All Forum Posts by: Tyson Scheutze

How data and tech fueled SFR growth…

As discussed in my last post, as Auben Realty began to grow, we created rental guidelines and policies to help further define our leasing standards. I wanted the business to grow primarily because I saw a massive void in the market for intentional, investor-focused SFR property management. Daily, I also saw the impact our investment was having in our communities.

Others also saw the opportunity to own SFR. And while we began to grow the framework of our property management company, the beginnings of institutional SFR ownership also began to grow. No one called it SFR (single family rental) in those days, but you began to see large buckets of institutional capital enter the SFR asset class for the first time. Starting initially on the West Coast in San Francisco and other cities in California, companies like Waypoint, Invitation Homes, American Homes 4 Rent and Tricon began to enter the single family rental asset class with lots of cash and an appetite for disruption.

Early movers into the space had a lot of assumptions about SFR's similarities to multifamily that largely proved to be incorrect. But it really didn't matter how wrong (or how right) they were when they were consistently buying at a fraction of home replacement cost. These large buyers targeted primary sunbelt and growth market cities like Phoenix, Dallas, Austin, Atlanta, and Charlotte and built strict buy-boxes around the number of beds, baths, square footage, distance from city center, etc. The acceptable vintage of a home constantly migrated to newer: for some aggregators starting at post 1950/1960 moving post 1980 to post 2000.

All of these restrictions and modifications of acquisition standards were attempts at controlling the variability of ownership of an extremely variable product: scatter site SFR. These large buyers/owners would discover that no matter how much they controlled their processes, it was extremely common to have multiple houses in the same neighborhood (or even on the same street) with dramatically different floor plans, mechanicals, and finishes. Even with access to the best data and risk modeling tools, trying to determine the projected amount of maintenance or capital expenditures proved to be very challenging.

As messy as the operations were, many of these large buyers realized they could essentially build machines to eat the equity. And the operations for owning would simply be a byproduct of a future sale. Available inventory and cheap money made for exponential full-throttle growth. For a great companion read, check out The Big Long, written by Waypoint founders Colin Wiel and Doug Brien. It details the challenge most operators were facing of figuring it out at 100 miles an hour trying to buy hundreds (or thousands) of homes a month.

Along with an abundance of capital coming into the asset class, the data and technology also began to quickly evolve. Zillow, Trulia and other real estate data platforms began to break down the closed doors of fragmented local market multiple listing services (MLS). This allowed an analyst sitting in Charleston to feel confident about suggesting an offer on a home in Kansas City, site unseen. Most offers were contingent only on a renovation manager or inspector's field inspection to ensure the house matched the photos and there were no major red flags.

A potential homeowner—with multiple financing and inspection contingencies—didn’t have a chance of winning the contract to buy a home when competing against the no-contingency cash offer of a fund.

A hedge fund owner who I worked for called it "a data revolution" and referred to data as being the new oil. SFR was a vastly different asset class from the one I entered only a couple of years earlier. However even as the data became more accessible and available, data integrity was always in question, mainly due to home condition variability. Rental comparisons were also nearly impossible to obtain with any reliability. The truth was (and still is) that most SFR owners were small local mom and pops who intentionally kept low profiles and built systems not to scale but to keep their sanity as single operators.

In order to combat variability of product, the hedge fund I worked for tried to create rubber bands of expected renovations around the age of the homes. The older the home, the more you were going to spend. Pictures became really important.

@Michael Smythe Indeed you do. One of the things we have done really well over the years is consistently question and update our processes to always seek to make them better. 

Creating standards to get rid of bleeding heart syndrome…

As we continued to work through our renovation standards, we began to define our leasing standards. It was a very analog process, but, luckily, Natalie loved the forensic portion of tenant background screening. Similar to efforts on the project management side, all of the lessons learned on leasing were learned with pain—a lot of pain.

We learned that no credit was not necessarily good credit, and that people will make up references and blatantly lie about evictions and delinquency on applications. We also quickly came to understand the value of a positive history of previous residency. A positive previous landlord reference (from someone not related to the tenant!) became our holy grail.

We tracked payments with paper notes and consistently followed up with residents about small delinquent balances. Initially, there weren't good property management software options for managing single family rentals. There were standard multifamily leasing softwares like Yardi, but single family rental management was still off everyone's radar. Several years later, our incorporation and utilization of a new SFR software, Appfolio, would prove to be a game changer for us, assuming positive control of residency from inception.

Every resident came with a story, and our bleeding hearts consistently led us astray, so we formed leasing guidelines. This was also necessary in order to be compliant with Fair Housing Standards. As important as the previous landlord reference was, the application process really orbited around credit score. Being in affordable housing against the backdrop of a tumultuous economy, we were consistently seeking credit scores above 600.

We tried different minimum credit scores of 600, 580, 560, 550 while also inserting other provisions like double security deposits. We would discover with time that as flawed as credit score algorithms may be, a credit score below 600 meant a diminishing chance our owners were going to be paid. Many years later when we had a much larger case study, we found a huge increase in delinquency and evictions with our residents who had credit scores between 560-580.

The interesting thing about property management without scale is that it is really hard to see residency in a vacuum as just metrics. You are also fundamentally dealing with people and generally people’s largest and most emotional transactions. Back in 2010 and 2011, there was no digital resident experience. So our residents knew us and we knew them—very well.

We knew Felix was not going to pay his $6 portion of non-subsidized rent, even if it meant consecutive $50 late fees and his father coming into the office. After incurring several late fees, Felix even asked for change for his $20 instead of paying several months in advance. We knew Connie was always going to be grateful for her home and—even while going through extensive medical treatments—was always going to have a positive disposition. We knew Willie Ann did not ever intend to leave her rental and is still there a decade later.

For all the positive ways in which we came to learn and know our residents, we also bit hook, line, and sinker on countless “grandmother died, car broke down, and kid is sick” stories. It definitely didn’t help the situation that my team members shared my excess empathy. Many non-paying U-Haul tenants later, I had to completely accept that Bank of America didn’t care what was occurring with my family. My mortgage payment was due when it was due.

The rigidity in policy was also easier to integrate as I began to further notice a pattern of correlation, consistent delinquency, and eviction with those we offered the most assistance to. Affordable income SFR property management can often be a brutal pill to swallow to one's perception of humanity.

As frustrating as problematic tenants could be, it is hard to describe the immediate gratification of seeing a house transform into a home and an appreciative resident. Because of my contrarian ways, we consistently were on blocks less traveled. Sometimes it worked exceptionally well with our investment spurring on other investors like Second Street in Olde Towne, and sometimes we became the island of bad decisions like our investment on Sharpes Lane in Turpin Hill which was quickly destroyed by vandals.

I often describe those days as waiting for the next person to line up to punch me in the face. But somehow there was enough satisfaction in the good to wash away the struggle.

@Michael Smythe We used to try to always use Lowes builder grade Sahara Beige tiles and we would also try to always leave extra. Agree there are definitely better and more durable products out there these days like LVP. 

Most successful investors I know all share the same quality of persistence. Good Luck and stay the course @Chris Momongan!

Improving Augusta one home at a time…

In the fall of 2009, Auben Realty was officially in business. A handful of homes I owned (which I couldn’t sell) and some early-mover, non-local investor-acquired homes rounded out our inventory. We were decidedly in the affordable price range with our rental property offerings in Augusta.

And we would learn and experience hard lessons about property management in affordable income homes. On a home on Lofwood Lane in south Augusta, I never stopped to question why the prospective renter showed up to view the rental in a U-Haul with her family in tow. Six months of non-payment later, I realized she was just seeking a sucker landlord with a slack application process. In those days, I was an easy mark.

After getting burned a couple times by professional, experienced renters who quickly recognized our management inexperience, we began to pivot to increasing our knowledge of subsidy programs, mainly Section 8, which had inherent resident accountability measures modeled into their programs. At the time in Richmond County, Georgia, there seemingly were way more homes and properties than vouchers. So we knew early on that ours had to be the best to stand out from the rest.

Most landlords who invested in affordable and lower income rentals had the mentality that the tenant “was going to trash the property, so why would I invest beyond the bare minimum?” We disagreed. Even with limited capital at our disposal, we adopted the mentality that Section 8 resident pools were like any other applicant pools: There would be excellent renters and renters who would be problematic. Having the best properties would increase our probability of success by letting us pick the best applicants and not having to simply accept the only residents to apply.

In our quest to be appealing, we tried to find aesthetic improvements which would also provide better long-term durability. Beneath decades of bad flooring choices: if there was hardwood; we refinished it. Or, if the condition was good, we buffed and coated the hardwood. Instead of sheet vinyl, we installed ceramic tile–later laying the tile in a brick or diagonal pattern for improved aesthetics. We darkened the grout lines in the tile and sealed them because we found they collected less dirt and grime and showed better after we “turned” the property in preparation for the next tenant.

Most of our good decisions were born out of bad ones. Brand new carpet looked like a Jackson Pollock canvas after six months of residency by an evicted tenant. Sheet vinyl was no match for washer/dryer delivery day and the ensuing gashes. Flat paint didn’t hold up to children aspiring to be Basquiat as well as paint with a sheen.

We learned what we shouldn’t do by looking at what we had to do again when our residents vacated. We had limited resources in those days, and, for every good decision in terms of longevity, there were horrible decisions made in an attempt at frugality. Used appliances tracked down all over the city died within months of installation with no recourse.

One of the things we began to realize was the incredible variability of product and process with scatter site single family rentals. I wanted to create order and something that could be replicated but was realizing the lack of uniformity was incredible. Neighboring houses on the same street had completely different layouts, different mechanical systems, and differing degrees of functional obsolescence.

Through all of our improvements, we began to collect, accumulate, and articulate what would become our Auben standard and what would become our mantra of Improving Augusta One Home at a Time. As committed as I was to the vision, there were many days and nights where it felt like a vision of one, but I would have many people who would come along for the ride.

The first portfolio of homes…

As I discussed in my previous post, I don’t remember seeing a singular market cycle shift event/turning point in Augusta in 2008/2009. It’s easier to remember the change in terms of news headlines: Big Investment Banks Failing, Real Estate Values in FL and AZ Cut-in-Half Overnight!

Maybe it was my naïveté or contrarian nature but I don’t ever remember feeling like there ever was not opportunity in Augusta. People still needed a place to live and those places were suddenly a lot more affordable.

My first big break would come in the form of a package of homes that a local bank had taken back through foreclosure. I was fortunate enough to meet a banker named Jane who believed in me from the beginning. Given my norm was disinterested bankers–feet on desk, clipping their fingernails into a trashcan–I didn’t take Jane’s trust lightly and spent a lot of time and energy cultivating and maintaining it.

The bank had a small problem, and I was ready to jump in the water to help. The homes were in the areas I wanted to be in Richmond County more specifically: Olde Towne and Harrisburg. But they all needed a boatload of work. One house had a tree “resting” on it–-which we had to remove with a crane.

I did precisely what every entrepreneur should not do and hired friends (and family) and significant others of the friends and family. We were like Motown with the interconnectedness and our ambition but a mile short on our organization and consistency.

My good friend from college, Caleb, who was an investor in California, was one of the first to see the opportunity in Augusta. A fellow to-his-core contrarian, Caleb was sold on an opportunity he wanted to see, and he was soon in-market to look at the dozen or so properties we bought for under $150k.

In retrospect, the sales price doesn’t seem real. A couple of years later, when it was seemingly much worse, we bought a package of 50 homes pre-foreclosure for a couple of hundred thousand dollars and immediately sold the package to my first large investor.

But, in 2009, we were going to begin to make the mistakes which would lead to the creation of Auben Realty. Caleb bought in and work began. Everything was off from day one, but our biggest miss was underestimating the renovation work that needed to be done: $10k became $20k. If we said $20k, it was $40k, and the bigger the budget the larger the variables affecting that budget. I quickly learned that I really wasn’t qualified to estimate the level of repairs we encountered, and my team also wasn’t able to execute on my representations.

We began work on homes on Second Street, Clark, Battle Row and many streets I would learn really, really well riding around monitoring “progress.” The energy and activity was intoxicating, particularly against the backdrop of doom and gloom in real estate at the time. It felt like we were discovering something no one else saw. Learning on the fly, I could barely keep up, but the frenetic pace and seeing daily transformation were early indicators I had chosen a career I would love.

The plan was initially to sell some of the homes to pay for others Caleb would keep, but our execution would alter that. We missed nearly every renovation budget, but thankfully we bought the homes so cheap that we were ok-ish.

As we began to sell some of the homes off in 2009 and 2010, we realized we needed to become more official and try to establish a way for us to keep some of the commission dollars in-house. Natalie got our license, we found a broker for hire, and Auben Realty was born in September of 2009.

We moved office locations from a single-family house in the suburbs of Martinez, GA to an iconic building on 1918 Central Avenue, a former Pure Oil gas station designed to look like an English Tudor cottage. We were official.

A change was coming…

In mid-2008, the market cycle mirage was still in full effect. To say the lending standards were loose would be a dramatic understatement. NINJA loans were more than prevalent. They were normal and underwriting occurred in a matter of days, if not hours or minutes. NINJA, which was short for no income, job, or asset verification, ensured that everyone was able to get high with increased supply continuously coming on the market.

We barely noticed any change in the weather. Macro trends weren’t relevant. We were just trying to figure out how to flip homes and keep the train rolling. I’ve tried to think back to those days in search of any defining moment of a market cycle shift. But news and market trends took a while to reach Augusta.

In Augusta, the market cycle change was more of an ease than a shift. I think a lot about the line from Ernest Hemingway’s novel, The Sun Also Rises, where the character Mike describes bankruptcy as gradual and then sudden. The market was always going in one direction: up. Until, suddenly, it wasn’t.

Augusta never had a dramatic run-up in price appreciation, so we didn’t have a precipitous fall. Suddenly, everything just seemed a lot harder. I remember it materializing first in our owner-occupant buyers. Underwriting, which was previously instantaneous, began to take longer. In 2009, 2010, and 2011, trying to close a loan for an entry-level buyer reached points of absurdity. If you were using a big bank, you could expect it would take 60-120 days to close, in what previously took 30 days. Your only hope was using local banks who didn’t need 9 people to “touch” the file to reduce the likelihood of default.

Between the fall of 2008 and 2009, I began to understand we had to shift course. Homes weren’t only taking longer to sell, they simply weren’t selling. It became clear that I would have to prioritize the rental portion of our business. I didn’t know anything about being a landlord other than I didn’t want to do it and didn’t think my career was in a position to not have large infusions of cash from home sales.

A change was coming and luckily we were somewhat aware. I initially tried to use some local property managers but got very frustrated with the results. Homes weren't renting, signs weren't put in the yards, and calls didn't get returned. The SFR property management realm at that time was a haven for agents who struggled to sell and a means to an end for brokerages to get more sales listings.

I thought there had to be a better way, and—even clueless—I could do better just by calling people back. I knew enough to know I needed help. I was awful at admin activities which did not present challenges and the ability to be creative.

So, I posted an ad on Craigslist.

I don’t remember all of the activity, but I interviewed several candidates at my makeshift office which was a single family home in Martinez, GA. The final two applicants were a guy who I enjoyed discussing music with and a much more qualified woman named Natalie who had recently relocated to Augusta.

Natalie, new to town and job searches, had notified her fiancé at the time of the precise coordinates of her interview with me, in case I turned out to be “some sketchy Craigslist guy.” I was pretending to be a lot of things in those days, but I was not a sketchy Craigslist guy. I was a real estate investor in need of help.

I made one of the best professional decisions of my life, offering Natalie the position. She agreed, and her first day was figuring out what we could work on together. Always looking at the big picture, Natalie and I made a filing system for the 3 or 4 properties we managed. I ran out of items for Natalie to do around 2 o’clock and asked her to go get the drycleaning for the nice shirts I had to wear to bank meetings to beg for money.

Even with our auspicious start, Natalie turned out to be a truly significant link in the creation of Auben. She was the yin to my yang. Everything I loved to do, she hated. Everything I hated doing, she loved. Where I was a head-in-the-clouds dreamer, Natalie was a practical penny-pincher. It was the first time I ever experienced this complementary dichotomy in a partnership, and it was liberating. We didn’t always see the world in the same way but we got sh#! done and began to create the building blocks of an investor-focused brokerage who acted in the best interest of our investors all the time.

The early days of Auben homes…

After we sold the Willowood home, I set out to find other homes to flip. Once you start the flipping machine, there’s a pressure to feed the machine a pipeline of properties. And I had hardworking people committed to my fledgling real estate vision and wanted to keep the train rolling.

High off a profit of 20k-ish, I hit the streets to find more homes to flip. I limited my search to the greater CSRA (Central Savannah River Area) but there really was very little I would not look at within an hour drive of Augusta. While it continued to be difficult to come face to face with distress, I enjoyed the challenge of coming up with a solution for the home-sellers I met. If that solution was not me, no problem. There were thousands of houses to buy and sell. And I began to understand the many variables of conditional and situational distress, always creating market opportunities—if you are always looking.

Looking for leads anywhere, one of my early mentors, Bernard, told me to go through my phone starting with letter A, and call every contact to tell them I was looking for a home. He used this method of contact cold-calling with frequent success. His approach was definitely aided by Bernard being extremely gregarious and friendly.

We also spread “We buy Houses Cash” bandit signs around town on Friday afternoons, hoping we could get through the weekend without municipalities asking us to take them down. We had “We Buy Houses Cash” magnets made and gave them to our contractors with the proposition of $500 if they got a lead on a home we purchased and closed.

I needed a name for my business and knew Schuetze Homes was not an option. Around this time, many companies like Zillow and Google were making up/modifying words for their brand. I wanted to be trendy but I still wanted to be at the front of the phone book. We named the company Auben Homes, not realizing people would always refer to it as “Auburn” or assume I went to Auburn University. It would not be the last time I realized that Georgia south was different from Kentucky south.

My brother’s college friends created a logo and we ordered free business cards from VistaPrint. Different versions of the logo were blue and black and brown and beige. Auben was born.

I went on the road to real estate seminars to gain more education. This was a practice I did consistently to try and make up for the sharp learning curve I was experiencing daily. The seminars were good for inspiration, even when I took the inspiration too far.

A year after starting Auben Homes, I announced my goals to my team, including the creation of an international office. My partner, Natalie, pointed out that we could barely make payroll. I was not deterred with details. I had more debt than when I began and a ballooning team of people who hoped I could provide a clear path to a job and a career.

Even though there were many daily struggles and small failures, I relished the challenge. I credit my parents and their experience as small business owners for instilling in me a strong sense of independence balanced with a desire to create and provide opportunities for myself and others. I wasn’t going to always get it right but I was going to get up again.

Daily, I made up the habit of calling my friend, Andy, early in the morning to remind him: “It’s a great day to be in real estate!” I told him this was motivation for him but I think it was really affirmation for me to keep going. We found a beautiful bones home on a street off Highway 1 outside northern Augusta, South Carolina. The home was a 1940s built Cape Cod- style cottage on a street called Bleachery in an area locals called “The Valley.” We also purchased a 3 bedroom/2.5 bathroom brick ranch home on Indian Trail in an established neighborhood called Montclair. Looking at names drawn in the cement sidewalks, we later confirmed this to be the childhood home of a good friend’s wife.

Bleachery and Indian Trail began with the same intensity as Willowood, but our small operation struggled to keep up with 2 flips. My mentor, Justin, came with tools to help bail me out of a floor joist issue on Indian Trail. Daily, I looked for instructions everywhere, taking mental notes of everything and everyone. I was learning the basics of investing, unaware that 6 years later I would oversee a team completing 125 renovations a month from Jackson, MS to Kansas City, MO.

Story is still being written @Dan M. Sharing some of the different detours my investment career took to hopefully give beginners confidence and perspective that its a long game and persistence is what often defines those who succeed.