1 00:00:00,000 --> 00:00:06,000 Ever wonder what really happens behind the scenes in construction, real estate, and development? 2 00:00:06,000 --> 00:00:12,000 We pull back the curtain on the new home construction industry, the real estate market, and the trends shaping it all. 3 00:00:12,000 --> 00:00:17,000 Discover the stories, insights, and expertise behind the process of building a new home. 4 00:00:17,000 --> 00:00:22,000 Join us for Trust the Process podcast, and let's build something great together. 5 00:00:22,000 --> 00:00:29,000 Welcome back to Trust the Process, podcast that takes you behind the scenes on real estate, construction, and everything in between. 6 00:00:29,000 --> 00:00:35,000 Thanks for joining us today. I'm Krista, joined again by our resident expert, Michael. 7 00:00:35,000 --> 00:00:37,000 Love that. Love. 8 00:00:37,000 --> 00:00:46,000 And we're going to be talking today about subdivisions. So subdivisions specifically in terms of the build process and how that happens. 9 00:00:46,000 --> 00:00:52,000 We have, we're also going to introduce our sort of our highlight project of the moment. 10 00:00:52,000 --> 00:01:02,000 So Serena States is the home, is the community that we're starting, and we're going to introduce that to you and kind of be able to chronicle that as we go along. 11 00:01:02,000 --> 00:01:06,000 So giving you backstory and unfolding that as things happen there. 12 00:01:06,000 --> 00:01:13,000 So I'll let you jump in with an introduction to subdivision and we'll just kind of see, see how we layer that in. 13 00:01:13,000 --> 00:01:15,000 Yeah, well, it's a great intro to that project. 14 00:01:15,000 --> 00:01:16,000 It is. 15 00:01:16,000 --> 00:01:19,000 And I think it's an important component. 16 00:01:19,000 --> 00:01:26,000 The whole subdivision piece is a re, I mean, obviously everything that we do either happens within a subdivision or becomes a something that's right at some point. 17 00:01:26,000 --> 00:01:27,000 So in general, right. 18 00:01:27,000 --> 00:01:30,000 In a part of the whole situation. 19 00:01:30,000 --> 00:01:39,000 It is. I mean, it's, you'll never create more inventory without subdividing existing parcels and everything started off as a larger parcel. Right. 20 00:01:39,000 --> 00:01:44,000 I mean, it's the Louisiana Purchase was the single largest land purchase in 1804. 21 00:01:44,000 --> 00:02:00,000 So I mean, everything starts there and then it's sectioned out. So practically in practical sense, what we're talking about when we talk about in development, larger parcel existing infrastructure is always improved. 22 00:02:00,000 --> 00:02:20,000 And then dividing that parcel into more digestible home sites that can accommodate kind of your average suburban house that runs again from a 4500 square foot cookie cutter lot to a 25000 square foot estate style lot that can accommodate everything in between. 23 00:02:20,000 --> 00:02:26,000 So taking for instance, serene estates, a raw piece of land that is what's the parcel size on that spot. 24 00:02:26,000 --> 00:02:27,000 Two and a half acres. 25 00:02:27,000 --> 00:02:30,000 And then taking that piece of raw land. 26 00:02:30,000 --> 00:02:39,000 How do we get that piece of land, all of the infrastructure that happens to know how many homes will fit on it and what's going to happen within that window or what we'll put on that parcel. 27 00:02:39,000 --> 00:02:41,000 So that's it. I mean, that really is where it starts. 28 00:02:41,000 --> 00:02:43,000 You've identified the parcel. 29 00:02:43,000 --> 00:02:50,000 In this case, the parcel came to me with the landowners that wanted to do it as a joint venture and had the existing zoning in place. 30 00:02:50,000 --> 00:02:58,000 So you're looking at the parcel, is it a marketable area? Is it somewhere that can support a build to sell project? 31 00:02:58,000 --> 00:03:00,000 And what is the existing zoning? 32 00:03:00,000 --> 00:03:03,000 Is existing zoning something that can be changed as a builder in general? 33 00:03:03,000 --> 00:03:13,000 You're always going to see greater returns on the denser you go, which there's a push pull between the city, the residents and the builder. 34 00:03:13,000 --> 00:03:17,000 The builder is almost always going to skew towards more units per acre. 35 00:03:17,000 --> 00:03:26,000 Probably a session or an episode all on its own. But how does that zoning get initiated? Where does it come from originally? 36 00:03:26,000 --> 00:03:28,000 Okay, we'll save that. 37 00:03:28,000 --> 00:03:30,000 I wish there was something more than water in this. 38 00:03:30,000 --> 00:03:37,000 What it comes down to is it started after World War II and it was a push to suburbanize America. 39 00:03:37,000 --> 00:03:44,000 People had moved out of farms early part of the 20th century into cities for job opportunities, part of the Industrial Revolution. 40 00:03:44,000 --> 00:03:48,000 After World War II, we kind of saw a decentralization of the economy. 41 00:03:48,000 --> 00:03:56,000 And the Federal Housing Administration was created as part of the New Deal and that served to ensure mortgages. 42 00:03:56,000 --> 00:04:02,000 And without mortgages and the flow of money, there was no economical way to build. 43 00:04:02,000 --> 00:04:09,000 Previously to that, builders would take parcels in cities and build row houses, apartment blocks. 44 00:04:09,000 --> 00:04:21,000 There really was no zoning. That's why in older cities, you'll see a lot more live workspaces, kind of a mixture of low density, multifamily, high density, multifamily, high rises, commercial on the first floor, residential on the second floor. 45 00:04:21,000 --> 00:04:31,000 It's in suburbia that we're used to these shopping centers and zones strictly for gas stations, zones strictly for office, zones strictly for residential. 46 00:04:31,000 --> 00:04:40,000 So really everything kind of falls in that mold and that was the invention of the cul-de-sac, was post World War II. 47 00:04:40,000 --> 00:04:43,000 Great little back story. That's right. I didn't know we were going to go there. 48 00:04:43,000 --> 00:04:49,000 That's why I didn't either, but this could be its own episode. Maybe there's two parts to this episode and I'm not opposed to that. 49 00:04:49,000 --> 00:05:06,000 But that's kind of how zoning started and it was kind of up to the individual cities that could make their own zoning, but without having product that could be then insured by the mortgage market, federal housing administration, FHA. 50 00:05:06,000 --> 00:05:10,000 You really would have no economically viable way to develop that. 51 00:05:10,000 --> 00:05:22,000 So what it meant was the idea of building and selling multifamily pretty much went out the window because FHA made it really challenging to buy an apartment, which is what we rebranded as condos, but that's an apartment. 52 00:05:22,000 --> 00:05:27,000 You're buying an apartment. You own the air. You don't even technically own the drywall. 53 00:05:27,000 --> 00:05:30,000 And there was a period in time where apartments were being converted. 54 00:05:30,000 --> 00:05:31,000 Of course. 55 00:05:31,000 --> 00:05:32,000 So that you could sell. 56 00:05:32,000 --> 00:05:40,000 And that was as we decoupled from so federal housing FHA mortgages are not a huge part of the mortgage market in general. 57 00:05:40,000 --> 00:05:50,000 It's just that all the other mortgage lenders and people that buy mortgages, what we call qualifying residential mortgage or QRM, they pretty much mirror the FHA. 58 00:05:50,000 --> 00:05:56,000 It's easier to just follow their guidelines, even though it's not an actual loan from insured by the government. 59 00:05:56,000 --> 00:06:01,000 It's maybe insured by Fannie Friday's, you know, the people that buy up these mortgages and bulk. 60 00:06:01,000 --> 00:06:06,000 They're looking at mortgages that predominantly match and mirror the FHA guidelines. 61 00:06:06,000 --> 00:06:11,000 So with that, you saw a move towards single family. 62 00:06:11,000 --> 00:06:15,000 Most of town home where you own the dirt below it. 63 00:06:15,000 --> 00:06:23,000 What you touched on the condo conversions was as there was this huge flood of capital in the early part of the 2000s, which later led to the housing crisis. 64 00:06:23,000 --> 00:06:31,000 They ran out of homes to sell mortgages on so that like, why don't we convert these apartments and then people can get 8% mortgage rates. 65 00:06:31,000 --> 00:06:32,000 They're condos, they're cheap. 66 00:06:32,000 --> 00:06:34,000 That's a housing alternative. 67 00:06:34,000 --> 00:06:36,000 And it worked great until greed got the better of it. 68 00:06:36,000 --> 00:06:41,000 And then, you know, the music stopped and unfortunately, so I know we know the history. 69 00:06:41,000 --> 00:06:43,000 So it's taking a long time to come back from that. 70 00:06:43,000 --> 00:06:50,000 And what is challenging is that I understand the concept is you don't own anything but the air. 71 00:06:50,000 --> 00:06:59,000 So therefore you're completely reliant on the homeowners association taking care of the roof of the building, the exterior, all the infrastructure that goes to the building. 72 00:06:59,000 --> 00:07:00,000 I get it. 73 00:07:00,000 --> 00:07:01,000 I mean, it is a risky. 74 00:07:01,000 --> 00:07:02,000 Exactly. 75 00:07:02,000 --> 00:07:03,000 Yep. 76 00:07:03,000 --> 00:07:05,000 The parking lot, the roads, the curb, the car. 77 00:07:05,000 --> 00:07:06,000 Common areas. 78 00:07:06,000 --> 00:07:11,000 If you get sued because a lot of these places have gyms and amenities, someone gets hurt at the gym. 79 00:07:11,000 --> 00:07:12,000 They sue the HOA. 80 00:07:12,000 --> 00:07:15,000 And if you own in that, you're actually being sued fractionally. 81 00:07:15,000 --> 00:07:17,000 One 200th of that lawsuit is towards you. 82 00:07:17,000 --> 00:07:21,000 Even if you sue your own HOA, you're suing yourself as a fraction. 83 00:07:21,000 --> 00:07:22,000 Right. 84 00:07:22,000 --> 00:07:23,000 So I understand. 85 00:07:23,000 --> 00:07:29,000 And on mass and in scale, and you're, you know, you're, you're, you're guaranteeing mortgages. 86 00:07:29,000 --> 00:07:34,000 I understand why you'd say, okay, well, if we have 30% of our mortgages on the books, that are all condos. 87 00:07:34,000 --> 00:07:35,000 It's risky. 88 00:07:35,000 --> 00:07:37,000 At least townhome, you own the dirt. 89 00:07:37,000 --> 00:07:41,000 You have some communal shared walls and some shared spaces, but it's a lot less risky. 90 00:07:41,000 --> 00:07:47,000 But overall, the, the, the market will go towards the least risk, you know, their risk averse, right? 91 00:07:47,000 --> 00:07:48,000 Right. 92 00:07:48,000 --> 00:07:49,000 Investors are. 93 00:07:49,000 --> 00:07:50,000 Yeah. 94 00:07:50,000 --> 00:07:54,000 So they're looking at single family home sites and they're saying, well, we want single family because you're in control. 95 00:07:54,000 --> 00:07:59,000 You might belong to an HOA, but the main is of your home is controlled by you and you alone. 96 00:07:59,000 --> 00:08:00,000 The HOA might control the gate. 97 00:08:00,000 --> 00:08:07,000 They might control some of the common spaces, but the liability of the HOA and the responsibility of the HOA is so much more manageable. 98 00:08:07,000 --> 00:08:12,000 Therefore, lenders and people that invest in mortgage backed securities are more comfortable investing in those. 99 00:08:12,000 --> 00:08:14,000 That being said, we're in a most city zone. 100 00:08:14,000 --> 00:08:17,000 They're going to zone and lean towards single family residential. 101 00:08:17,000 --> 00:08:21,000 You'll see some multifamily, but that's generally in most markets, especially Las Vegas. 102 00:08:21,000 --> 00:08:29,000 Most multifamily is built, rented, brought to, brought to 90% capacity and sold off to Wall Street in real estate investment trusts. 103 00:08:29,000 --> 00:08:35,000 And they're sold into part of your pension funds and part of your, your investment yields. 104 00:08:35,000 --> 00:08:44,000 And that's, you might own one, two hundredth of an apartment complex and not even know if you have money in a pension bond or if you have money in 401K, that's part of the REIT. 105 00:08:44,000 --> 00:08:49,000 So that's where you're seeing kind of how the zoning story was written. 106 00:08:49,000 --> 00:08:53,000 And now we're seeing the, we're still on those coattails to this day. 107 00:08:53,000 --> 00:08:59,000 So cities favor suburban sprawl because lenders favor suburban sprawl. 108 00:08:59,000 --> 00:09:02,000 And cities follow to, I mean, that's, that's right. 109 00:09:02,000 --> 00:09:03,000 You follow the money. 110 00:09:03,000 --> 00:09:04,000 Right. 111 00:09:04,000 --> 00:09:07,000 And what that, what that is to a city, they love it. 112 00:09:07,000 --> 00:09:10,000 They only have to maintain the main backbone roads. 113 00:09:10,000 --> 00:09:15,000 And now they're almost exclusively wanting HOAs to be generated as part of the subdivision. 114 00:09:15,000 --> 00:09:24,000 So if you're developing in Las Vegas and many jurisdictions, I'm sure mirror this, if you're developing more than five acres, you have to form some sort of an HOA. 115 00:09:24,000 --> 00:09:26,000 Otherwise you have to do an HOA exemption. 116 00:09:26,000 --> 00:09:34,000 And the reason they do that is because then the homeowners are responsible for all the improvements from the initial subdivision onward. 117 00:09:34,000 --> 00:09:36,000 So you're not building exact. 118 00:09:36,000 --> 00:09:38,000 That finishes and the builder steps away. 119 00:09:38,000 --> 00:09:39,000 That's right. 120 00:09:39,000 --> 00:09:45,000 Once a builder steps away, now the homeowners are holding the bag, which is fine because you're, it's kind of a small city on its own. 121 00:09:45,000 --> 00:09:52,000 So if your HOA takes really good care of you're, you're not, you're not beholden to the city to maintain your streets and you're invested. 122 00:09:52,000 --> 00:09:53,000 Exactly. 123 00:09:53,000 --> 00:09:56,000 So if you're in that HOA environment, typically tend to take better care of it. 124 00:09:56,000 --> 00:10:11,000 In general, you, yeah, as a, as, as a rule, now there are a few exceptions, but if you look at the way development and growth favors all of these things, it should be no surprise when you fly in to a major growing metropolitan area. 125 00:10:11,000 --> 00:10:12,000 It's all suburbs. 126 00:10:12,000 --> 00:10:14,000 And that's, that's the method behind it. 127 00:10:14,000 --> 00:10:20,000 And you look at a city like Las Vegas and you look at Charlotte, North Carolina, you look at Phoenix, Arizona. 128 00:10:20,000 --> 00:10:25,000 They maintain their main routes, which are usually getting subsidies from the department of transportation. 129 00:10:25,000 --> 00:10:28,000 They're getting state dollars if they're in the city roads. 130 00:10:28,000 --> 00:10:32,000 And, you know, there's a lot of money going into the pot for that road maintenance. 131 00:10:32,000 --> 00:10:34,000 And then once you turn into your neighborhood, that's on you. 132 00:10:34,000 --> 00:10:36,000 That's kind of how the city favors it. 133 00:10:36,000 --> 00:10:39,000 And it's a way to keep suburban city solvent. 134 00:10:39,000 --> 00:10:46,000 Because before that, if you look even 15 years ago, there was a fear that there was going to be this bubble. 135 00:10:46,000 --> 00:10:52,000 That the cities were rich when they were growing, but then when they had to maintain it, they were going broke, 136 00:10:52,000 --> 00:10:57,000 which is why a lot of Northeastern cities that don't have this model and those Northeastern dense cities, 137 00:10:57,000 --> 00:11:03,000 now density will save a city because you're getting all the tax dollars for a mile of road versus imagine how many suburban homes 138 00:11:03,000 --> 00:11:06,000 you can build on a mile versus how many apartment apartments you can build on a mile. 139 00:11:06,000 --> 00:11:10,000 If you look at that, how we solve that bubble were HOA. 140 00:11:10,000 --> 00:11:11,000 So that was a stop gap. 141 00:11:11,000 --> 00:11:13,000 How are cities going to keep approving? 142 00:11:13,000 --> 00:11:18,000 You're giving them a bill for road maintenance and improvements. 143 00:11:18,000 --> 00:11:21,000 And it's all fun and games for the first 20 years. 144 00:11:21,000 --> 00:11:25,000 But if you're in a cold climate, if you're in the Northeastern corridor in an area that is growing, 145 00:11:25,000 --> 00:11:28,000 let's say out of the DC metro area, maybe you're in Maryland, they've got snow removal. 146 00:11:28,000 --> 00:11:30,000 Who's taking care of all that? 147 00:11:30,000 --> 00:11:32,000 And that becomes a liability on the city. 148 00:11:32,000 --> 00:11:34,000 So cities have since gotten wise to it. 149 00:11:34,000 --> 00:11:41,000 And I think if it means we can grow and if it means that cities can stay solvent and it means more personal accountability from the homeowners. 150 00:11:41,000 --> 00:11:46,000 And it's kind of a pay to play thing that, okay, my HOA is a little bit higher, but my park looks really good. 151 00:11:46,000 --> 00:11:48,000 This isn't a city park. 152 00:11:48,000 --> 00:11:50,000 My gate is never in disrepair. 153 00:11:50,000 --> 00:11:52,000 I'm guard gated or whatever. 154 00:11:52,000 --> 00:11:58,000 You're, you know, and that's probably unpopular to some people, but at least it's okay. 155 00:11:58,000 --> 00:12:01,000 It's the highest form of accountability. 156 00:12:01,000 --> 00:12:02,000 I pay a little bit more. 157 00:12:02,000 --> 00:12:04,000 My neighborhood looks a little bit better. 158 00:12:04,000 --> 00:12:05,000 My values are a little bit better. 159 00:12:05,000 --> 00:12:09,000 And it kind of creates some stratification for better or for worse. 160 00:12:09,000 --> 00:12:15,000 There are definitely downsides to that, but I will say that it, it solved the problem because the alternative would be your city's broke. 161 00:12:15,000 --> 00:12:18,000 Your city can't maintain or your city doesn't want to allow new development. 162 00:12:18,000 --> 00:12:21,000 And then your housing values are higher because there's no supply of new homes. 163 00:12:21,000 --> 00:12:23,000 So it's a necessary evil. 164 00:12:23,000 --> 00:12:32,000 And I, the bane of my existence, half the time you asked me, if you asked me seven out of 10 days, what's the bane of your existence as a home builder? 165 00:12:32,000 --> 00:12:33,000 It would be HOA. 166 00:12:33,000 --> 00:12:39,000 And I think that's just dealing with them and dealing in each ways that I did not create and having to play by their rules. 167 00:12:39,000 --> 00:12:44,000 And even during the bill process, they're on us about various things and grievances and stuff after the process. 168 00:12:44,000 --> 00:12:45,000 That's right. 169 00:12:45,000 --> 00:12:46,000 That's right. 170 00:12:46,000 --> 00:12:47,000 Yes. 171 00:12:47,000 --> 00:12:52,000 So that's my, so I think that it's a necessary evil. 172 00:12:52,000 --> 00:12:57,000 So I think we should continue this on a second part of this episode and talk about subdivisions on it. 173 00:12:57,000 --> 00:13:05,000 Why they are the way that they are and why we even need to talk about densities and things like that and what goes into subdivision now that we have this background. 174 00:13:05,000 --> 00:13:08,000 So we should do second part of the episode. 175 00:13:08,000 --> 00:13:09,000 Later foundation. 176 00:13:09,000 --> 00:13:14,000 And we'll join you in our next episode as we talk a little further about it. 177 00:13:14,000 --> 00:13:15,000 Thank you. 178 00:13:15,000 --> 00:13:18,000 Thanks for joining us on the trust the process podcast. 179 00:13:18,000 --> 00:13:20,000 We look forward to seeing you again next time. 180 00:13:20,000 --> 00:13:21,000 Bye bye. 181 00:13:23,000 --> 00:13:26,000 Thanks for tuning into the process podcast. 182 00:13:26,000 --> 00:13:32,000 Make sure to follow us on Spotify to stay in the loop with the latest insights project updates and everything in between. 183 00:13:32,000 --> 00:13:57,000 See you next time.