Swimming with Giants: Olson Homes’ Strategic Approach in a Sea of Big Builders

Podcast
Scott Laurie and Olson Homes know that you have to be smart when you are one of the smaller fish swimming in the sea of big fish. You have to be nimble. You have to play the long game. You have to be omnivorous. You have to seek opportunity where others may not see it.

Olson Homes is a Southern California builder with a laser focus on what they build best and where they will sell best. However, the lessons learned from Scott’s experience as a small builder are universal.

Featured guest

Scott Laurie, Chief Executive Officer, Olson Homes

Scott Laurie is the President and Chief Executive Officer of Olson Homes. He joined the Company in 2007 and oversees the organization’s administrative and operating groups including strategic planning, acquisition, development, finance, construction, legal, and human resources. Under his leadership, Olson won the coveted Eliant Homebuyers’ Choice Award for Best Overall Home Purchase and Ownership Experience in North America in 2013, 2016, 2017, 2018, 2020, and 2021. Previously with KB Home where he held the position of Inland Valley President, Scott held various corporate and division-level executive positions in his nine years at the company. In the home building industry since 1996, Scott is currently a member of the Executive Committee for the USC Lusk Center for Real Estate, as well as a member of the USC Sol Price School of Public Policy and the Urban Land Institute Residential Neighborhood Council. He has previously served on the Executive Board of the Building Industry Association of Southern California, Baldy View Chapter, and has been involved in various other real estate organizations. A native of Southern California and a resident of Los Angeles, Scott earned a Bachelor of Science degree from the University of Southern California in Urban Planning and Development.

 

Transcript

Dean Wehrli:

Welcome everyone to the New Home Insights podcast. I’m your host, Dean Wehrli. When you’re a relatively smaller builder in a field that seems more and more to be dominated by the big guys every year, you have to be smart and nimble to survive. Olson Homes has combined tightly focusing on doing what they do best and also tightly embracing data and analytics to swim in this really ultra-competitive sea. So today we have Scott Laurie, he’s the CEO of Olson Holmes, and he’s going to share with us how Olson has survived and thrived as a relatively smaller fish in this big fishpond. And Scott, is that enough fish metaphors for you right there?

Scott Laurie:

Yeah, that’s a lot. But I like thrive better than survive. So I’ll sit with thrive.

Dean Wehrli:

Let’s do thrive.

Scott Laurie:

Sounds like a blog in the past.

Dean Wehrli:

As I’m talking, I’m realizing I got to stop talking about fish. So anyway, Scott, tell us first intro, first you, how you got to where you are and then give us first a big picture on Olson Homes. And then listeners, we’re going to talk to Scott about three large sections. One is product in place, what they do, where they do it, why they do it. The next is the market, gives us his take on what’s what the market right now specifically with the kinds of homes they build.

And then we’re going to end up, we’re going to talk about this data analytics. I just sort of teased where Olson is just really kind of cutting edge and looking at data and using data to do as best they can. Scott, start with you. Tell us a little bit about Scott Laurie.

Scott Laurie:

I’d be happy to do that. So I went to USC and got a degree in urban planning and development and went right into real estate. So when I graduated right before I’d started an internship with a master plan developer out here in Southern California and did that for a couple years and learned a lot on that end. And then went to work at KB Home during the Bruce Karatz time period. That was a while ago now because I’ve been here for 16 years. I had started right out of college acquisition and then went to KB Home as well, doing acquisition at the beginning of my career and then moved up the ranks there and ended up running a division called the Inland Valley for four years there. It was a great career and a really good time in my life to be doing what I was doing there.

As you may remember, this was ’97 to 2007. Those were pretty hard charging years. KB was in a battle for Lennar to see who would be at the top. Clearly the top has changed. Lennar is still there at this point in time, but it was a really good career choice for myself to be there. And I had a lot of great people and mentors around me during that period of time, which really influenced my career. And then I went to the Olson company. The market had changed in ’07. I did not see what I was doing as my future. And so someone gave me great career advice and they said, you should leave what you’re doing, which when you’re married and you don’t have kids yet, you can do that. And so I left and they said, you should really step back and focus on the next chapter.

And so I did that and it was ’07 and the world was changing very quickly, but I knew that the button pushing, lever pulling part of the business was not what was exciting me. And I was still in my early 30s. I said, you know what? I’ll find out what else is out there. And the person that spoke with me said, “You know enough people and they knew people and you’re going to figure this all out.” And they were right. And so I met with many different companies. I tell people I still have five offers. Those five companies don’t exist. I found the way in the Olson company and I met Steve Olson and we really hit it off and I think we had a simpler vision and it actually brought me back to USC and true urban planning and development, very different than merchant building.

Dean Wehrli:

And Olson company, very different model than that sort of mass scale KB Home. I mean that’s almost the opposite ends of a builder continuum in a sense, in product and in size to some extent. Is that fair?

Scott Laurie:

Yeah, I would absolutely agree. My division at KB Home, we were doing 1,600 homes and again, it was more of a merchant building philosophy. And what I would tell you, it’s a great model too. It works very well, but that’s high production home building and a lot of what I experienced and learned at KB, you could actually take high production home building and pull that into a urban infill environment to create more disciplined structure. And KB when I was there, was a very disciplined, structured company with a lot of process, which was good because you need those things to grow.

And sometimes in the private home building space, you don’t have the same type of structure. And that was something that was a real opportunity coming in to the Olson company to create that because I think that if you look at urban infill as one project at a time, it’s very difficult to grow that business. You have to look at what the opportunity set is in front of you, which is more of a bigger builder concept of can you take the same product and replicate it and do it in multiple locations and utilize the data and analytics to really drive that business forward for growth? So you have to be opportunistic in urban infill, but you also have to be strategic and have a growth.

Dean Wehrli:

So let’s start there. Let’s start with again, we will talk about sort of product in place and what you do, but let’s start at the beginning with what Olson does. What parts of the food chain of home building is Olson part of? Is it soup to nuts or entitlement, development? Or are you solely a merchant builder at the end of it buy and finished lots or are you throughout the process I guess?

Scott Laurie:

Here’s what I’m going to tell you, and this is how I’ve always described. This part of the business is the blank canvas. So either we are going to paint a masterpiece or it’s something that’s never going to get put on the wall. And I love that. And you do, by the way, there’s some public builders that do some of the entitlement, some of the development. They aren’t all just in the merchant building end of the business but it is a very different game plan because we come in and we’re doing the entitlement development and construction. We own the whole process all the way through and it is much more people and time intensive.

But to me that’s what separates us and that is the great value creator in our business. The model really doesn’t work in a public scenario because the one thing that’s hard to control types is the actual schedule of these communities going through the entitlement development and construction. We try our best. And there is another thing that could be brought from public building and structure. You have a good scheduling system, but you also have to have patience. And sometimes in a public world with analysts and shareholders, it’s hard to have that same level of patience. It’d be very difficult to build a public company out of urban infill opportunities in the just in time model. I think we’re pretty good at it. But if you wanted to be just in time, you’d miss a lot of opportunities on the entitlement side.

Dean Wehrli:

Especially in California where that entitlement process can just be so onerous and take such a long time that it’s even harder in California if you’re not patient.

Scott Laurie:

And by the way, that’s why homes are so expensive. Correct. And that’s why a lot of people don’t want to invest in California. There’s a lot of risks, there’s a lot of unknowns. What’s critical, it’s called portfolio management. You got to manage your portfolio, you have to understand risk. And again we have an incredible team. You know what we do, we create value. So you have to understand how to create value and a lot of the value creation happens in the entitlement. And so that is where I think we have a real strength as a company.

Dean Wehrli:

Do you think that actually helps you against some of the builders? That is, you’re so intently focused on infill locations and you’re in Southern California. We’ll talk about that in just a second. Do you think that kind of scenario that you just outlined kind of scares away some of those bigger players that we mentioned earlier and it sort of maybe helps you succeed in this area?

Scott Laurie:

Yes. I mean we have some good competitors in the space too. I think for all of us, most of the builders in the space are private. And I think what would scare me is different than … Or concern me. Not much is scaring me but what concern me versus other builders are two very different things. So in my public building world, you can write a check for $50 million, $75 million and you’re going to buy a bunch of blue-top lots or a super pad. And then you own up and then you’re going to be driven by the market. So you can’t control appreciation or depreciation. We don’t control that either. But what we control is the ability to option land.

And during that option period, which could take a year, it could take two years, could take three years, we’re getting a pretty good look at the market. And once you own the dirt, I haven’t seen someone go back to the seller and say, “Dean, we got this wrong. Can you give me $1 million back or 100,000, 10,000, 50,000?” As we get conditioned and things happen in a project, if markets go up and down, we can continue to have that conversation and everybody’s watching what goes on in the marketplace, whether you’re the seller or the buyer. That’s a different opportunity. And we are also getting to see the shifts in the market as we go.

Dean Wehrli:

Now you mentioned urban infill, so for the audience, let’s lay the groundwork geographically for them real quick. Where are the markets you’re working in? What’s your geographic footprint?

Scott Laurie:

So we have built all throughout the state of California and for the last 10 to … It’s probably been 13 years now. We have focused solely in Southern California, LA and Orange County. And when we started that, which was 2010 coming out of the last downturn, there were a lot of questions. Could you really grow the business just focusing on those two markets? And if you look at the number of people that live in those markets between Orange County and LA, I have 14 million. And are we looking at all those people? No, because we’re in the core, and when I say in the core, we’re in a 30-mile radius around our office. So we focus more in the coastal areas and we’re truly only in core LA, which are good markets, but just not for us at Santa Clarita Valley or Antelope Valley or the Inland Empire. In Orange County, we’re not in South County, we’re in North County. All you have to do is get-

Dean Wehrli:

For the audience, those a little bit more outlying suburban in this case actually mostly inland from those coastal counties in Southern California. Those areas that Scott’s referring to. So think kind of core – not just core CBAs, but core counties really, core major employment centers and population centers. Correct?

Scott Laurie:

That is correct. Where the jobs are, the job with the incomes to support our housing and transit.

Dean Wehrli:

The place that people commute into in the morning basically.

Scott Laurie:

And we want them to commute in here and stay.

Dean Wehrli:

So Scott, now for the listeners out there, we’re talking about Southern California where you work, the places where you work, the markets where you work, but how about what you do? That’s more generalizable. You focus on urban infill, correct?

Scott Laurie:

That is correct. And the way I would describe it, we’re taking the puzzle pieces and replacing them. There’s nothing new created here. We’re not buying ag land or orchards. There’s not these big vacant parcels we’re repurposing. So there’s always something that’s already on the land. Occasionally it’s a small vacant parcel that we’ll find, but usually there was something there at some point in time.

Dean Wehrli:

What are a couple of the funkiest things? I’ve done studies where it was a gas station. I mean, what are some of the strangest couple of examples off the top of your head that you redeveloped?

Scott Laurie:

There’s a few and what I could share with you is if there is not something ugly or concerning surrounding our site, there’s something wrong. So we will build along those power lines and freeways, and we used to do some of this at KB, and so train tracks whenever it may be, everything’s contaminated. So we do the cleanup, of course, as part of that. When I say everything pretty much there’s some level of contamination. And so we do a lot of the cleanup work related to that. So we found some interesting sites. Clearly over time, channels is another thing that we run into channels many times at the back of our project. So I’ll give you two interesting ones. One was if you’ve ever had sriracha hot sauce. So Red Rooster, we bought their facility, which was in the city of San Gabriel, and they had a building that went over a channel that was in the jurisdiction of the Army Corps of Engineers.

And it went over the channel and ended up in another city. So it was in Rosemead. So part of the project was in San Gabriel and part of it was in Rosemead. And so we decided to entitle the portion in the city of San Gabriel for 88 town homes. And then we decided to take the portion at Rosemead since it was a separate city and just cut the building over the channel and leave the portion of Rosemead and sell that as a industrial building. That I’m going to tell you, most people at our space aren’t doing it. Go ahead.

Dean Wehrli:

Scott, one second. Just for the listeners, you’re talking about a flood control channel, correct?

Scott Laurie:

That is correct. A flood control channel. And for the listeners, the city of St. Gabriel would be about a 20-minute, 25-minute drive into downtown LA headed west and is one of the most significant Asian markets, San Gabriel Valley, particularly city of San Gabriel, Monterey Park within the United States. And so that’s a significant buyer for us as well. So we acquired this sriracha hot sauce site, left a portion of an industrial building, which we then sold off and then built 88 townhouses. And there’s a sign, a plaque that we had made for sriracha hot sauce and it was a Wham-O Frisbees back in the day as well. Other interesting sites, we bought what looked like a runway on one side was a channel and industrial low rise. On the other side was the Alameda Corridor East Rail.

And so you had massive trains coming through. We had to build a 16-foot sound wall. And again, this is the part I love of our business. Our team does an amazing job. You got to figure out the solutions. You got to create value, got to figure out who’s going to live there, why are they going to live there. So we worked with our architects and created a pretty impressive site plan and had these little pods that went all the way down a quarter mile. I think we had 72 units and we had pocket parks to break it up in between. And it was one single loaded stream on one side where these pods and the other site was the railway and the engineer, one of those trains used to love to blow the horn. And so at the worst times possible. And I remember we’re just opening up and the salesperson’s like, “How are we going to sell there?”

I’ll tell you how we were able to sell there and what I’ll share with you, we have a partner in Oaktree Capital that’s phenomenal at understanding these deals and they know the market and their headquarters is based in Los Angeles. That’s a huge benefit. So we’re out there, we’ve opened up, it’s gated. We created this beautiful community. We typically will bring in feng shui consultants in the design process. We don’t bring them in at the end. That’s not helpful. We bring them in at the beginning and talk about good design principles is how I describe.

Here’s what was compelling about this site. On the other side of that train was a different, less desirable city. And how do I know it’s less desirable? As you and I have discussed, we look at school scores and crime and at that time, delinquencies. All these other factors that we’ll discuss a little bit here. And what we looked at is how do we create a better product, something new in cities that haven’t seen new product in 20 years? And what’s the value proposition?

Well, we were $100,000 below what was on the other side of the train tracks for resale product. And we ended up having a very, very successful community for that project. It did very well. And I think our absorption was close to seven or eight a month.

So one other project, and they all have Dean, but I’ll tell you, they all have a story and that’s just part of what we do. And there’s a history to most of the communities, the cities we’re building in and the projects. One of interest recently that we just completed working with the city of Compton, which is right outside of the city of LA and LA County for those that don’t know, there was a movie produced about the rap group, N.W.A. And so for anybody that ever saw that movie, there was a facility called Skateland. We ended up buying Skateland and there was a real history to this particular property because Queen Latifah and Dr. Dre and all these prolific artists had played at Skateland. And so there was an incredible story to that community.

Dean Wehrli:

Are you always concerned or do you frequently find that there’s just going to be shapes and sizes and those things you’ve talked about? What’s next to you? What’s under the ground? How about just the shape of the ground? Is that often a concern when you do an urban infill?

Scott Laurie:

It’s always irregular. Occasionally you’ll get a square, sometimes a rectangle, but you got to go in with it. It’s going to be irregular. And we have a really strong community development team and experience team and a really good set of consultants who help us work through that. Here’s the other thing that’s very important at what we do, and again, why a lot of people don’t want to go through the process. It’s painful and you have to have a high threshold for pain, which we do because we can see to the other side of what we can turn that blank canvas into and we can create something really special when it all comes together. And I think that’s a very important part of the process. You have to be nimble, you have to be flexible, you have to be able to shift a product. You have to be able to sometimes do a product that you may not have intended to do the first time around.

And to have that flexibility, that’s a cultural thing, that has to go through the company because frustration could set in very quickly when something’s not working. You have to have the mindset of we’re going to make it work. And then I’ll give you the other mindset you have to have. You have to know when to walk away. It’s not going to work. And I’ve seen many times the builders just can’t walk away and they have to get to the finish line and then the product gets built and the buyers don’t show up. So it’s important to know when to stop, which I think we do very well as a team to know when to all come together and figure something out to get it done because we could see what we’re trying to create. We could see what it can become if it’s stuck.

Dean Wehrli:

And you have a fairly specific product that you do. Correct? So does that enter into your equation? It’s like look, the shape of that, we’re fine with the irregular shapes we have to be, but sometimes our product just isn’t going to fit there.

Scott Laurie:

You know what’s not going to fit there for me and for our company? A luxury home. A podium. So that’s a no-no, no go zone right there. So we focus on two and three-story town homes. And it could go from 18 to 30 on the density. We do small lot detached. Maybe we’ll get down to 10, 14. There’s always going to be some density compared to the existing neighborhoods. But I think a lot of lessons have been learned by home builders in the past on going to debts and the requirements to do so. And we started with by comment on portfolio management, which is risk management. You got to be careful what you’re putting into your portfolio and you start getting the wrong deals in that portfolio and that can present some challenges going forward.

So we try and focus on the products we know, the products we have built before. We are able to replicate products in working with cities and we really know our floor plans, which I think is important because the one thing that you have to know in all parts of home building is how to underwrite. When you’re underwriting to something that may not have zoning, it becomes even more important to understand what that product is going to be or could be. You have to have a baseline and I think we’ve done a good job of creating baseline sets of architecture.

Dean Wehrli:

Are you focused on your product from things like cost? For instance, you mentioned podium, so you’re not going to do podium. Is that driven by the cost of podium or is it just that’s not what you do well?

Scott Laurie:

I think the challenge is with podium is it’s hard to phase it. It’s expensive. The financing is challenging. And, unfortunately, I’m going to say the percentage of construction defect lawsuits is very high. And I don’t think for us, we don’t get the return from something like that with the risk that we would be taking. And so what we try and focus on is products that we build well. As you may know, we’ve won the Eliant Award for customer satisfaction for seven of the past eight years. That’s something that every person in this company is incredibly proud of and an amazing achievement. You’re not going to see design awards. We build incredible designs. We want the awards from our customers. So it’s nice for people in the industry to get the design awards. Those are a benefit, but we want to know what do our customers think?

They’re the best critic and they’ve told us we’re doing well. So that helps out the products we’re building and what we’re building and who we’re building it for. And it goes back to the design because you’re absolutely right. There has to be a cost that works or you’re never going to build the project. And that’s where that underwriting is critical. And I know we’ll talk about this a little bit down the road. You have to listen to the buyer and I think that sometimes people don’t want to hear what the buyer has to say.

Your company does incredible job with NHTI. We were doing something similar when that landed on my desk, I’m like, oh, this is brilliant. So thank you for taking a lot of time and effort. You guys do an incredible job with that.

Dean Wehrli:

Of course.

Scott Laurie:

We read it. So there’s a big difference between something going on the desk and sitting there and actually reading it and understanding it. And you have a great team on that.

Dean Wehrli:

Now you said you have to listen to the buyer, you also have to listen to the cities, the jurisdictions that you’re dealing with sometimes. Have there been periods, please don’t name names, where the cities are trying to force you to do something you don’t want to do with respect to product or density or parking, something like that? Do you run into that when you’re an urban infill focused builder?

Scott Laurie:

So if you were doing urban infill, there’s two things I would share with you. One is you need to know how to say no. If you always say yes, you’re going to end up with a project that may not work for you at the end of the day, I don’t know, you have to figure that out your own, but you also have to have the ability and the wherewithal to say no when it’s time to say no. And what we do, we’re negotiating. You’re negotiating all the time. You’re negotiating with sellers and jurisdictions and commissions and utilities. Our whole life is a negotiation. I think our team does an excellent job in negotiating. And part of that is if you said yes to everything, the no part becomes when to walk away. You have to come to the realization because you described something great Dean. You said these sites, they’re compact and I said they were irregular, they’re tight. There’s only so much room to go. So what gets squeezed?

You’re getting squeezed on the margin and that’s not a city issue, nor do we expect it to be, but it is the company issue. I’ve described for years the business that we’re in is we do good things, really good things. We’ve got the awards for doing really good things, right? We’re selling homes in areas that many are not building in and I love what we do, but we do it for selfish reasons, which I’m going to say the majority of the people on this call do that, particularly if you’re a public home builder and the privates side of. And that is you’re doing it for profit because if we don’t have the profit, we are not getting the financing. The project cannot come to fruition and you’re not going to do it again. The one thing I could tell you with cities, we work with great cities. And it’s not me just making a statement. I’m not going to rattle off 10 different cities so that they can listen to this. It’s not about the names.

We go to cities that we’ve had experience in. There are certain cities that we have done seven or eight communities in the city. I could share with you, there are cities that have come to us and they’ve done the land acquisition for us and that hasn’t just happened once. And how are we able to do that? Nothing is more important. And again, this is not the builders that would be working with John Burns, but sometimes you’ll see where someone goes off and does a one off joint venture and they don’t build a great product. And what happens? The city says, “My God, we will not do that again.” Our attitude is we want the cities to say, “We want you to come back.” We recently had a city that literally at the hearing said, “Why can’t Olson Homes build all the projects in our city?” That’s what I want to hear.

Dean Wehrli:

Now sometimes though, what’s happening lately it seems like I’ve seen a lot of is cities are pushing for policy reasons really towards all the more density and sometimes the things they’re squeezing out is parking. As an urban infill builder, do you find that you have to figure out good solutions to those things like that? How do you get enough parking in a tight space? How do you get enough bedroom count, whatever, home size? How do you sort of solve for that?

Scott Laurie:

Yeah, and we’re problem solvers. So you’re a solution provider to cities. You got to be a problem solver. Parking is a problem. How is parking a problem? If a city did not want you need building in their city, they could fix that with parking. And there’s some ways to navigate around that. You have to understand the laws of what the cities want. There are a lot of cities that are flexible. There’s a lot of people that don’t want to build tandem parking. We know a lot of tandem parking. Do we prefer side-by-side? Sure. Most people prefer side-by-side. In one particular jurisdiction, we had to do four-car parking for a three-story townhouse. A lot of people would say we’re not doing that. We figured out a way to do it very successfully. It was one of the best projects we’ve done in a coastal beach city.

It was a home run and it would’ve been easy for us to walk away from that. We figured out a great way to do that in working with the city. Bedroom counts. One thing I have not done in my 16 years here and the company has not done, we’re now looking to do studios and one bedrooms. That’s just not something we’ve done at this point. And the value proposition I don’t think works great to rents particularly in an 8% or 7% or a 6% interest rate requirement. There’s specific places to do those things. It’s not great to a three-story town home product all the time. And again, you have to know the buyer. So where we’re building in our urban infill locations, we also don’t need to have four bedrooms.

So what we’ve tried to do is in certain communities we’ve done what I call the best of, where we have twos, threes, fours or what we want to do is have choice. Let’s do two bedrooms on the third level. One in the middle, one down. Let’s do three at the top. Whatever it may be, one thing we’ve learned is to offer choice in our communities, which a lot of builders don’t like because it can be more expensive on the architecture, the design, the consult, that’s et cetera. And it’s a different program for sales. We like choice.

And here’s one thing I’ll give you on the cost side that I find to be very important. It would be easy to tell yourself as a builder, we don’t do this, we don’t do that. We don’t want to offer these different floor plans. One thing I think our team is very good at is you also have to look at the bottom line. Okay? It’s not just what the top line tells you. What does the bottom line tell you?

And by that I mean sometimes if you can step outside of this thing, and that’s the great thing about our company, again, being nimble and flexible. We can step back and say, “You know what? We think there’s a real market to do this and have we done it before?” No. “Is it proven?” There’s not a lot of people that would say, “I really don’t want a four-car garage or I really don’t want a downstairs bedroom.” There’s certain things. Now what I can tell you is there’s certain markets that they are going to tell us, “I really don’t want a three-story town home.” We’re pretty good at knowing what those markets are, where not to build something even though you could be allowed to build it. And that’s the other thing I think that’s very important on what you asked.

Cities are not your land acquisition team or your community development team. They are going to lead you to a path of something they want. And sure, that may be great to do. They want more density. They want a five-story building. You want a three-story townhome or a two-story townhome. The five-story building might not be a good answer for that market. That may not be what the buyer wants.

Dean Wehrli:

Let’s talk about market then before and then we’ll talk about your data and analysis. What are the key fundamentals? You’re looking at potential sites, you’re looking at the city level, whatever. And this might bleed a little bit into your data analysis, but what are those critical fundamentals like job location, et cetera that you are constantly searching for?

Scott Laurie:

I’ll give you a good one. And I think sometimes people forget this or they just think it’s a word, affordability. And affordability may mean something very different to me and to you, but what does it mean to the buyers? What are the incomes in the immediate area to support the product you’re building? There is no conversation for the last, I’m going to say almost two years on buy versus rent. It’s buy versus buy. So what can you afford? In our markets, there could be a $2,000 or $3,000 spread to the rental market. So you’re not just able to say you could make the same payment. There has to be a real reason and you have to understand the market. How do you understand markets and urban infill? You need to understand your buyer, which we’ll get into. But more importantly, what’s the resale market and what is your spread to the resale market?

And a red flag to me is when we start getting really close to pricing on the detached side for attached or we don’t have enough spread on attached versus attached in the resale. And then you can get real complacent on these things that lull the sleep with my favorite conversation of oh, well the product is 70 years old. Okay, well that’s great. A lot of product that’s 70 years old actually has indoor plumbing now and electricity and has been updated and has marble countertops and all kinds of other things, et cetera. So you got to be careful.

So our team does a great job at analytics and throughout my career, the companies I’ve been at, they’ve always focused on that. And I love, love that part of the business. But you got to know in our world the resale market. And I think the other thing that’s really challenging right now is you have this massive new home share. And why do you have that? Because I’m not selling my house. I don’t think you’re selling your house. And so there’s not a lot of inventory. And be careful with which story line you want to pick. I think you got to go back to just fundamentals of a marketplace and not ignore what is Dean’s payment on a monthly basis.

Dean Wehrli:

It’s funny you say that. We have noticed that given the incredible scarcity on the resale market and in the very low months of supply, we’ve seen more market movement on the resale side in the same market, in the same time span than on the new home sites. You got to be careful when your “comps” as they’re going to be in your case just resales because there may not be anything remotely like you in the new home sector to comp off because it’s just not near enough to you and it has different product than you do.

Let me ask you about land acquisition. This is a weird question, but I know a ton of land acq people and just process wise, how are you finding those nuggets? When a city’s not calling you and saying, “Please build here.” How are you finding enough infill sites that are buildable to keep the pipeline?

Scott Laurie:

I wasn’t going to share this, but there is a 1-800 number for any land act people. I used to call this number and there’s a guy that comes and he drops off a bunch of books and flyers. They just…

Dean Wehrli:

1-800-INFILL22. I think that’s the number for…

Scott Laurie:

Load your pipeline up. And so that is one of the more challenging parts of the business. And again, this is easy to say. It’s all about relationships. Here’s the difference. Our relationships go back to patients. One of the best deals that we’ve done, two actually in coastal cities took five years to put together. Five years, okay? I don’t know a lot of builders, that’re going to wait five years. And so our head of land worked on these deals and he had them. He had them in his back pocket and he built these relationships. And I remember we had a meeting, he had to leave. The guy who owned this property who was older, he couldn’t change the light bulb in his garage. So he left our meeting to go down there to help him. get ahold of his son. And he called the person that runs our community development.

Dean Wehrli:

That is service.

Scott Laurie:

That is service. And you know the other thing? And I learned this from my days of acquisition, it was called wear your knee pads. Why would you wear knee pads? Because you are begging and praying.

Dean Wehrli:

I was worried there for a second but-

Scott Laurie:

I mean you still have the worry in your eyes. That’s where it’s, it is tough. I’ve done it. It’s tough to be in land act. What do you have to do? You got to work hard. Okay, you got to put the effort in, you got to build trust and you got to build those relationships to build your business. And the other thing is we’ve had times because our sellers could be anywhere in the country. You got to be willing to get on a plain. Another deal we had a major issue and I talked to our team. I said, you guys got to go out to Boston and find a way into this office building and get to the guy’s desk. They did it. We got the deal done. That is what it takes. And that hasn’t happened just once. So that’s a key part of it on sourcing deals. Get in your car. Our head of land always makes a good comment of go out on the freeway and take the surface streets on the way back.

Dean Wehrli:

Oh, yeah.

Scott Laurie:

Your viewers can figure out what that means. Our whole team here, we have a pretty good size team for urban infill. Everybody’s looking for land in our company and they’re always texting and emailing and did you see this? You just take a picture on their phone and you text it over the land team. Have you seen this site? Have you seen that site? Everybody wants to help find land. And it’s amazing when just being your car, particularly for urban infill, you have to open your eyes. We have bought more properties than you, Dean would drive by and say, no one would ever build a house there. And we drive by it and we’re like, “Oh, why wouldn’t you build a house here? And this is something we should try and figure out.”

Dean Wehrli:

Let’s talk about the market for a minute. How is the market right now specific to urban infill? Are you noticing more demand because you’re in these infill, more urban locations that are near the jobs? Are you seeing an increase in your buyer demand from people coming back and saying, “Oh my God, I can’t live so far out anymore because I go back in the office.” Are you seeing that demand pop up for that reason?

Scott Laurie:

No, they never left. Okay. I mean you got to think. How many people really left? And if they did leave, I don’t know, maybe they went to their parents’ ski house, but they’re back. And the question more becomes affordability and making that work. And guess what? Just like inflation, I used to love this transitory inflation, that always made me smile. Okay, would this transitory work from home, I don’t know. But now all you’re hearing is back in the office.

So again, and a lot of it comes from the company. But I agree with you, there are certain markets that were much more impacted by the work from home and now people are coming back. But where are people going? They’re going to go where the jobs are and guess what? You know this, job markets tightening up. There will be a recession. I’m not going to tell you when. I promise you there’s going to be a recession. Why? There’s always a recession. We talked about this. Oh, this time is different. Okay, well transitory inflation, that’s really different too.

Dean Wehrli:

Do you see the mortgage rates having any impact yet? I know it’s only been a very short time, but we’ve seen these mortgage rates suddenly … And by the way we’re recording this, Scott and I are doing this in late December. So mortgage rates have popped down here appreciably over the last week or so. It may be too early to tell, but do you think that has an impact going forward? Are you going to see some positive impacts from that?

Scott Laurie:

I do. We were in a world of volatility. Okay, what has occurred for 2020 during the pandemic period. Some people may say that were the post pandemic, which we’re coming out. We’ve been out the other side of this, but still there’s been more volatility from 2020 to 2023 in my opinion, than 2010 to 2020. Not even a question. And there were periods that you felt the market moving up and down. We had a scary 18 coming into 19 when rates went up. None of us have ever seen anything like this. Forget the pandemic that none of us at seen unless maybe you were 110, but we haven’t seen this. You want to know what it is? It’s exhausting. Okay? It’s exhausting. It’s like you’re here, you’re there, you’re everywhere.

But to be more direct to your question, John Burns and John does some great interviews and I love his monthly report. And for anybody wondering, Dean didn’t ask me or pay me to say this. It’s great.

Dean Wehrli:

He did not. I did not.

Scott Laurie:

I love the updates. And I am a fan of John. John had Barry Habib on. Barry Habib had a great call on inflation. He nailed it. I think he was right on inflation coming back down as we’re getting the last year and end of this year. And that’s been beneficial. But rates went up and when rates went to eight, that was a hard stop. And now all of a sudden you have rates coming down and they appear with where the tenure is. I think we’re 3.9 today. That’s an incredible move just over a month ago, right at around five. So it’s a big move down and interest rates have come down.

I’m going to tell you it has an impact even though it’s been quick. I am not going to tell you where it’s going to be a month from now. And you have a Fed now saying that they’re looking for to decrease rates. There aren’t going to be rate hikes for the moment. Who knows if inflation comes? There’s all kinds of theories and thoughts on all this. That’s all we’re doing today. But Barry made an interesting comment and he said that for every 100 basis points that rates go lower, there are 5 million new buyers that could enter the market. It’s pretty interesting. I’m not going to dispute that. Give me 2 million, but I think he might be right and the ability to purchase is what he’s talking about. But I think that his rates have come down. You have a lot of people that were sidelined either because they just said, I’m not going to make that kind of payment or I can’t afford it.

So that does help with affordability. But the thing that does not work is the complete lack of affordability because we had rates go up and prices go up. It doesn’t make a lot of sense to me. So we are so shallow in the pool right now, and people may not want to hear it. It’s the facts. There are not a lot of people that can afford to buy in our markets today, and something’s going to have to break here to widen the pool because at some point, there will be more inventory. And so we’re going to have to figure those things out. And it’s just a question of where we’re building. How can we get those buyers into those homes to make it affordable? What’s that payment need to be? Because the market, again, has become so unaffordable this year.

Dean Wehrli:

Do you think we will see things like toning down spec levels or decreasing home size, which both seem to be kind of trends lately, I think, to get to relatively more affordable prices? Are you seeing that and do you think we’ll see more of that?

Scott Laurie:

Already happening. If you haven’t been doing that for well over a year, year and a half, you’re late to the game and those things, we have margin improvement meetings. We’ve been doing them for well over a year, cost savings meetings. We were just doing frame walks for four and a half hours yesterday. It’s really dialing in looking at that product, trying to find the efficiency. You never ever want to do as you’re aware, you don’t sacrifice quality. But there is an absolute opportunity and spec level. You’ve heard the George spec creep. Certainly there was a lot of spec creep. And now you could easily say to yourself, “Well, the town home’s $800,000. I have to include this, that the other thing in my spec level.”

You really got to step back and understand your market and understand the buyer and understand what’s important. And we started this call and right now is a great time to listen. And listen to your buyers and understand what are those trade-offs because there have to be trade-offs for the buyer and there have to be trade-offs for the builder.

Dean Wehrli:

Now Scott, I want to talk to you about your data and your analytics. You guys look at data and like I said earlier, embrace analytics more than any other builder, or at least as much if not more than most builders. First let’s first talk about the why of that and then let’s talk about that. So why is data and analyzing data so important to you?

Scott Laurie:

It’s the one variable I think that can give us a competitive edge in the market. And so by understanding the cities, the buyers, what we call the who and work with a consultant very closely on that. And now what we’re focused on is the why. Who is going to buy here and why? And you and I can make up all kinds of things as to who’s going to buy here and why. Let’s look at the data. The data is going to tell us who lives in the area. What psychographic segments are they in? Why does someone want to live in one city versus another? What does it come down to?

So there’s a couple things that we do. We rank 168 cities against each other and that we break them down into the markets. And it’s a proprietary model that we created 12 years ago. So it would be very difficult for someone else to create it. Stuart Miller, he has a workshop of elves that do data. Lennar, I love what they’re doing.

Dean Wehrli:

That makes him Santa Claus.

Scott Laurie:

Yeah, obviously he is the Santa Claus of data. So for us, I don’t think many people, particularly privates, are ever looking at the level of data and spending the money. It’s very expensive to do what we do. They’re the return for it. And we’ve seen it in our communities and we have a very good track record. So I won’t get into it because I don’t want to jinx it, but we have a very good track record that’s proven this out, which allows me to say it works. It works. And it’s been proven in well over 70 communities that it works in.

Here’s what works. It’s understanding cities, the coefficients within cities, the incomes, the school scores, crime, drive times. And we load all this in with coefficients, run regressions and have a model of ranking. And it’s just paper in a spreadsheet if you don’t actually follow it. And it has led us to the water on many things. One, including a number one ranked city that I described before with the train tracks on one side and the channel and all these issues. We wouldn’t have even been looking there if the report hadn’t put it as number one. And I said to our land team, we need to be here.

And we went there and then we went to the neighboring city and we really started understanding what was happening in the San Gabriel Valley and to the level of … We even wrote a report myself and one of our consultants on the phenomenon that was happening there nine years ago. So we were really early on. How did we get so early on? Understanding the debt. And the other piece of it is, so you got to understand the cities and why people want to move into the cities. And then who?

That’s very important as you’re aware of, Dean. It’s that segmentation piece and understanding prism and not just saying someone’s number seven muddy brains or 12 Bohemian mix or great power. You and I are great power. So there are all the segments and understanding the affluence within the segments. And you’re not stereotyping people, you’re just trying to get the information because here’s what you do with it. You understand who’s living there, who wants to live there.

And then what you can also do, it’s a massive effort. We’ve coded many home buyers. So we understood who bought and what the segments were that they were in. And so then we know going into cities, here’s who was there before, here’s who’s bought, and then we can zero it in. And we do that very early in the process. So that is very helpful. And by the way, all builders have their data points, their analytics. And just things that we do. The other things that we do is we do something that I don’t think very many home builders do. We do home buyer focus groups.

Dean Wehrli:

Hold on. I want to tease out one thing though on the quantitative data first. I want to make sure I understand it. So again, you’re doing regression analysis, which is not common. So you’re putting these independent variables like schools and crime and things like that. What is the dependent variable? Are you doing price? Are you doing sort of the desirability of these cities? Is that what you’re looking to answer?

Scott Laurie:

Yeah, I mean that’s where it comes down to. So you end up getting a socio and an economic ranking and then you want to see where that comes out. And then what we would do is compare certain cities against each other. Again, it’s a decade long process that then by the way, it’s changed. Every year, we go through the whole process again, good luck for someone replicating this and everything. And we have outside control that, that do this along. We have some great people. We have two incredible analytics people that, again, I don’t think most privates are going to have within their shop. They love this stuff. I love it.

I think it’s very important to be able to, like we talked about listening, you got to listen to the data. You have to really do that. And then by the way, once you have it, then if everything’s pointing up, then you can use some gut instinct. But when thinking of pointing down, you can’t turn the needle to get it to point up. You have to listen to it and know when it goes back to what we started with. When do you walk away from something? I think the more inputs you can have, the better you could be at doing what we do.

You’re going to load yourself with knowledge. Load yourself with knowledge as much as you can know about that resale market, about that city, about that buyer, and we get down into the block. I want to know what’s happening on that block. And then the last thing, I’ll leave you on that. The other thing people forget, how about getting in your car and actually going out there and parking and start walking. Start walking, walk the blocks, walk the neighborhood, see how you’re feeling and start thinking about who’s going to live there and how they would feel.

Dean Wehrli:

Let’s end with this question. Tell me truthfully, have you ever had all of your quantitative data and even your qualitative, you mentioned focus groups a minute ago. Have you ever just said, you know what, that all says no, I don’t care. I have a gut. I’m saying yes.

Scott Laurie:

Never if all the arrows were pointed down, ever.

Dean Wehrli:

Interesting, interesting. That’s a discipline.

Scott Laurie:

There’s been times that not every arrow is pointing up, that there may be something we know in a particular market or something that’s changing in that market that you can’t quite put into the data. But if the other arrows are pointing out, related to things like crime and incomes, et cetera, those can’t be changed. But there are things that we know, related things that might be infrastructure or things cities are doing that are coming and remember what we’re doing today doesn’t come out of the pipeline sometimes for four years.

And so we’ve got to be able to look into the future. And the reality is you can’t do what we’re doing without the data. You can’t do what we’re doing without the people and you can’t do what you’re doing or what we’re doing without the knowledge. And you still have to have good instincts. So here’s the key to what we do. Every single day, and I love this and our company loves, there is some type of problem that happens every day. Okay, you better embrace that and enjoy it. And I love a challenge and that’s what we do. So you’re figuring out how do you unlock value? How do you overcome the challenges in these communities?

Dean Wehrli:

It’s kind of almost moneyball like in a sense except … but you’re the Oakland As a while ago. You’re not the Oakland As of 2023 for God’s sake.

Scott Laurie:

No. We’re the Dodgers. We’re going to pay $2 million a year and we’re going to take 68 on the fly. And I love the Dodgers.

Dean Wehrli:

They’ll be paying Shohei until what, 2060? I don’t know. But you know what? More power to him. Scott, that has been awesome. Thank you. Yeah, like I said, I definitely wanted to get to the data here. This was great because you guys look at data in a way I think is different than a lot of folks. And that discipline that you mentioned there, “Hey, if everything says no, you’re not going to say yes. That takes a lot of discipline, so I appreciate that. Awesome. Thank you so much for coming on, Scott.

Scott Laurie:

Thank you Dean. That was really great.

Dean Wehrli:

This has been the New Home Insights Podcast. I’m your host, Dean Wehrli. We will be with you in a couple of weeks.

 

 

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