Dream Finders Homes (DFH +9.35%) is an unusual homebuilder, both due to its focus on some of the highest-growth Sun Belt markets in the U.S. and its asset-light business model when it comes to land ownership. In this Fool Live video clip, recorded on Dec. 15, 2021, Dream Finders' CEO Patrick Zalupski discusses that business model with Fool.com contributor Matt Frankel, and explains why he believes it will provide the company with significant competitive advantages over the long run.
Matt Frankel: You're kind of unique in the sense that you don't buy land until you have a house on it. You prefer to have options to purchase, things like that. Can you briefly describe your asset-light business model and why that gives you an edge?
Patrick Zalupski: Sure. The best reference point would be, there's one public company that uses this model -- it's called NVR (NVR +4.43%), out of Reston, Virginia. We've really studied and modeled ourselves after them. Frankly, when I started the homebuilding company, I didn't even know who NVR was. We were just Jacksonville, Florida, and they're not a home builder in Jacksonville. So it was intuitive to me, being from the finance background and focusing on capital allocation, which also -- risk came into play significantly, because I had a homebuilding business, a really small one, doing a couple of projects into the downturn of the GFC.
I lived through that and went through the financial crisis personally, and had the scars to bear. So coming out of that, my No. 1 focus was, I want to build a homebuilding company, but I want to focus on A and B locations, single-family detached because I felt both of those two items will be more durable in the next downturn, should there be one. And then, focusing on asset light, it allowed us to mitigate our risk.
Again, all of these were -- how do I mitigate the risk, having just gone through this really painful financial crisis? So that was really why we went asset light. I found out that I could get developers with a very low deposit to hold land for us and allow us to buy it back over time. It, one, generated the highest and best returns. But two, it was by far the most risk-averse way to start and build a homebuilding company. That was really the idea behind being asset light. For anybody who doesn't know what "asset light" is, it just means we don't own any land on [our] balance sheet. So we find a developer, or what we call a land banker, which is really more of a financial transaction -- an institutional company. We find the land, we underwrite it, we pro form it. Then we take it to a third party [and] say, we'd like you to develop it for us and own it for us, and then we'll buy back lots on a set contract schedule. If we don't meet that schedule, they can default us out of the deal and take our deposit. As long as we meet the obligation of the schedule, then we perform and move on to the next deal.
That's the general idea, but by not having all of that land on [the] balance sheet, not only is it lower risk if you fund into another crisis, but you're able to tie up a lot more deals because, if you think of it, if you had one deal that was $10 million and we put up a 10% deposit, we can control a $10 million deal with really only $1 million. The way we look at it, we'd rather take $10 million, [and] instead of owning one deal, we'd rather own 10 deals by putting $1 million in each one.
