Leadership

Mining City-Centric Scattered Lots As A Scalable Production Play

Tampa-based 3rd-generation homebuilding visionary Sharon McSwain's Domain Homes proves out an inner-ring lot financial acquisition model with vertical construction on the back end.

Leadership

Mining City-Centric Scattered Lots As A Scalable Production Play

Tampa-based 3rd-generation homebuilding visionary Sharon McSwain's Domain Homes proves out an inner-ring lot financial acquisition model with vertical construction on the back end.

June 13th, 2022
Mining City-Centric Scattered Lots As A Scalable Production Play
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Not assuming you already know is a powerful principle of focus."

A perfectly valid question today might go like this. "What's a line from a 50-year-old book about tennis doing in the lead of a story about a distinctly mid-2022 housing crisis and what vested and invested housing stakeholders might do about it?"

The quotation is quarry of W. Timothy Gallwey's The Inner Game of Tennis: The Classic Guide to the Mental Side of Peak Performance, published exactly a half-century ago. So what does that have to do with homebuilders and homebuilding as the financial markets whipsaw, financial policymakers flail at taming the twin-hydra of runaway inflation and spiking interest rates, and builders' No. 1 challenge feels first and foremost like closing on the homes they've already sold.

To start, some of us will recall 1972 – the year The Inner Game" was published -- as the eve of a mid-1970s period known for economic stagnation and corrosive inflation.

Mind you, the full-bore impact of the Baby Boom cohort's surge into a two-income household juggernaut was – at that very time -- supposed to be the driving economic force of the 1970s decade and beyond. Sound familiar?

It does in more ways than one to Sharon McSwain, a third-generation homebuilder who also just happens to have competed at a national level as a professional tennis player in an earlier chapter of her story, one that breaks ranks with tradition – as potential examples for others -- on both a personal and a strategic level.

Having come of age "with a tennis racket in one hand and a hammer in the other," McSwain and her team at Tampa, FL-based Domain Homes now compete – for local customers, local trades, local access to lots, and a local, regional, national, and global pool of investment capital as a strategic "zag" when most everybody else is "zigging." Domain, on pace to close upwards of 200 homes in 2022, at more than $100 million in revenue,  on a model that is 80% purchased scattered lots, and 20% build-on-your lot, is now looking for a capital boost to power expansion of its model to five new markets – Raleigh and Charlotte, NC, Nashville, TN, and Austin, Dallas, and Houston, TX.

Image courtesy of Domain Homes

On the "zag" path Domain Homes bears similarities to Orange County, CA-based Thomas James Homes, another fast-scaling production-semi-custom hybrid taking dead aim at inner-ring one-off properties. Earlier, we wrote of competitive advantages of a city-centric high-volume production builder style operational model here:

The model's "focus is inner-ring residential tear-down and infill on-your-lot projects, technology, zoning and building code data, and an operational template with reliably-low variability – being able to fly below the radar of custom home extravagance but above the fray and risk of new path-of-growth entry-level oriented high-volume development and building has emerged as a product, location, and pricing position fit to weather turbulence ahead.

That competitive edge's genesis, in this case, emerged in an entirely different geography and local economic backdrop from that of Tommy Beadel's growing scattered-lot production model, and from an entirely separate set of motivators for Sharon McSwain, who grew up in the Atlanta area, the daughter of a well-known and highly regarded couple of homebuilders, Dan and Elaine McSwain. As an elite athlete, lessons about channeling her own "inner game" have proved out the advantages of two of her business strategy's simple rules to "hit the ball where your opponent isn't" and "don't beat yourself."

That second rule came to McSwain out of an all-too common fate she suffered during the Great Recession, with her first homebuilding start-up effort. It was a company modeled very much like the firm her parents, and her brother Keith, had fashioned so successfully in an Atlanta market once full of independent operators playing the land, personally-guaranteed lending, and construction game.

We got it going, and then the market took it away," says McSwain, who made time to speak with The Builder's Daily last week. "That lesson in life we all went through in '08 and '09 was among the most valuable I learned in 37 years in the business. Part of the lesson we had to take from that time was that as all those properties and subdivisions went back to the banks in big groups of distressed bank-owned deals, you couldn't really know where the bottom of the market was going to be, and therefore how to price it. What if you paid 40 cents on the dollar, but found out later it wasn't worth 15 cents on the dollar. We had to look at something else."

If she was going to play her own inner game, and not beat herself, McSwain thought, she decided that with the next start-up venture, she might as well look to a business model that started from a different set of assumptions than the template her family had applied, and further, do it in a geographic market new to her. In other words, that first rule of engagement borrowed from McSwain's inner game mentality, "hit it where they ain't," was going to get its launch as a business pillar.

I thought, what if we buy five scattered A lots in Tampa, and apply all the principles and practices and land valuation disciplines and business modeling – from a costs and revenue standpoint – as though we were building through an endless supply of tract lots," McSwain said of the Domain Homes kick-start in 2010. "We created a product, built model homes, did the branding, the marketing, and offered a high-quality customer care experience, just as if we were doing greenfield subdivision and masterplan production building. We mirror the production model in so many ways – the due diligence is the same, the defined product array, the features and options, etc., but we've found a niche in the scattered, on-your-lot business model that sets us apart as a big gorilla in a smaller sandbox."

With that first five-lot "pilot" in 2010, McSwain began by picking up lots two or three at a time, and "turning" the inventory and returning on capital in a disciplined two-times annual cycle. Domain then reinvests the capital in more lots, and growing the scale, at first algebraically, then logarithmically, and eventually algorithmically.

In year six or seven, we realized 'wow, this is scalable!' and started wondering whether the same model approach would work in other markets," McSwain says. "We began – baby steps – with tests in satellite neighborhoods in St. Pete, Lakeland, and Sarasota, and discovered, 'wow, this same model can scale in these other markets as well!' That's when we started putting together a very experienced, land-savvy team who could help us zero in on the best location inside the city-centric rings. That team has now enabled us to introduce the Domain brand and business model to the Orlando market."

Key to the system's success, says McSwain, is data, which in the case of city-center single-family residential properties, has been built from the ground up.

"To pencil this business at scale and buy the lots on a one-off basis, you have to develop reliable analytics for your comps and valuations, and IRRs," says McSwain. "We went back to curb-level, old-school style statistical analysis – starting with a geographic square on a map, and comping out the properties, knowing every deed and every permit in that particular sandbox, and drawing the lines to create the valuation models on evidence. It's the most fun I've ever had – there's a lot of intellectual property in urban infill, and you've always got to be able to look at what's around the corner."

The opportunity for Domain is to template-ize and expand its model as a regional Southeast and Texas power player by leveraging the purchase of post-World War II homes, 800 to 1,100 square feet, on lots zoned as single-family city-center properties, says longtime big, national homebuilding enterprise strategic executive Jim Birkholz, who joined McSwain and the Domain team as ceo of the company in 2019. Birkholz notes that the Domain strategic braintrust of five top executives now weighs in at an average of 27 years, each with high-volume homebuilding experience, bringing production builder practices and discipline to Domain's scalable model of monetizing scattered lots like a real estate investment and acquisition fund with construction on the back end.

Birkholz, who most recently did stints as division presidents for Mattamy Homes and CalAtlantic (now Lennar), notes that a crucial advantage of the Domain land acquisition model is that entitlement, zoning, and permitting are a fait accompli for the inner city lots, eliminating time and other costs from the internal rate of return calculus for each of the properties in the Domain portfolio.

What's more, we're not out there competing with a dozen or more builders, investment funds, land bankers, and developers for the land we buy, so we're not part of bidding up the prices on them," says Birkholz. "The big capital's playing in the suburbs, and we don't play there. In a red oceans versus blue oceans context, we're doing what we do – bringing a suburban production mentality to non-contiguous lots – in uncontested markets."

Sky-high fuel costs, and a reality-check for work-from-anywhere and hybrid work models that have fueled interest in home purchases farther out from urban job centers, could add to a more favorable near-future growth opportunity for a Domain Homes model whose sweet spot on the land acquisition front is within city limits.

We have the systems, the financial and production teams for larger scale, and we have an operational and business plan that proves out above-average returns for the industry," says Birkholz.

What McSwain, Birkholz and the team at Domain Homes is pushing for now – at a time land investment pro formas for the next six- to 36 months may undergo timing shocks and stresses as demand gets sucked into a vortex of both high prices and mortgage rates that have derailed payment power for 10s of millions of would-be homebuyers.

Those strategically "zigging" teemed all at once – starting in late-Spring 2020, into greenfield tract-building with all the resources and capability they could muster. Whether it's for-sale or for-rent, they've been pouring in new neighborhood planning and construction investments disproportionate with the high-volume single-family development and delivery channel's capacity to pull those investments through an evenflow of build-cycle completions.

Now, the full throes of opportunity create steep slopes of risk and out-and-out crises for housing and real estate's heavily front-loaded speculative investments in a red ocean full of players in suburban greenfields. Those same throes of opportunity tip the playing field in favor of those whose position and skills apply where others are absent, saving money, time, and meeting unmet needs.

What’s unique and impressive about Sharon’s vision for Domain is that she leveraged her experience as a competitive athlete to drive her success with this innovative business," says Margaret Whelan, founder and ceo of Whelan Advisory Capital Markets, which Birkholz notes is working with Domain to explore capital options. "It would have been easier for her to stay in Atlanta and run a more traditional home builder. Instead she went to the deep markets of central Florida, new to her, identified this market need that was not being addressed, and thoughtfully proved out the concept."

Competing – individually and as a company – is part and parcel of McSwain's strategic play and her business cultural focus. It's clear, too, that part of the reason for her wins in business owe to what she learned from adverse conditions and rivals she's played against.

Once one recognizes the value of having difficult obstacles to overcome, it is a simple matter to see the true benefit that can be gained from competitive sports. In tennis who is it that provides a person with the obstacles he needs in order to experience his highest limits? His opponent, of course! Then is your opponent a friend or an enemy? He is a friend to the extent that he does his best to make things difficult for you. Only by playing the role of your enemy does he become your true friend. Only by competing with you does he in fact cooperate! No one wants to stand around on the court waiting for the big wave. In this use of competition it is the duty of your opponent to create the greatest possible difficulties for you, just as it is yours to try to create obstacles for him. Only by doing this do you give each other the opportunity to find out to what heights each can rise.”
Zach Kleiman, The Inner Game of Tennis: The Classic Guide to the Mental Side of Peak Performance

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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