage a few in-house models, one of which is a property risk score, where the address and a whole host of other factors generates a risk score, and with that score, we can help tweak leverage if necessary. If it’s higher risk, we can offer higher leverage, if it’s a much lower risk property and we can make those nuanced adjustments so that we’re not having to, most lenders have to go cut leverage across the board if they need to skinny down leverage. We can be very surgical in those decisions using these risk scores.

So we’ll also kind of educate the customer about it too, many of our super prolific customers want to understand, well wait, it’s come in at a high risk, why? What are the factors? Help me understand, because I want to make sure that my execution’s going to be set up for success too. So we’ll offer up some of that information as well, just to help with the process.

Dean Wehrli:

You’re kind of helping them learn that business through pointing out, okay, here’s where there might be a weakness. Okay. That’s interesting.

Stephanie Casper:

Yeah, look, it doesn’t matter how long you’ve been doing something, there’s always some morsel you can learn from somebody else from time to time. And I think our customers, I think are very thirsty for that kind of additional information and insights.

Dean Wehrli:

Very true. I feel like we have made dirt bag into a technical term within the housing sector today, and I’m proud of that.

Stephanie Casper:

It’s a technical term in real estate for sure. It definitely is.

Dean Wehrli:

As it should be. What is, you mentioned, so typically that one year buy sell is how we measure these fix and flippers, what is your typical time period? Is it shorter than that?

Stephanie Casper:

Yeah, our average turn is a little north of six months. It’s eked out a little bit, I think with the interest rate environment, but then it sort of bumps around, but it’s usually kind of 180, 195 days, somewhere in that range.

Dean Wehrli:

And how short term is short term, how short of a term would you go?

Stephanie Casper:

Oh, our shortest loan amount, loan term, excuse me, is 12 months.

Dean Wehrli:

Yeah, 12 months. Okay.

Stephanie Casper:

But we have some folks that are really good at getting in, they’re doing primarily cosmetic rehabs, so they’re not tearing down walls or reconfiguring floor plans, and they are often getting in and out in 90 days in some instances, which is pretty darn fast.

Dean Wehrli:

Does that make you more nervous, if they are doing something major, keeping that one wall so that don’t have to get a permit kind of a thing and tearing everything else down, does that heighten your sense to see that there is the solid underwriting to that deal?

Stephanie Casper:

Yeah, so I think we want to know that they know how to do those kinds of projects, those really extensive renovations. They do take longer, they’re fraught with more problems, lots more can go wrong. Although I have gotten into debates and I may have come over to the dark side in believing that it’s actually riskier to do a fix than it is to just tear down and start new or build ground up because no surprises, other than the weather or a contractor that doesn’t show up, but you have the contractor not showing up when you’re doing just a fix. So from an underwriting perspective and diligence perspective, we’re going to look at and understand one, is what is being proposed allowable on the site? Is our customer capable of executing on this? Does the plan make sense? Does the scope of work make sense? Have we seen them do these kinds of projects before? That gives us a lot more confidence.

And then we administer and manage our own loans. So we service our own loans and administer and manage our own construction draws. And so we’re able to get insight and help along the way if necessary, how progress is coming along, or how the project is progressing. I got my words confused. And so we’re going to look at all of those things for sure. In some instances it might mean we do a little bit lower leverage, but it really just depends on the project and the sponsor.

Dean Wehrli:

What are the things that set you apart from your competitors in terms of appealing to those customers? Is it the technology, is it the ease, is it the terms? What do you have as kind of a competitive advantage, you think?

Stephanie Casper:

Yeah, it’s kind of D, all of the above. I think the way that we are capitalized has given us a cost of capital advantage that we’ve been able to pass along to our customers. And while super prolific, really seasoned guys and gals for that matter, will recognize that when you are maxed at leverage at 90 or 100% of your cost, what that effectively means is interest rate is irrelevant, because when you’re doing your return calculation, your denominator is zero. So that basically means your return is infinite. Now, I realize that that’s an oversimplification, but super prolific investors recognize that rate doesn’t matter if I can get 90 plshus percent leverage. We’re able to offer high leverage because we have really great risk processes in place and risk management processes in place, such that we see wildly lower delinquencies than our competitors, and that’s just based on public securitization information in terms of DQ60s and that sort of thing.

But because we’re able to do that, we’re able to offer those higher leverage amounts, so terms are another area where we have a competitive advantage. And then it is really that tech and process in combination that allows for us to close in five days in some instances, sometimes even less. I say a lot of times, people will ask, “Well, how quickly can you close?” It’s 100% dependent on the sponsor and how quickly they can get their third parties to get the information you need for the lender, and they’re already, and answer all the questions and move forward. But because of the way that we’ve leveraged models in our tech, we’re able to just move through much more quickly.

Dean Wehrli:

Okay. Let’s switch over to the single family investor space. Let’s start with this just pure size, how big a part is the single family investor part of your business as opposed to the fix and flip?

Stephanie Casper:

Yeah. So we started out lending only on the short term side, and we launched our rental loan product in the fall of 2019. So it’s newer and is a much smaller piece of our business, it’s probably 20% of our business today. I’m just looking at some math real quick. Yeah, that’s right. And so it’s smaller. I’ll tell you though, the rental space in general dwarfs, it’s a larger addressable market than the short term flipping business, and continues to grow. And that’s largely due to the economic environment, affordability challenges with respect to housing, whether that’s interest rates or home prices driving a lot more folks to desire rental housing. And then coming through the pandemic, more and more people were saying, “Oh, hold on, I want some space. I don’t want to be in a high rise apartment building. I want to rent a house with a yard and have a little room to breathe relative to my neighbors.” And so we continued to see demand for rental properties, from renters, that demand continues to grow and then by extension, investors are seeking to invest in rental properties as well.

Dean Wehrli:

Do you see a long runway for the single family investment world to keep growing and expanding?

Stephanie Casper:

Absolutely. Absolutely. I do. Look, depending on who you read, we have a massive housing shortage in the US. I think at the IMN conference when it was opened, I want to say the SVN folks said something like two million homes short this year in terms of availability of housing. And so rental properties are one way to help solve some of that, but because there is this shortage, it helps sort of support the fundamental support investing in rental properties.

Dean Wehrli:

Yeah. A single family unit bought by an investor does not take any unit out of the housing sector because there’s a lot of antagonism toward it from some folks on parts of the political spectrum. And often, especially in the fix and flip space, often it makes a somewhat inhabitable space into a much more habitable space, actually kind of enhances the housing stock.

Stephanie Casper:

It can for sure.

Dean Wehrli:

Pet peeve of mine.

Stephanie Casper:

Yeah. One of the other things to keep in mind is, I believe the statistic is 2%, maybe a little north of 2% of all rental homes, single family rental properties in the US, only 2% of them are owned by owners of more than, I think it’s 100 homes. So this idea that you have these huge institutions buying up all the houses, it’s 2%. 80% of the rental investment properties, single family rental investment properties in the US are owned by folks that own 10 or fewer, they’re small business owners. And then I think it’s 60 some odd percent are owned by folks that own five or less. It’s mom and pops, it’s people investing for their retirement. It’s not this sort of greed fueled investment strategy that it’s positioned as in the media.

Dean Wehrli:

Like you said, Wall Street buying over Main Street, that’s not what’s happening. We’ve been publishing those stats as well. It’s a small single digit that is a large institutional investor. And then even still a single digit, that is a sort of decent size, 50, 100, even that is still a relatively small part of the picture.

Stephanie Casper:

For sure. And I think there are some debate around the build for rent communities, purpose built, that’s being very heavily driven by institutional, and so they’re adding housing stock and increasing their ownership up as a percentage. So does that shift over time to two and a half or 3%? Maybe, maybe not.

Dean Wehrli:

Maybe it does, but like you said, they’re adding housing stock, they’re making that bottom number bigger.

Stephanie Casper:

That’s right.

Dean Wehrli:

For what you guys do, for your customers, for your single family investor customers, do they tend to be the onesie, twosies, the mom and pops, or do you have semi institutional? Do you have the folks who are kind of mid-size as well?

Stephanie Casper:

Yeah, we have, like I said, that three buckets again, we have folks that have one, two, five maybe, and they’re doing single asset loans with us. We have institutional guys that are doing portfolios of rental loans with us as well, and sort of everybody in between. We have a very large repeat customer cohort in both our bridge space as well as in the rental space. So folks come and do those loans with us, whether it’s on the bridge side and then they refinance the rental, or they come in and they just continue to stick with us, because they think, well, my belief is that they like our process, they like who they’re working with. The technology helps make things more transparent, and so it’s just not so much of a black box.

Dean Wehrli:

How big is big? Do you have folks who say, “Hey, I want to buy these 50 homes, 100 homes,” they’re noncontiguous addresses, but do you get that kind of size portfolio that they’re looking for?

Stephanie Casper:

We do, we do. I kind of consider those types of investors sort of aggregators. And so oftentimes they’re using our short-term financing to buy and stabilize. Maybe there’s some deferred maintenance that needs to happen, they need to re-tenant, whatever the case may be, and then they’re going to take chunks of 25 to 50 at a time and refinance those into the bigger portfolio loans. We have not, our portfolio product is a little on the newer side as well, it’s only a couple years old, we have not graduated to the really big institutional types of loans like the CoreVest’s of the world will do for portfolio yet, but I would envision we’ll potentially get there.

Dean Wehrli:

What kind of timeline are these folks now thinking? I know you’re relatively new to the SFR investment, but I’m assuming they’re thinking in terms of years, not months.

Stephanie Casper:

Oh, yeah, yeah, yeah. So most of them are like five, seven, 10 year terms with 30 year amortizations. We also do a 30 year fixed as well. And so it’s sort of a combination, just kind of depends on their investor horizon. They all also have a variety of prepayment penalty options that step down and that can enhance their flexibility if markets change and they’re able to exit, return makes more sense for them to do that, versus hold as a rental in a couple few years, or interest rates come wildly down. Let’s knock wood that that happens, or doesn’t feel like it’s in the near future. So to give that optionality. But yeah, they’re looking much longer term than that, five years is the minimum term.

Dean Wehrli:

Do you expect them to for sure have an exit plan though, five years, seven years, 10 years, or could they just be indefinitely as long as this thing’s making money?

Stephanie Casper:

Yeah. So they’ll either have to refinance into a new, just depending on the term of the loan, or for folks that have a 30 year, they have a lot of runway, but I don’t necessarily expect them to have an exit in terms of getting out of the property. It just kind of depends on their investment horizon, especially on the institution, the more institutional, they’re often raised funds that have a certain horizon where they’ll have to exit or pay back their equity partners.

Dean Wehrli:

And you’re not locating or helping them find product, correct? These that’s on them. You’re helping them with the financing only, is that correct?

Stephanie Casper:

That’s right. I think we have aspirations, I would think most lenders do for that matter, of finding more ways to provide greater services to our customer base. And if the opportunity arises for sharing properties or pointing them in a direction, that’s something I think we would be super open to, it’s just not something we do today.

Dean Wehrli:

Okay. Let’s walk through the math. You kind of started to do it a minute ago, but I want to kind of understand, I know this is kind of something that you’re passionate about, is the math behind real estate investing, the kind of capital that’s needed for this, the right things and wrong things to do in a deal, walk us through that from your perspective.

Stephanie Casper:

So I think what’s most important to think about with investing in residential properties, whether you’re going to fix and flip it or you’re going to hold it as a rental property, is that it has to be unemotional. Most people when they’re buying a home to live in, it’s a very emotional purchase. And even though it’s a house, as an investor, you can’t allow that emotion to come into play. And so what I believe is the most important thing to think through is start with what is the return you want to get on your cash that’s in the deal and start there. And then as you find properties to assess, you’re going to look at all the costs associated with buying, fixing, holding that property in some cases, if it’s a rental, what is going to be the cash inflows and putting that equation together to make a determination on does it hit your investment threshold, your return on your invested capital.

It’s a business decision, it’s a quick and dirty Excel model that you can build, and then anytime you’re making that purchase decision, you’re using that model to back into how much are you willing to pay, given what you know or think you’re going to put into it, if you need to put anything into it, in order to hit that return threshold and just really kind of stick to that math. The interest rate environment is an input. The debt service you are going to pay is an expense line item in that cost equation. And so I have gotten a lot of questions over the last year or so, as rates have run up dramatically, 450 basis points in a very short period of time, does it still make sense to invest in residential real estate? And my answer is, yeah, if the math works. If it doesn’t work, then it doesn’t, but I can’t tell you what your investment hurdle should be. Mine could be very different from yours, and that’s okay.

When you think about owning rental properties, so it’s funny, I’ve had a conversation with my kind of newer sales folks, that a flip is basically taking all your profit within a 12-month period, whereas owning a rental, you’re taking your profit over a much longer horizon. Because not only are you getting the cashflow from the rental income stream, but you’re also getting home price appreciation and it might not happen all in the first year, it’s a little bit over time and a little bit over time and a little bit over time, and you just have to do the math based on what is your return threshold.

Dean Wehrli:

And you got to be brutal, you got to be cold and calculating.

Stephanie Casper:

You do. The one other thing I will say is assume everything’s going to cost more. I know this sounds really trite. Assume everything’s going to cost more and everything’s going to take longer. The 20% rule, I think is absolutely, it’s probably overly conservative, but it’s probably going to happen. And if it doesn’t, you’re in a great place.

Dean Wehrli:

Wasn’t there a movie, The Money Pit, a Tom Hanks movie?

Stephanie Casper:

Yes. I love that movie.

Dean Wehrli:

Shelly Long, I want to say.

Stephanie Casper:

It was.

Dean Wehrli:

That where it was kind of this, here’s the awful things that can happen.

Stephanie Casper:

Oh yeah.

Dean Wehrli:

How many clients have gotten divorced? I’m just kidding.

Stephanie Casper:

Oh, I’m sure. I mean, I actually think we have friends who have this amazing house, but it needed a big rehab and the husband said, “You know what, we’re just going to buy a different house because if I have to go through a 12-month rehab, we will end up divorced.” So I think there’s a lot of truth to that.

Dean Wehrli:

You mentioned interest rates, mortgage rates. Does the higher mortgage rate environment make it tougher though, to get to that return? I’m assuming it must. How do you hedge against that?

Stephanie Casper:

It definitely creates thinner margins. And so-

Dean Wehrli:

Are there tips, can you hedge against that, can you work, at least make that a little better through some tricks of the trade?

Stephanie Casper:

Well, that’s what everybody’s thinking is going to drive home prices down. So if you think about that math equation, if that expense line item goes up by, not double, but let’s say it goes up by 25 or 30%. If you think about, call it a year ago, I had customers being able to get interest rates at sub 9%, some even sub eight, and now they have to pay 9.5, 10, 11.5. That’s a big impact in that line item. But you’re backing into then what can you pay for the property? And so what ultimately occurs is that in theory, the price you’re willing to pay comes down so that you’re still able to make that same margin. I think people tend to stretch because they want the inventory and they want to do the deal, but if you don’t stretch, then you probably just do fewer deals.

Dean Wehrli:

Yeah. You mentioned a while ago about how important technology is to your platform, because it’s obligatory, now I have to ask you, are you using AI in what you do, are you planning on using more AI?

Stephanie Casper:

We do. We use AI and machine learning, internal, proprietary built stuff. And it’s interesting to see how the learning piece, because I am not a computer science person, I’m not an engineer. I come from kind of the business sales side person or personality type and focus, I can build a mean model though, I will say, financial model. But it’s very interesting to learn and see the outputs of our data science teams and how the models take in new data and adjust and continue to iterate. It’s pretty fascinating to observe and see the impact has been, is already fairly dramatic in our business.

Dean Wehrli:

Yeah. It’s a way to leverage and make us smarter and do things we didn’t know we could do before. So in that sense, I think it’s all positive. I know there’s lots of fear and loathing surrounding AI, but I think we’ll get a handle on it.

Stephanie Casper:

I know, we just all saw all those movies.

Dean Wehrli:

Terminator movies, I know, they are scary.

Stephanie Casper:

Terminator or isn’t there one called AI? Wasn’t Robin Williams?…

Dean Wehrli:

You know what, there was a movie called AI, but it was weird and sad and depressing and boring.

Stephanie Casper:

Totally.

Dean Wehrli:

I think I did see it.

Stephanie Casper:

I even think about the, what’s the one where … I can’t think of it, but it would spit out the ball and then they’d go get the person. I think Tom Cruise was in it.

Dean Wehrli:

I don’t know. Oh, I don’t know. I don’t know.

Stephanie Casper:

Anyways, sorry.

Dean Wehrli:

We’ll figure it out.

Stephanie Casper:

Sorry for the movie-

Dean Wehrli:

Welcome to New Home Insights Movie Hour, it’ll be a podcast spinoff we’ll do, we’ll do movies.

Stephanie Casper:

Perfect.

Dean Wehrli:

Let’s end with a minute or two on what’s up next for Kiavi. Anything big? Anything you might be thinking about it in terms of maybe economic expansion or into different sectors?

Stephanie Casper:

Yeah, look, I think we continue to develop and introduce new products, new loan products to meet the evolving needs of and strategies of our customers. And in this market we think about inventory being very constrained or existing inventory, there’s still a fair amount of opportunity for infill development projects, the last few lots in a home, excuse me, a subdivision. So I think we’ve started piloting some ground up construction stuff. I see us expanding there. We share from our customers they want to continue, they want to do those kinds of loans, they’d like to work with us rather than having to find another lender to do it with. So those types of things.

I think a natural extension for many of our customers is also small multi-family repositioning. It’s not that much different to fix a four unit than to fix a six unit or a 10 unit, so I envision us evolving there too. And then we have some interesting tech things on the distant horizon that we’re working through. But I could tell you, but then I’d have to kill you, I think.

Dean Wehrli:

You’re far away from me, luckily.

Stephanie Casper:

Lots of cool stuff happening.

Dean Wehrli:

Okay. That’s interesting. So it sounds like you might even, sort of the BTR world, the purpose-built built to rent world, you might lend on those kinds of communities, that scale?

Stephanie Casper:

That would be something I would absolutely love to do. I learned all about that and kind of helped launch that loan product at my prior company. It’s so cool to go kick dirt and see the big earth moving and the lot development. It’s just cool. So I think that’s really great. We are busy with the things that are currently in our wheelhouse, that’s not to say that it’s not somewhere on the horizon, but I think that would be great. I love that stuff.

Dean Wehrli:

Yeah. And you got to keep your foot on the throttle. I get it. Everyone does.

Stephanie Casper:

That’s right.

Dean Wehrli:

Right on.

Stephanie Casper:

I think it’s a time with the economy, everybody’s a little bit nervous, don’t be too spread out, don’t get too overextended, I guess is the word I would’ve used, and really focus on, and I think this is for real estate resi investors too, whether you’re a rental investor or a flipper, do the things you know and do them really well. Don’t get overextended, don’t stretch outside of what’s known and true for you in your business model. And I think that goes for a lot of how we’re thinking about things for our company too. What are the natural extensions versus pivoting wildly kind of in the next 12 months while we wait and see what the recession looks like.

Dean Wehrli:

So you’re not going to make movies about sad AI, I’m assuming that’s probably not in the future.

Stephanie Casper:

Not yet, no, no.

Dean Wehrli:

Okay. That’s probably good. Well, Stephanie, I really appreciate you coming on and tell us about what you do and also your take on the markets for fix and flip and the SFR space. It’s been insightful as always.

Stephanie Casper:

It’s been a ton of fun. Thanks again for having me.

Dean Wehrli:

Absolutely. This has been Dean Wehrli for the New Home Insights podcast. We’ll catch up again in a couple of weeks.

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