This Week in Startups - The Next Unicorns: Adena Hefets CEO of Divvy Homes, forging a new path to home ownership | E1246

Episode Date: July 15, 2021

To kick off this season of "The Next Unicorns," Adena Hefets, CEO of Divvy Homes, joins to discuss how they are helping Americans blaze a path to owning a home (2:51), if we are in a real estate bubble (25:37), the American home shortage (34:53) and more!

Hey, everybody. Hey, everybody. We got an amazing episode for you today. Adina Hefitz is with us. She is the founder of Divi Homes. And she talks about how she is helping people go from renters to home buyers. And we talk about the entire real estate market and how it's changing in 2021 and how crazy it's been post-pandemic during the pandemic. And this is all part of the next unicorn season number three. Yes, you remember the first two seasons of the next unicorns. This is where we look for companies that are over $100 million in valuation, up to maybe $500 million, and we introduce you to the companies we think, my research team thinks, will become the next unicorns. That will go public, that you'll be talking about, let's say in 2025, 2024. So we like to look at our crystal ball

and say, hey, does this company have the ability to get to hundreds of millions of dollars in revenue and eventually billions of dollars in revenue? So we're kicking off our first season with this amazing episode about Divi Homes. It's a really, really interesting company. I'm in love with real estate and I love this model of letting people rent to own. Part of your rent goes towards a down payment. Really clever idea. And we need more ideas like this so that people here in America can go from renters to homeowners, which becomes a beautiful way for people to move up into the next strata, the next stage in life where they can have wealth accumulate and we have more economic equality here in the United States. If you want to see previous seasons of our next

unicorn series and track this one, you can go to this week in startups.com slash unicorns. Okay, let's get to it. Stick with us. Season three of the next unicorns is brought to you by O-DU is a fully customizable and fully integrated suite of business apps that lets you build and scale your stack as you build and scale your business. Your first app is free forever, and right now O-Doo is offering $1,000 off your first implementation pack at O-D-com slash twist. That's O-D-O-O-O-com slash twist. Drata Don't let requests for SOC2 compliance reports slow down your business.

Use Drata to stay ahead of the curve. Go to drada.com slash twist for 15% off. And LinkedIn jobs. A business is only as strong as its people, and every hire matters. Post your first job free at LinkedIn.com slash unicorn. Adina Heffitz is with us.

She is the founder and CEO of Divi. Divi Homes is a on-ramp to home ownership where people can rent and then eventually own. Users pay, I think, one to two percent up front. Divi pays the rest and then the person pays Divi a monthly rent and puts aside like 25 percent of that towards a savings that could be used for the future purchase of the home. what a brilliant idea.

Adina, welcome to the program. Did I get that right, the description of basically what you're doing? Better than I can, Jason. Thank you for having me here. Okay. So how did you come up with this idea? And then how many homes have you bought on behalf of your renters? Sure, yeah.

So when I came up with the idea for Divi, it was really based on a couple of things. Personal experience and then understanding the market. From the market side, let's start with that. I saw that we had just made it out of the global financial crisis. If you looked at the rates of homeownership, they were at all-time lows. And I thought, you know, people can't get mortgages. There has to be another option that we can offer them. And so wanted to figure out a way in which people could buy into the equity of homes

without taking on a massive amount of risk from a credit lending perspective. And so making them into a renter, letting them buy into the equity, sharing in the appreciation, um, seemed to seem to be a good idea as a way to start. And then more on the personal side, my parents, myself, I couldn't get a mortgage. My dad, when he had immigrated to the U.S., couldn't get a mortgage. Him and my mom had actually just gotten married, just got pregnant, and they were looking for a house, couldn't find one. And then ultimately they found a lovely woman who was willing to give them seller financing on a home.

And that house became my family sole source of savings and wealth. And eventually my dad had a credit score, refinanced that house with a mortgage, and was able to take cash out and use that to pay for me and my three siblings to go to college. So from a personal perspective, yeah. Yeah, personal perspective, I get the value of homeownership. And then from a business perspective, I think the market was pretty in an interesting and unique spot to actually disrupt it. Great. And so when did you start the company?

And then how many homes have been bought this way? So we founded it in 2017 and then started purchasing homes in 2018. We don't publicly release how many homes we've purchased. But I will say there are. dozens, hundreds. Thousands. Thousands. Okay.

That was my next goal post. Thousands of homes. Yeah. Wow. Thousands of homes. Now, is there a certain value of homes and an ideal customer profile here? Because if I remember correctly, you brought up the great financial crisis, which was, in fact, caused by people who maybe traditionally shouldn't have had a home buying a home.

And here you are saying, we're going to help people who traditionally wouldn't get a home and buy a home. So how is it different than what got us in trouble last time? That's a great question. Well, to your first, your first question is we serve 16 markets. We are not in San Francisco and New York. I always joke we're not solving for the problems of the coastal cities and the Bay Area folks, but instead from middle America.

You're not here to solve coastal elites and NIMBY madness. We are solving the problem for the rest of America. So our markets are Dallas, Houston, Atlanta, yes. And our average home price today, it varies by markets. So someplace like Dallas, where maybe $350,000 home. Some place like Cleveland will be $150,000, but it averages to call it around $250,000. And in terms of your more provocative question, which I very much enjoy, we actually, when we first fundraise, we got this question where someone asked if we're the new subprime, which I think kind of got to your question. I mean, I kind of know the answer, but I'm asking on behalf of the audience.

Yeah. Yeah. Yes, I understand. So just to give you the audience a little bit of context, for the 20 years before the global financial crisis, underwriting requirements were much looser than they had been in previous times. That's why when you think your parents got a starter home really easily, that's because they did.

And it is much harder for you to get a mortgage today than it was for them to get one 20 years ago. That obviously led to the global financial crisis. underwriting tightened and became very restrictive after that. So the average FICO that you needed to actually get a home went from somewhere on average around 700 up to about a 740 FICO, right? And so all of a sudden there's a ton of people who maybe can access homeownership. Now, the difference between Divi and what had happened during the global financial crisis is during the global financial crisis, you were extended debt. You were giving credit a mortgage. Dibby is very different. There is

no debt. I'm not lending you anything. You are a pure renter in the home, which is what you would have been if you weren't owning anyway, right? You're an owner or you're a renter. It's one or the other. So you're a renter and you're not actually an owner and you're just buying into the equity of the property. That is pure savings. That is not debt. Those savings are the same way that you can save and put your money into the S&P into a 401k, into other things that compound and appreciate over time. So the difference is we are not lending to our consumers. And instead, we are basically a four savings mechanism in an asset that appreciates and compounds their wealth over time.

Correct me if I'm wrong here just to bring up Nassim Taleb, you have the skin in the game. You are buying these homes yourself, so you are on the hook for the home. As opposed to in the financial crisis where you had these financial instruments and sharky, you know, low moral character, people signing up, let's face it, first time home buyers who maybe weren't as educated as they needed to be in starting what doc, and depending on what. documents they signed, they didn't know what they were signing, and putting them into instruments they should never have been in, but they didn't care because they were just getting the commission and they were done.

Yes. If you were to do something like that, you're the bagholder. Yes, we are fully the bagholder. So we're buying the homes. The risk, the assets are being purchased fully by divvy. We buy them with part equity and part debt. We are responsible ultimately for that debt. The renter that we're putting into the house is purely just a renter that's building equity

in a synthetic equity account in a ledger, right? And so we are the ultimate owner of the house and we are on the hook for all the homes that we do purchase. All right. So we had this scenario of the $350,000 home in Dallas, 30-year mortgage, 3% APR. Monthly payment would be 1264, 1265 for that. What do you charge people then if they didn't have to put a down payment down, right? They're not putting a down payment down? You put the down payment down.

So then what would the rent be on a house like that? If we took this prototypical one that you outlined. So I'm going to use easier numbers than your 1264 and just say, let's say on average, we're in an area where rent is roughly $1,000 a month. Got it. For a house where you're paying rent of about $1,000 a month, roughly your mortgage payments, let's say, are, I don't know, $700 a month or something like that. Now, on top of that, you need to pay your maintenance. That would be like $150K house, I'm just guessing. Yes, exactly.

Yeah. And I'd say more like $150,000. But on top of that 700, you'd have to pay maintenance, taxes, and insurance, right? Which a landlord typically covers completely for you. So let's say that 700 is now maybe $8.50, right? 850 a month versus the $1,000 to rent. The delta between that is how much your landlord typically makes, right? That is there.

I mean, they have to pay out interest and other things like that. But there's some spread there, right? So Divi would charge you that $1,000 a month. But then on top of it, we add in a savings portion, which might be something like $250. $50 a month. So instead of paying $1,000, you're paying $12.50, but the equity portion is actually your savings. That gets invested in the house, and as the house appreciates, you own a percentage of the house, so your savings also appreciates with the house. How much time and money do you spend integrating a bunch of different software products together?

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$1,000 off. Go to odoo.com slash twist to check it out, ODO.com slash twist. So you worked at TPG, I know, and previously, and you are a student of unit economic. So when we look at this, the cost of the house being $50, if I was the owner and I was renting it, maybe I charge you $1,100,000, $1,100 so I can make my whatever amount per year, make a tiny profit. It's not a great business to be in, obviously. You now are having them save $250.50. So where do you make money from? That $250 is theirs. You are making the $150, $250, $250 that the land would normally make? That's your business or is your business that the

appreciates and you get the gain on the appreciation of the house. I'm just guessing here. Yeah. So, so, uh, we make the money off the rent the same way the landlord would, but our bet is that because typical landlords end up having a ton of turnover. So when you are an average renter, no one takes a rental car, the car wash, you tend to destroy those rental properties. You turn over every 12 months. So our bet is I can charge you the same rent as a landlord. I can make the small profit along the way. I sell back to you. We make a small amount of money off the buyback, but most of it is just the rental income. But we actually can make a larger margin because you're staying in the house for longer.

You're not turning over and you're treating the home better because you actually care about it. The owners act like owners. You're basically in a way teaching people to be owners. And that is the American dream. There's one of the things that have made America an amazing country for immigrants, like your parents is, if they get into the home ownership like 60-odd percent of Americans have, boy does it help you move up from one, you know, class to another, one, you know, strata to another. So now let's look at the appreciation of the house.

It's $150K house in Atlanta. And Atlanta gets hot and it becomes Hotlanta. And now it's a 300K home, you know, just five years later because everybody wants to leave the dystopian society known as San Francisco. Now you rented somebody for $150, now it's worth $300. They've been paying $250 a month. They've got whatever it is, 3,000 equity in the house, maybe 10,000 equity house. Now, who gets that jump from 150 to 300?

When I go to buy the house, am I buying the 150K house? Am I buying the 300K house and that 150? Do I get some percentage of that? If I owned 5% of my house, does my 5% now become worth twice as much? Yeah, so we preset the, we call it the buyback price. So it's the price at which you can buy the house back. We set it at the beginning. So every single payment is set in a contract before we even put the offer down.

You get that contract. You review it. Everything is pre-sets. If you don't feel comfortable with it, there's no moving forward. What do you set it? On the 150 house, what would you preset it at? 175? So probably for our folks, just easier to stick with if it's $100,000 house, generally we appreciate

about 3% a year. So you can look at it. It would be about $110,000 after three years. So that's the buy-back price. You can buy back at the halfway point for $105,000. Got it. So you build that into the model that it's going to appreciate a little bit. So they get the upside if it appreciates more.

But that's actually what's been happening in the country. So let's get into modern day. You put people into houses in 2019 in Atlanta and in Dallas, and they have, correct me if I'm wrong, gone up at least 50%. They have a call option that's in the money for them. Yes. Which in plain English for people who don't understand means what? It means that the house is now worth more than what they have the right to buy back at.

So theoretically, even if they don't want the house, that $100,000 house is now worth $150,000. They have a right to buy it at $110,000. They should buy it. They can sell it the next day and make a $40,000 spread. That is their right. And that's what you want. Now, truthfully, though, Jason, like, our customers are not thinking about an arbitrage game here. That is not how it works.

And no one thinks about their home in that way. I mean, you're at your house now, also I assume, your house has now become your children's source of school during COVID. your office. It's like family center. And so the way that you're thinking about it is, I want to make a sound financial decision and I want a place to raise my family and feel safe.

Right. And so our customers are not using Divi as a way to hedge the market. Not yet. Not yet. But I mean, if you do your job, if you do your job and you taught them how to be an owner, correct me if I'm wrong,

they're going to say, hey, wait, I'm an owner. I have $40,000 in profits here. I could, you know, move an hour, or outside of Hotlanta to the next hot place, you know, somewhere outside of Nashville for 100K and I could do it again. As I hope they will. That is it. That is the dream.

We are trying to create, well, that is the point of this. But all you get is the landlord's spread? Is there some other secret to this business that I'm missing? Well, that's our core business. And so the landlord spread when you make that every month consistently for three years is the average term of our lease, right? That's a nice annuity. of cash, right? It's cash that comes in. And once someone's in the house and they're fairly

stable in that house, there doesn't tend to have to be a ton of work that needs to go into it. Once you have a tenant who's happy, any maintenance stuff might come up. But generally, we know that's super seasonal. So Aces are going to go out right around this time of year where they're starting to use them again, right? And we know that heaters are going to go out probably in the fall, right? And so we know these timings, but outside of that, it tends to be very little work. You're sitting on an annuity, a cash flow stream, which is how we make the majority of our profit. Now, that's our core business. As you can imagine, we're constantly thinking about how we could expand.

Most of our expansion into new services is actually not for the profit. I actually want to be very transparent about that. It's actually because we just want a better customer experience. So, for example, today a customer comes, Jason, you go to our website, you apply and we say, Jason, you're approved for a $350,000 house in Dallas. Go out shopping with your realtor. You go, Adina, I don't have a realtor who should I go out shopping with. Historically, we'd introduce you to a Keller Williams agent or Century 21 or Compass or someone else, right?

One of our, just someone in our network that didn't work for Divi. You guys go out shopping and you say, you know, what happens when I actually want to buy back the house? What price do I pay? And that agent's like, I have no clue. We have to call Divi, right? And that creates a pretty friction-filled customer experience for you. And so our goal is we're going to actually start to do things like build out. a Dibby brokerage. Now, the goal of the brokerage, obviously, we get a commission, right? And

financially, there's a benefit to that. However, the real goal of it is that it creates a more seamless customer experience helps drive up conversion. So the largest single family landlord in America is a company called Invitation Homes. They own 80,000 homes. They're a $20 billion dollar enterprise value company. So the industry, I know you're thinking, this is the margin you make, But when you sit on a series of cash flows across what's even tens of thousands of homes, it ends up being a pretty profitable and large business. And I take it without giving that Blackstone owned entity a hard time. But Blackstone also owns the, you know, SeaWorld.

Let's just say these folks are not doing it for charity or the, you know, they might not have as charming of a origin story as you do. They're in it for the money. Yes. Period. So are they, let's leave them out so you don't have to badmouth the competitor, but is that category of folks more sharky in the sense that they're going to be more cutthroat about the cost of the rent, etc? So I'd say there's a couple of things. One, most of those competitors have actually bought portfolios of homes.

And so they bought these massive amounts of foreclosure homes during the crisis. And as you can imagine, foreclosure homes that are sitting there without someone living in them can get run down more quickly than someone that has an announcement. actual tenant in. So I'd say quality of the portfolio is a bit lower, a lot lower than what it is for Divi, where our customers go out, they find the best home, the home that they want to raise their kids in. So overall, the quality of our portfolio is better, which means that our tenants are getting a better experience. They're getting a better home than they would otherwise. You're skimming the cream of the best owners. Well, not only that, they're picking out the home. You're picking out what home you want. You're not, and poor sale inventory is always better than rental inventory.

Rental inventory is just run down, right? Yes. And so, I, I think that the customers get a better experience because they get to pick out the home. The home quality is better. We try our best to be really forward thinking around things like, you don't have to worry about paying rent every month. It gets automatically pulled if you opt in from your bank account. You get an email that notifies you and a text that notifies you, hey, your rent has been paid.

I mean, I even think about my own experience in San Francisco before I was a homeowner. I used to have to log on to my bank account and wire every month to my landlord, right? We want to take away all the friction and just make this a really beautiful experience that helps guide people through the path into homeownership. Makes total sense. Except your competitors are getting all that appreciation of the homes and you're not. They are. We're sharing in that appreciation with our tenants who are in the house, for sure.

We get the 3%. So I guess... We do get the 3%. Yeah. So, and I guess I'm trying to think historically, what has historically the last 20 years look like? Is it 3% in the markets you're in? No, they've appreciated much more.

In fact, right now, I think... I think average price, home prices, we're up, call it 15 to 20% year over year right now. And so we're giving a ton of that upside to the customer, but that's okay, right? Our view is that if you can create a portfolio where you treat the customer right, you give them access to this. Our customers end up turning over at a lower frequency. We end up cashling better. They take better care of the home with lower maintenance.

And ultimately, our profit margin from what we can get from rental income ends up going up because we have to spend less on turns. So basically if someone, if a customer leaves the house, basically filling that house with another rental tenant, and we have to spend less on maintenance. And so far that bet has held very true. We make a better profit margin than any single family read out there because this bet is actually holding true. In today's startup landscape, committing to security and compliance is vital for growth.

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and the Good Face project work with Drata for their compliance needs. Twist listeners can get 15% off and waived implementation fees. at drada.com slash twist D-R-A-T-A-com slash twist How do you buy all these homes? Because if you have thousands of homes at, you know, 350K or 250K, we're talking about hundreds of millions of dollars

and billions of dollars. How do you do that? You're not doing that venture dollars, obviously. So are you just doing REITs and then letting people buy every year 100 homes in different cities? How do you mechanically do that? Yeah, so it's interesting, Jason.

When I found it to be, I was like, okay, well, let's say we're buying $200,000 homes. homes. Let's just get to the first hundred homes. And I was like, I don't know, $20 million. We can do that, right? Now I'm doing the math and I'm like, oh, God, it's like $20 billion. How do you get that much capital in order to do this? And so the way we finance it is we raise debt facilities. So essentially, a very simple way to put that is we go out and we basically get like a credit card that has a pretty, except it's not a $20,000 limit. It's like a $200 million limit.

and as we buy the houses, we draw down on the debt from this credit card and we pay interest against it. So that's how we're funding the purchase of these homes today. We're actually setting up. So that's kind of the first way that we fund it. And then the rent pays off the mortgages. Exactly. The interest expense.

Now there's a second way that we're financing homes, which is definitely kind of a newer trend in the market where essentially everyone talks about like prop co-opco fund structures. it's not exactly a fund structure, but essentially someone else owns the equity and the property. They get their own debt against it and we get servicing and origination fees. We get paid a fee for actually acquiring the home, putting a tenant in it. The customer knows no difference, whether it's divy's debt or this owning to a third party.

It looks absolutely the same to them, but it allows us to buy more homes more rapidly. Why? Because like you said, we're a startup. Every time we want a new credit card, I'm going to call, but it's really a warehouse facility. We have to go out and we have to raise. those. And so it's much easier when we're having rapid scaling to be able to have a partner who has deeper pockets who can just say, you guys need a billion dollars. Here you go. Right. That's pretty

easy. And to our employees, also, one thing I want to emphasize, to our employees, our customers, it looks no different. And it's treated no different. In fact, our employees don't even know who owns which house. Um, when, are we in a real estate bubble right now? We're in an inventory shortage. We have a shortage, okay. But houses have this have appreciated 15% in three months, 50% year over a year in some market, are we in a bubble? So I think that there's a difference between a bubble versus fundamental supply and demand. So what happened in 2000, well, what happened in 2009 was the government did a mass amount of foreclosures and flooded the supply when demand was staying constant.

Increased supply, demand stays constant means prices are going to drop, right? Right. Today, we actually quite the opposite. And what's actually so interesting, Jason, is, you know, I've raised several four rounds of capital at this point. Every investor, when I was raising, every venture capitalist asked me, they said, what happens if home prices decline? Right? What is Divi going to do? Not one venture capitalist asked me, what do you do in home prices skyrocket? And inventory becomes tighter.

And so that's just a lesson in the unknown unknowns, which is, you know, no... Or just how the venture. mind thinks, right? There's some, they're like, I have a chance to ask the founder a question. I should ask them about what happens if the Titanic hits an iceberg. Exactly. It's actually not as much about, and I know you spent some time in venture, it's not as much about they actually care about the answer to that question as they care about how

thoughtful you are in answering it. Yes. Yes. And I understand that. I think that. The answer for you would be, if you're raising the price 3% and the home's gone down, 20% in value, now the person's underwater and they're demotivated. But you can always correct that.

Well, in those situations, well, we're sitting on a cash flow stream. So we make enough profit that we can sustain some hit in price. We can basically sustain, call it a 15% hit in prices and still break even on the property and we're fine. And then in that case where the customers under water, we'd extend their lease. We'd let them stay in the house longer, build more equity. And then buy back the house when the time is right. These are not 20, $30 million houses that people overpaid $5 or $10 million for it.

that would be a whole different ballgame. These are houses people need in a housing shortage. So are we in a, you don't believe we're in a bubble. So let's unpack why we're not in a bubble in your mind. Yes. So what we're seeing today is that COVID causes very interesting market change, right? Where all of a sudden, no one wanted to sell their homes because no one wanted to move during a global pandemic. So supply, you can say it's a constant to slightly decrease.

they're just less existing home sales. So you have a case in which supply is not growing. And at the same time, demand started to spike. Why did demand spike? Well, because everyone was living in their studio apartment was, you know, like, hey, you know, it would be great if I bought a single family home that had a backyard, right, in some place for me to actually spend some time outside. And so what we did was we actually saw demand go up.

Now, this was even more impacted by the fact that people who would have typically sold actually had the opportunity to refinance. right, they refinanced their mortgages because rates were really low, which kept them in their houses even longer. So, supply was even impacted more. So you have demand going up, supply going down, and the result of this is that home prices have started to rise, right? And that is a lack of inventory. Now, how does that correct itself in the market? One, you can add more supply.

I don't know how many folks, you know, realize, but like it takes like five plus years to build a home, right? It just doesn't go up overnight. Why? Because the government puts in titling and you have to make sure that the... The nimbly issues in some places. Those, yes, but that's for affordable housing. But yes, yes, yes. But point being that it just takes a long time for new build homes, right?

And so you're not going to flood the market with supply suddenly. And given the way that work is moving to be more remote, I actually think that demand is going to only continue to sustain. So given that, I actually think that home prices are going to continue to increase. And I think that we've entered just a fundamentally different time where remote work is going to be more acceptable. and that we were just under supplied on single family homes, which by the way was an issue even before COVID,

but was exacerbated by COVID. Is there an issue right now where people are moving into a kind of yolo moment and they look at their house they're in and they're going and buying a second house somewhere because they don't have to go to an office. And I'm talking about a slightly higher end of the market, but I think it's now becoming a trend where people are like, you know, I left Brooklyn and I,

now have a place in Florida or Nashville, but I decided to not sell my place in Brooklyn. Or I was in San Francisco or Palo Alto. I'm going to keep my place there, but I move to Park City because I want to ski and I can. So are there a lot of people now where they're owning more than one home and not selling the original one? Because let's face it, if this is a better asset than the stock market is, which I think a lot of people feel this might be a better asset than the stock market, which feels bubbly, now that's going to constrain supply even more.

Is that a trend or is that just anecdotes that I'm seeing near me because I hang out with a certain group of people? You definitely hang out with a certain group of people. I definitely don't know that as that area, the second home market as well, because transparently our customers are struggling to buy their first home. I think that if anything, Jason, that's more a factor of lower interest rates.

If you could refinance out your Brooklyn apartment at 2.5%, why sell it? Right. I mean, that's pretty cheap, right, to be able to keep it. Now, if interest rates increase, you have a 5-1 adjustable rate mortgage, interest rates increase in five years. Maybe that's something then that you would consider selling, because if you were paying 6% on that mortgage, even 5% on that mortgage, right?

All of a sudden, maybe you wouldn't be keeping it as easily. Right, because you wouldn't be able to rent it for as much as your carrying costs. Now you're screwed. Okay, now you have folks like BlackRock buying up thousands of homes reportedly. and sitting on them maybe or renting. I'm not sure what they're actually doing. That's always existed, but it seems to be increasing.

There was this big Wall Street Journal article about that. Is that reality? And is that causing problems? And if so, in which parts of the market? Yeah. So we're seeing, we call this like institutional investors.

We're seeing institutional buyers increase the pace of which they're buying assets. Why? Because there's no real healed. You're not getting returns across the market. And so they're turning to actually homes, which are one, appreciating extremely fast.

But then, too, you can rent them out and still make a pretty good return versus what you can get on maybe a bond or some other asset class that you would put your money into. So we are seeing a massive influx of institutional capital into the single family rental market. Now, on the positive side, I think that for our customers, what's nice about that is when Divy goes to bid on a home, we're bidding on behalf of them. So we'll say, hey, Jason, we think we should bid $350,000 for this house. And you might say, hey, Dina, I actually know the market. It's really hot.

I think you guys are bidding too low. Maybe we should go to $3.55. Or maybe you'll say, hey, you guys are bidding too high. Let's go to $3.45. Now, we have a range that we allow. But within that range, we have a conversation. We decide on the bidding strategy. And we will go out and bid for you.

You are going to get an all-cash offer that's going to have generally anywhere anywhere from zero to five-day due diligence period. We'll close within two weeks for you. And you just became as competitive as Blackstone when Blackstone goes to it. Right? So what we do is we take the average consumer and we make it so that they can actually compete with the Black Rocks, Blackstone's, imitation homes of the world because we offer as competitive of an offer that they couldn't do even if they had a conventional mortgage. Today, many small business owners are busier than ever since they're focused on managing

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My understanding is we're short seven million homes in the United States. I think the Wall Street Journal had five and a half million from a couple weeks ago, but seven million five, it's the same. Yeah. Okay, let's split the difference. Six million. Yeah. We billed like 1.7 million a year or something. in that range, my understanding, if I'm, I think I'm directionally correct. This makes no sense to me. Building homes is easy. We've been doing it for thousands of years as human beings.

Why is this, is this a ridiculous gap? Or is this just fun with numbers with different organizations who make them? Well, the biggest issue is just regulation, right? When you're building a community of homes, you can't just throw up, we can't just buy the land and be like, we're going to throw up homes, right? Because what happens if there's a fire in that community? and the fire trucks need to get through the road, right? They have to make sure that the width of the streets are perfectly. And then you can't mess up the soil because you're going to impact the environmental issues that are going on.

So to actually be able to build a community, while it doesn't take a tremendously long time to build an individual house, it does take a very long time to get the regulatory approval that you need. And in fact, it's probably the most, I don't actually know the exact step, but it's one of the most costly parts of actually building single family homes is actually just the regulatory aspect. It absolutely seems to be that. And then there seems to be some dysfunction that we don't build them in factories. Like, we literally build them. It's like building cars in people's driveways.

It's so nuts that we do this bespoke over and over and over again in the rain for, you know, whatever we do, six hours a day, eight hours a day when you could run factories 24 hours a day. I'm an investor in a company called Blockable, so I have skin in this game and horse noise. no blockable. Yeah. And we're able to produce the homes so much faster and homes that last 100 years. Yeah. The quality levels, you know, 10 times. It seems like part of the problem is the developers are building low quality stuff because

they try to make a big margin. Then they flip it. And they're not the owners of it ultimately. So there's some issues around that as well. But tell me, is the supply problem getting worse and will it get better? Like in the early 80s or 90s? you know, did we have a massive housing shortage? Have we ever not had a shortage? Well, we definitely didn't have a shortage during the global financial crisis. We had a glut of homes. Now, those weren't new home

builds. Those were existing homes in resell, right? So what happened is we went through a global financial crisis. You can then go buy an existing home that used to be worth $300,000. You can now buy for $200,000. There's a cost to build a new build home, right? There's labor and there's materials. You can't generally build a new build home for, if including labor, materials, cost of regulation, all of that stuff, maybe less than $250,000. It's just impossible. So at that point, builders really slowed down. And if you speak to any of the home builders right after the recession when there were all of these homes that were available was the worst time in the history for builders, right? All of a sudden, I'm not building anything, right?

Because there were so many homes that were available. And then all of a sudden, that dynamic switched, right? All of a sudden, there weren't existing homes that were selling for, you know, a third of what they had been a year prior. And all of a sudden, home builders had to kind of press back on the gas again. So you're asking them to now restart the fire. And it just takes a long time. It takes a long time to set the blueprints to actually build communities to get the approval to then start taking off. And I imagine that we're not going to be having this conversation about a housing shortage in five years for now,

because I think that the market will have rice dized by them, but it's going to take a little while. Everyone's expecting that, okay, I want a ton more homes in 12 months. It's just things don't move that quickly. Five years, perhaps, I think the market might stabilize a bit more. Yeah, during the financial crisis, I'm just looking at a chart here.

I know if this is correct, but 10 million houses in inventory available and then into 2020 down to 3 million available. Yes, that doesn't surprise me. We're seeing... We are at a... Since they've started recording... the data for 30 years, we're at the lowest we've ever been in terms of the inventory.

Yes. And there are two things to look at. It's new home builds and then existing home sales. Is that what they call starts? Is that what starts means in your industry? Starts are new built. Ah, God, okay. Yeah.

And so those are permits that are given out to actually build new homes. So that's slightly different. But in terms of just overall listings, you can look at it more a little bit, maybe a cleaner way to look at it. It's just the number of homes that are listed for sale, and everyone looks at months of inventory. So if demand continues the way it is, how many months of inventory do we have?

And what we're seeing across most of our markets is there's less than a month of inventory, which a healthy market you're looking at, or where we had been historically called five months, six months of inventory. And so we are down to very low levels in comparison. Yeah. I mean, just looking at this chart from stat, Tista. I like that website.

I used to pay for a subscription to it. I stopped paying, but I probably should pay for it again. It was too expensive. It was like 300 a year. They have a really interesting chart of what we bill by decades. And if this is to be believed,

we were building $25 million a year until the 2010 to 2019, and then we only built 5.8. I guess during the crash, nobody built for five years. Exactly. Wow. So now we're paying that price.

Yeah. Well, we're paying. that price and why didn't they build? It's just because it was when you looked, so everyone looks at how much homes are selling on a dollar per square foot basis, right? And when you were looking at what the cost is to build, what the replacement value, how much does it cost to actually build this house from scratch from a dollar per square foot basis? It costs more to build that house than it did to just buy an existing inventory. And so it didn't make sense to be building at that point in time when you can buy cheaper than you could build. Now, why is it more expensive to build than to buy? Well,

cost of labor, again, regulation and materials have gone up. So there's a certain level, again, you cannot build a normal three-bedroom two bathroom house in the suburbs for less than $250,000. Wow. Right. And so it's good when home prices are rising to the point that they're at, like call it an average home price in the U.S. at around $250,000, new home builders can be competitive and they can create new homes that everyone loves, right, and they can sell it at that price. However, if you went back... What is that price? Is it like $800 a square foot or something? Is there like a kind of zone?

I think the average, yeah, I don't know the exact average. Because you have to take the land in and the build cost, right? Because people say, oh, we build for, I've heard people say, oh, we bill for like $200 to $600 a square foot in Texas. I think the average is roughly about $100 a square. Average home is like $2,500 square feet, maybe a little bit less than $2,000 square feet or something like that.

And average home price, I think is about $2,000 at this point in time. Got it. So $250,000. That would be what size home then. Well, that's what it's selling at. That's not your build cost, right? So that would be like it sells at $100 or square foot, but maybe costs to build is like, I don't actually know what they're marginal, but 60 to 80.

Yeah. And they're making the spread on that. And that's where their profit comes from. Yeah. And then we had this lumber inflation issue. So, my God, it's such a dynamic, crazy market with so many players. At this point, you've raised a couple. couple of hundred million, is that right?

For the company? Yeah, several hundred million. Several hundred million. That means you have a couple of hundred employees at this point? How many people do? Jason, I run a lean team here. We have about 130 employees. Oh, wow.

Wow. So that's super efficient. That's like an employee for every hundred homes or something. That's what if I was you, I'd be calculating. How many employees do we have per home? It's funny. How do we get that number up? Well, I look at it a little bit more as like,

I constantly say how much profit am I making per home, and then how many homes do I need to break even versus my head count of marketing expense. So that's the ROI method. I'm constantly like, I'm like, how many homes is my break even? How many homes is my break even until I can be cash flow positive. How charming you actually think about cash flow.

This is your TPG education. You learned that eventually, like, well, this is great line that weren't Buffett quotes, but it wasn't his quote, which is like, the markets are a voting machine, and then eventually a weighing machine

like prices and stocks and eventually like it's what's the cash flow like how much cash comes out of this business and you're obviously on the way so what if you were an investor for a while I know you're at DFJ you did some time at TPG

you went to Stanford yada yada congrats on the amazing drag record there now you're running a company and guess what you're out of your Stanford and TPG DFJ bubble I'm assuming assuming you weren't a founder before that, you went the opposite way. So how was it actually jumping in the ocean rather than like flying over it? Well, I love being an operator. I worked at Square

for a bit and I was a product manager there and I love being an operator. I'm a worker bee like through and through. So I actually thought investing and sitting on the sidelines was it was just sad. You were watching all these people make these amazing impacts in the world. We were just like, I want to be in the game, you know? And so I think, look, both need to be part of the ecosystem. For me, though, being in the game is really fun. I'd say, never thought of myself as a CEO. So when we found a divvy, I was actually not the original CEO.

Why not? Why didn't you think you were a CEO? Curious. Well, my co-founder was originally the CEO and I was the C.O. And then as we needed to raise more capital, I was pretty good at fundraising into that. And then I ended up moving into the CEO role. And I always just thought that in Silicon Valley CEOs had to be like Elon Musk. Like visionary, like we're going to Mars, like big picture.

And not me. To me, I was a worker bee. Like, I did my models. I was very organized. I was diligent. I prepared for like my slides for every meeting. I did not think that was the stuff of a CEO. I thought I had to be a bigger picture thinker.

And what's actually amazing is having founded Divi now, I realize that there's a lot of different types of CEOs at different points in time. The person who I was for the last three years in founding Divi is not the person I'm going to be for the next three years. And there is no right or wrong, but more the right fit for the company at a particular time. And also, there's a bit of a misperception in what you said, which is like, oh, Elon is like this incredible visionary, which of course is true. But people forget, he's a world-class engineer physicist who actually knows how to do engineering and rockets. And like, he understands

metal science and that kind of stuff. So it actually turns out that a lot of times it's like, You know, Zuck was a developer. I don't consider Zuck visionary. I consider him a copying machine. But even like, you know, Steve Jobs was actually a designer at his core. I think he understood user design. So I think there's a little mythology of the visionary thing that gets oversold. Yeah.

And it actually turns out that a lot of the visionaries have a skill stack that is pretty intense, you know, and multifaceted in many cases. So that's, that's fascinating. It is intense, though. You have to work 80, 90, 100 hours a week to do what you're doing? Yeah, but that doesn't... How many hours you work in? I'm just trying to, like, send a message to the audience. There's this new thing where people are a lot.

You work every day, obviously. You do a little bit of work on the weekends? So I work not... Yes, I worked not up. I worked in banking and private equity. So 120-hour work weeks is like kind of just what I've been doing for the last like 15, 20 years. Are you a millennial? Or Gen Z?

I'm 34. What does that make me? I think you're on the bubble, probably millennial. Yeah, yeah. You're close to Gen X, I think. You're millennial. Yeah, for sure you're millennium. Yeah, and I, look, I wake up at 6 a.m. I, like, log on at that point in time. I always take time off to work out and, like, make sure I'm keeping the right balance and mental stability. But I'll be on my computer on and off until 9, 10 p.m. at night. And look, it's...

That's the level to do what you're doing. You are in a highly competitive space with... You don't want to do anything else. That's the thing. When you found a company and it's your baby, that is all you want to do. You're in the shower. You're thinking about your company. Of course. You're with your company.

It's your company. No, it's just like anti-hustle culture and the socialism and people shouldn't have to work hard. And, you know, I don't know if you saw, but like there was a revolt at Goldman with the Gen Z folks. Did you see that? Yes. How hard did you laugh at that? but they said they don't want to work on the weekends. I know.

I'm like, good for you guys, more chutzpah than I have because I just worked my butt off all weekend. I never questioned it. And I think they're going to, are they going to win that battle? I mean,

today is so different. To me, it's not, you have to work hard, but you also have to figure out how you keep yourself sane, right? And for you,

Jason, maybe like you wake up and you log on, I don't know, five, six a. m. And maybe you take a break at

seven, I have to be with your kids and have breakfast, right? Yeah. And I go for my run, right? That doesn't mean you don't work hard. It means that you have to like, I ruthlessly plan my weeks. I was about to use the word ruthless time management. Yes.

Like, I literally- Everybody who's successful is ruthless. Block off my calendar. Like, literally going for runs is blocked off on my calendar. Every minute is packed. Yes. But I think that it just comes down to knowing what you need to get done to keep yourself in the right condition to be able to execute on a really big business, right?

and planning it out consistently every week. So, yeah, I guess Goldman Sachs, CEO, David Solomon, told employees he won't enforce the Saturday rule. He will or won't? He will. Good. Which means employees cannot work from 9 p.m. Friday to 9 a.m. Sunday, except in special circumstances. If I was working there, I would make a point to be there. I would be getting sushi at 10 p.m. and I would stay through until the next morning just to break the rule because that's a test.

David Solomon is testing all these Gen Z people. And if you believe him, you are dumb and you failed the test and you're not getting to partner dummies. Well, you know some poor analysts is listening to you right now, Jason, being like, oh my God, I'm home and now I need to get into the office. Absolutely. If you're in New York, we're taping this. Like, you need to immediately get on a city bike and get into the office and literally be there on Saturday. It's a test. He's checking the badges and when you checked in and out.

you people are dumb I pray to God David Solomon is not doing something like that Of course he is He wants to know Who is going to be I had people work for me

Who wanted to go home at 430 or 5 And I was like For some twisted reason I allowed it for some period of time And then I was like wait a second If we're all going home at 430 or 530 We're going to lose deals to other people This is a if you're in finance

It is a 24 7 day a week job If you want to win deals Yeah, I mean, I would probably argue differently where I'd say you can go home at 4.30 or 5 p.m. Just get your work done. Get the results. Well, but if you log off. You get the results. At a partner at a firm. Get the results that I'm setting up for you.

And I think that's how I kind of run divvy is like there are KPIs. There are things we need to do. Oh, you're talking for your rank and file. Yeah, exactly. Do it on whatever time you need to do it. However you want to schedule your life. And if the results aren't good, then maybe we're going to do it my way. but until then

I trust you That's fine The way I look at it is Founder email is at 9 p.m. 6 p.m. And we don't get back to them within an hour and then other firms do?

That's fair. You are a little bit more Yes, you're very time sensitive and you work for the founder too on their time. Absolutely. Well, I mean, think about it. You had a bunch of investors in your company

if you emailed five of them and said, hey, I'm dealing with the situation. You know what time they've, you know their response time. The bottom person doesn't respond and they forget and you write them off. The bottom two respond the next day or next week. And the first two respond within minutes. Yes.

No. Our investors are. Who gets the next round? Who gets the next round? Who gets super pro rata? That is a good question. I actually just find that it's about just showing that you care as an investor. that you're a cheerleader

and that you're there through thick and thin. That is it, which is like you may have your views on the market is overheated that valuations are crazy but you better like go to bat for Divi

right and for the company and being the cheerleader is kind of look it's a hard game starting company is hard. It's emotionally tiring it sucks like it is your entire life it is stressful,

it is draining and you want to surround and most fail. And most fail. And most fail. And so for the one ones who don't, like, and that you're there through the long run be the biggest cheerleader the entire way.

I mean, literally people are like, how do you have such great deal flow, whatever? It's like, I have a podcast. I bring people on it and I'm enthused about what they're working on, knowing that one, 20, for every team that wins the championship, 29 do not. Yeah. It's the nature of the NBA. You have to be fired up with enthusiasm or you're going to be fired with enthusiasm. That is a good line.

I like that quote. I might use it at some point. Absolutely. All right, listen, it's a pleasure to meet you. Congratulations on your massive success. What you're doing is just super cool. And you're a great interview. Man, you know your numbers?

Like, good interview. I have to say, like, I was like, huh, maybe this is going to be a little boring housing, mortgages, whatever. But you brought it. I think, hey, team on the line, can we book her for a year from now and get an update? You're like an Instabook. You're like an Insta book. I know, like, Keith Rubey's like an Insta book.

I got some people like when I had, we used to have Chimoth on the pot, I'd like, get this guy back on. Just book it now. Please don't put me in the category with Keith and Chimoth. While they're both wonderful and brilliant people, I like to think that I, I'm a little tamer than they are for sure.

Come on. I'm not sending crazy tweets. You're not saying, you're not sending crazy tweets. You're not doing thirst traps on your Twitter like Chimoth. Or actually, now that I think about it, they're both thirst tweet. Like, if I think about,

Rabeau with this Barry's boot camp. Oh my God. Yes. Yeah. These are both thirst traps. Great shape. Good for him. That kid's diesel. Yeah. I mean, I know. I'm like, he was like, oh, I'd love to run with you. He's like, yeah, I don't think you could. And I was like, what? He built a basketball court. And he's like, I kind of, I play basketball. He's like 19 to 22 year old old are you? He's, you know, late 40s or something. He's running basketball games with 20, people in the early 20s. I'm like, man, that's crazy. You don't get injured?

No, of course not. That's amazing. You're hiring, obviously. So you want people who will work 24-7, no excuses, Saturdays, I get it. No. Who care about the mission? That's actually the number one thing is you got to care about our customers in and out. Because why is this lesson so important to you?

Well, because one, they're paying us, right? They are our customers. They are everything to us. No, but why is the hiring, why is the top of your list that enthusiasm and the mission? Like, what have you learned? Because this shit's hard. Because it's hard to found a company. And the way that you get up every day is not for your future equity that's going to be worth

millions, maybe hundreds of millions of dollars. But actually, you get up every day and you deal with the lower salary in cash because you care about what the heck you're doing. Correct. And that keeps you there for the next five to seven, ten years until, you know, there's a liquidity event. And you've got to love it. Love the people you work with. Love the people you serve. Enjoy what you're doing every day. If I could do a hundred emoji right now, I would do like five, 100 emojis, but we're not in Slack. Continuous success. We'll see you all next time on this week

of startups. Bye-bye.