Epcon Experts Series With Jad Buckman: Business Development and Financing

 

Jad Buckman, business development director at Epcon Franchising, discusses scaling and diversifying a home building business, financing options and more in this episode of the Epcon Experts Podcast.

“We’ve developed strategies to raise money from outside investors without divesting our ownership interest in our business. We’re able to share those with our Franchise Builders.

Host: Today, we’re joined by Jad Buckman, business development director for Epcon Franchising. Welcome, Jad.

Jad Buckman, Business Development Director at Epcon Franchising: Very happy to be here this morning.

Host: I want to start out with a question we typically ask everybody. From your perspective, what are the most important traits that are necessary for an Epcon Franchise Builder?

Jad: Great question. One we talk about very frequently. I think there are some common ones that are universally relevant to being a successful small business owner. In our industry, construction or related real estate experience is huge. Having project management experience end to end, directly overseeing a profit and loss statement, financial wherewithal.

I always like to throw in having hired and fired in the past. That’s always one of those things that is more difficult than people perceive it to be. Now, all of those obvious ones being said, the force multiplier is to be someone who can follow a system and to follow our blueprint in particular, especially when it doesn’t make sense, because that’s really when we look at our top Franchise Builders. They have common goal orientation to Epcon, and are hyper focused on following that model and not trying to reinvent the wheel.

Host: As we talk about the Franchise Builders with business acumen, talk a little bit about your business background and your current role at Epcon Franchising?

Jad: Sure. To get to where I am now, we have to start at the beginning. That happened my freshman year of college when I came home for the summer and needed a way to earn some money. I ended up working that summer for a College Pro Painters franchisee in my hometown of Rochester, New York.

What I saw was a young college guy executing this painting model, cashing two or three, couple of thousand dollar checks a week. All summer I kept thinking to myself, “This guy no smarter than me. This guy certainly doesn’t work harder than me.” That opened my eyes to this world of franchising.

The next summer, I dove in and operated a College Pro Painters franchise north of Bowling Green, where I went to school in Toledo, Ohio, and ran a successful painting business as a franchisee for the next two years. Was the entry point for me to this world of franchising. Now, ultimately, I put it on the back burner.

When I graduated school was in 2004, the market was doing great. I went to work for some major financial institutions for the first leg of my career. Did that until about 2010. Then as it was time to reinvent myself, found myself marrying those two things.

Having lived the franchise world, I was a perfect fit and took my first job as director of sales for a Midwest restaurant concept. Grew with those individuals, and after five or six years, was able to meet some of the representatives from Epcon, found a very unique business model, and have been very thankful to be here since.

Host: Number one, I hear you got some painting background. I need some painting at the house, so we’ll talk later.

Really, you talked about coming to Epcon. Talk about that, what attracted you to the company?

Jad: One of my commitments is personal development. I stay involved in many of the national learning organizations, and I met the then-leader of Epcon Franchising. In my mind at that point, I saw service brands, I saw restaurant brands. I felt like we had peaked the concept I was at.

I hear about this home building franchise, and I’m like, “Home building, what? How do you package that up?” As I continued to have conversations, it became very clear to me that this was a total blue ocean market where you had a great business plan, we just had to figure out some of the execution to take it to the next level.

I love a good challenge, and that’s where we are able to work together to come in and start tackling that project.

Host: Home building and land development franchise, there’s not that many out there, so I can understand where you’re looking at that a little strange.

Jad: Absolutely.

Host: Talk a little bit about what you do with Franchise Builders around the country. How do you advise them, how do you work with them?

Jad: I’m lucky to be able to start working with Franchise Builders very near their initial entry into the system. Between myself and the team, we help evaluate existing businesses and investors who are interested in joining the Epcon model, and then help them determine if it’s a great fit to come together and work on executing this locally.

I view my role as that person to remain on board as a consultant for them. I also spend quite a bit of time given my finance background working with our Franchise Builders around both horizontal and vertical construction financing. It’s a sounding board, sharing best practices, trying to help them navigate those waters.

Host: You’ve talked about a number of the Franchise Builders you work with have had amazing business backgrounds, amazing businesses already. Why do you think they decide to become part of the network?

Jad: Usually, it’s going to depend on their background, but there’s typically one of three things. They’ve either grown their business and this would be probably a custom builder, a remodeler or flipper, where they’ve built their business to 20, 30 homes a year.

They don’t have the resources or haven’t figured out how to get over the hump. They’re maxed out and they understand if they don’t make a change, they’re going to remain there and they want to be more.

The second group would be more of your regional production builders. These builders may be doing 50, 100, 150 homes a year. They’re focused on other parts of the market than we are.

For those folks, it is a diversification play and they’re able to take the Epcon model. Again, they knew what it took to get where they were to do that first 100. They’re looking at taking our product to add another business line that’s non‑competitive with that.

Then the last one are those peripheral real estate professionals, usually developers, multifamily folks, especially the developers. They realize they’re already taking all the risk for these communities to be developed, and they’ve got the opportunity now instead of passing this on to another business owner to bring it all in house.

Host: I’m hearing people who’ve reached a ceiling and where they’re able to grow their existing business and reaching their goals personally, professionally. They see there’s more out there and they’re trying to figure out how to get to it.

Jad: Absolutely.

Host: As you’ve said, you’ve got a business and finance background. I think you’d agree that securing capital is critical in these instances, especially in home building, because it’s needed to acquire land and start a new home building project. Can you talk about the challenges that builders face in this area?

Jad: Yeah. The problems tend to be pretty varied based on who we’re working with. For your custom builders who may have not developed before, it’s that lack of experience.

When they go to their financial institution to present a plan to develop 100 lots, they don’t have the tools and resources or the experience to build the confidence of the lenders who are going to move forward that way.

Another one for a lot of folks looking to scale their business are the big equity requirements. We’re talking 20 to 30 percent of your total acquisition and development costs for the land. They’re not sure how to navigate those waters.

Then sometimes other challenges include institutional lending limits, loan caps, how much do I need for vertical? Those are some of the bigger challenges that we come across frequently.

Host: Those are the challenges, but then how does Epcon help in those instances?

Jad: We can take for example, that prior development experience as the first one. How do we tackle that? How do we take someone who’s got a strong track record of building homes and help them understand how to secure development financing?

That begins in our orientation and onboarding, where we begin to give our Franchise Builders the opportunity to look behind the curtain. We’re able at that point to share with them full development proformas with horizontal costs from around the country.

Give them those tools and sample documents that they’re able to then customize for their individual situation, so that when they do go to the lender, they’re able to have a much more compelling conversation and are able to enter into that relationship with their eyes wide open. That makes a big difference.

The other piece there, are those large equity requirements, and we face the same thing. One of the great things about Epcon is we’re not just a franchise company. We execute this model now in six major markets across the country. Think of all the equity that Epcon has to raise.

Again, we’ve developed strategies to raise money from outside investors without divesting our ownership interest in our business, and we’re able to share those with our Franchise Builders and help them put themselves in a position to be successful.

Host: Epcon’s been there, done that and they’re able to relay that experience. Let’s continue on that topic. Can you also talk about some of the various real estate development financing options that are available to builders today?

Jad: There are dozens of options, I would say the most common for Epcon. You have to start the conversation by recognizing in our world, there are two separate components. You’ve got your development, so your land and putting the streets and infrastructure in, and then you’ve got the building of the actual homes.

On the development side, we’re typically using traditional acquisition and development loans. These would be a 30 percent equity raise, followed by interest‑only payments until development would start, and then equal principal repayments at closing.

There are also mezzanine and hard money nontraditional lenders. One of the interesting things that’s happened is, some of the markets have changed as you’ve got big institutional and family money coming in and investing in projects all over the country.

Host: Let’s talk about funding vertical construction. That comes with a different set of challenges, correct?

Jad: It does. Traditionally for builders, this is one of the areas where they struggle, typically a little more before they come in and they understand the Epcon blueprint. Especially in the market we’ve been living in, there has been a lot of spec building going on.

In a spec building scenario, your builder goes out, builds the house from the ground, they finance it and then they go try to sell it. That requires a good equity component for each one of those builds, and you’ve constantly got the bank watching how much money is out there.

That’s the first component that’s difficult for builders outside our model. Epcon, although we do spec a bit, we’ve historically been a pre-sale model. That is to say that we’re going to go to market, we’re going to sell a house and then we’re going to build it.

When you look at the way that we specifically go to market with our community launch events, we’ll go into a given market, put a marketing campaign together and bring potential buyers in, even before we have anything to show them. This leads to refundable deposits on lots. Those roll into a percentage of then firm contracts.

In that way, once we’ve gotten through the development process, we’re going out and we are able to start those first four or five‑customer builds alongside our model and it gives us a head start. From a financing perspective, historically to today, we’re still seeing 85 to 90 percent of our hard costs being able to be funded for each one of these builds.

You consider a 10 percent down payment, very little of our builders’ equity are in those vertical starts. Creates a much better environment.

Host: I’m sure that’s a little bit different than what builders are typically doing today.

Jad: It is. The other scenario or area where I think folks struggle…Say you’ve got a pretty successful custom builder, most of them would have, “I’m building you a house, Rob. You’re going to go get a construction loan. Then I’m going to deal with your lending institution, and deal with the draw schedule.”

That’s all fine and good for me building you a house, but what happens when I’m building Rob a house and Megan a house and Peter a house and Joe a house? You need a small army of accountants just to manage all the different draw schedules.

The simplicity that we provide in that area and frankly, the confidence to the lending institution that we’re going there with a firm contract, a down payment and proof of funds or an approved mortgage to close, gives them a high level of confidence that they can hang with us on the vertical side.

Host: As you look to scale any business, simplicity is very handy.

Jad: Absolutely.

Host: Jad, when it comes to money, we know obtaining financing can be difficult for any business, especially if they don’t have a proven track record. Talk a little bit about how Epcon helps in that regard?

Jad: It’s two-fold. First, our Franchise Builders, it starts at the planning commission before financing even starts. They’re going to go and say, “I’d like to develop this community of Epcon homes.” It’s not the first Epcon community that’s being developed, although that municipality may not be familiar with it. It’s the 451st.

Same as you move to the bank and to the customer, it’s not the first home that this Franchise Builder has built, it’s the 35,000th Epcon home. That creates an area where it opens doors and it gives a different perspective to those people that we are working with externally.

I’ll add that on the vertical side in particular, once the acquisition and development financing is approved and in place, the pre-sale event that we have when we go to structure our vertical line of credit, if we’re able to take them 5 or 10 pre-sales, whatever the number happens to be, it gives that bank a level of confidence that, “Yes, this has legs. This is going to happen.”

That’s a critical component to ensuring smooth operations there.

Host: We talked a little bit about development, home building, financing. Let’s talk a little bit about the buyer. In terms of financing their home purchase, can you talk about the 55+ demographic and how it’s a bit different?

Jad: When we look at the opportunities so far as the market is concerned, it gives us some unique advantages when facing some of the cost‑related challenges that we’ve been facing in recent years. Given the strength of our demographic, we have a high percentage of buyers who are cash buyers.

There are programs such as the Home Equity Conversion Mortgage program, Fannie and Freddie backed. That gives buyers 62 and over the ability to buy a house for a roughly 50 percent down payment, and never have another payment besides their taxes and insurance as long as they live in the home.

It puts us in a position, the strength of the market to gain market share, because we just don’t have as much influence from some of these outside factors.

Host: If you’re used to building custom homes, first‑time buyer homes, move‑up buyer homes, if you’re thinking about exploring the 55+ market niche, there’s a lot of opportunity that maybe the others don’t know.

Jad: Absolutely. When I ask builders around the country why maybe they haven’t looked at it, they may have an idea that those buyers they’re not at work, so they’re hovering over their job sites and potentially more difficult to deal with. They’ve also been through this before.

They’ve had high interest rates before, they’ve built homes before, so they understand. It is an opportunity that most people come around to understanding.

Host: Jad, as you go around the country and talk to builders, I’m sure a number of them have a feeling like, feels like 2008 all over again. They talk about maybe they’ve lost everything or they knew people that lost everything during the Great Recession. Can you talk a little bit about how 2022 is different than 2008?

Jad: Yeah. There’s a lot of those undertones going on throughout the market right now. Most of the folks who are bringing that up are actually not invested in real estate developments at this time. It’s more of what they heard about from other folks. I think for certain land prices have gone to all‑time highs.

The cost to develop land has run up to all‑time highs, and the national builders are holding a bunch of land. Some of those worries for someone who didn’t practice appropriate risk mitigation and was sitting on 10 projects when they should be sitting on 2 probably has some reason for concern.

By and large, we look at even the Epcon history. You could give three good examples: McKee Homes in North Carolina, you’ve got Ladera down in Texas and Perfection Builders in Kansas and Louisville. All three of those builders came into Epcon between 2007 and 2010.

They are now some of the biggest players in our business, and it’s not lost on us why. Because what we’re going to begin to see, the landowners may not have gotten the message yet that their property was fully valued last year, but as soon as the nationals have to start reporting financials, they’re going to be looking to get land off the books.

We’ve got developers who’ve been able to charge whatever they want. They’re going to realize they have to tighten up their belts. It’s the best time to acquire land, tends to be in the dips, and the best time to sell homes tends to be when things are going up.

While someone in a bad position now may have reason for concern for people evaluating this opportunity or you’re looking at the land pipeline and realizing there aren’t a lot of options, there’s probably no better time than sometime in the next 6 to 12 months.

Host: I’m sure that works with trades as well. As things start to slow down with other builders, trades will become more available.

Jad: We’re already seeing it, where we’re back to being able to have trades hold prices for longer periods of time. A lot of the big guys had gone almost exclusively to spec-ing homes. Lenders are taking note of that and lenders with a bunch of spec homes on the ground, they’re rightfully feeling 2008‑ish.

It is a great time, and I’d say that to any builder who’s listening to this right now, it’s a great time to go back, remind your trades why they do business with you and do some negotiation.

Host: We should talk about prices going up. That’s been the case for the last two years, is costs for building and construction have escalated. Epcon can help in that area, can they not?

Jad: Yeah. We’ve got a great national purchasing manager, who came to us from Pulte, one of the biggest nationals on the stage.

He’ll come in and share what we can do from our national account partner perspective, but take a consultative approach and look at how our Franchise Builders are purchasing and help them ensure that they’re not leaving money on the table that way.

Host: That’s great, so you can be able to negotiate on behalf of all the builders all across the country and bring that power into play.

Jad: Absolutely.

Host: I’m sure when you’re talking with builders across the country as well, the R‑word, “recession,” is coming up. What’s your take on the state of the economy right now, and what is the conversation you’re having with builders?

Jad: The recession word, everyone’s scared to say. You just said the R‑word, that which we will not name, but I think for the majority, it’s fear. No one is projecting housing values to crash. They may not triple in value every three years as they have, but we’re getting back to a place where you’ll have a little more time on market for those existing homes.

Going to have a little leveling of pricing, but we’re still, depending on what stat you want to read, a million, two million homes under‑built in this country. This is an opportunity to gain market share so far as I’m concerned.

People who have gotten away from those fundamentals that helped builders be successful through the recession, pre‑selling homes. They’re going to have to make major adjustments to their business to come back to reality and be able to play over these next months and years.

Where we’re positioned, we’ve got a good opportunity to claw out of this and come out of this and come out bigger and stronger than before.

Host: Another way to look at what’s transpiring in the market today is it’s a return to normal. The past two years have been burning red hot. When you slow down from 100 miles an hour to 80, feels like you’re going slow but it’s back to normal. Would you agree?

Jad: Yeah. That’s a great point. We talk to builders all the time. We may have been selling four to five homes a month. Now, oh my goodness, we’re doing two instead of four. Those same people would have been screaming hallelujah for doing two prior to that, so I think that’s right.

Building a sustainable business is all about even-flowing production, building a proforma that’s not based on outlandish numbers. You would not be successful if you thought you were going to sell eight times as many. You built a model that worked, you did 200 percent of what you thought you would, you’re a happy guy.

It backs off, and you’re still running a very successful business.

Host: Let’s finish up and talk about how well you believe Epcon is positioned to help builders’ weather changing economic conditions.

Jad: Looking back through history, Epcon was founded in ’86, we’ve had four or five recessions depending on how many you count. We’ve been there, surviving, growing and becoming an even bigger player on the national stage through all of those times.

One of the things that first drew me to Epcon and one of the things that I’m most proud of working here is that we tend to be on the bleeding edge when it comes to product design, marketing, innovation.

We are well‑positioned and will continue to innovate. No one knows what’s going to happen at the end of the day with external factors, things we can’t control, but Epcon’s got a 35‑year track record of intimately understanding the business and having a solid grasp on the things we can control.

Host: Thank you, Jad. I appreciate your time today. Thank you for joining us.

Jad: Thanks, my pleasure.