As someone who has spent his entire career focused on digital marketing, product innovations, and building or acquiring “digital platforms,”; it’s interesting to see the similarities in approach and some of the critical differences between real-world and digital assets.
In any investment, there is a risk. Still, the group charged with leading the acquisition or divestiture's main job is to de-risk that investment through thorough analysis, research, and a long-term strategy aligned with the capabilities of the business/investors. In corporate M&A, often this is doing consumer research into the product-market fit of the businesses solutions, how proprietary the product/intellectual property is, how valuable the users of the product and how likely they are to stick around, understanding the leadership of the Company you are looking to acquire, analyzing synergies between the acquirer and acquired businesses, and building financial models to project various possible scenarios. When it comes to price, like most things, it’s partly a sales process (getting the other party excited about your business), part understanding the motivation of the other party (why do they want to sell, what is their long-term dream), and part creating the financial outcome that aligns with both parties goals.
At Mansion Group, we take some key learnings from Corporate M&A that make us a bit different in the Real Estate investing sector. We also follow some primary real estate investing 101 fundamentals in our underwriting approach that I won’t elaborate on here, but that includes:
So now you know a few of the basics, how does Mansion go about sourcing, underwriting, and acquiring the homes in our portfolio for our investors? This post may, over time, date itself, as we are learning daily, but currently, we follow what we call the APPROACH.
It’s a long acronym, but the process isn’t meant to be short or cut corners; it’s intended to ensure we have done our diligence and are selecting homes that we are confident will perform well on our platform for years to come. So what all is in the APPROACH? I’ll break down each step after the break below.
A — Analyze with A.I.
P — Proprietary Attributes.
P — Partnerships.
R — Risk Reduction.
O — Organic Growth.
A — Analyze with Humans.
C — Contract.
H — Home.
Now let’s spend a few minutes in each area to tell you what that means to Mansion without giving away too many of our internal processes :)
There are over 750k active MLS listings in the U.S. at any given moment (as of Nov. 2022 FRED Data…see chart.), so evaluating every single listing by our criteria by hand would not be scaleable even at our current size. Even in the Charlotte market, there are over 7k qualified MLS or FSBO listings at any given time (homes or townhomes). We use machine-fed rules and simple evolving logic algorithms that help us surface opportunities that meet our current investment criteria and where the data suggests that we could meet or exceed our return thresholds.
Although rules-based, these criteria are flexible; as many of these criteria move with dynamic market shifts, the algorithm considers some variance across its rule sets. For example, our logic may evaluate a band in acquisition price possibilities vs. asking price (what could we purchase a home for vs. what are they asking for it.) to ensure we aren’t cutting houses that would accept a lower price. Current data sources for our A.I. include AirDNA (short-term rental data), Zillow (Public MLS and Market Data), ATTOM Data (real estate aggregated data), HouseCanary/Comehome.com, Mansion internal data (historical performance vs. third-party projections), and many more.
A.I. means many things to many people, but at Mansion Group, currently, it’s shallow-level Ai, but we have big visions. When the need arises, we have strong internal capabilities (our Chief Growth Officer led the data & A.I. teams at Red Ventures…who recently got press for some of their A.I. generated articles used on the asset they own Bankrate.com).
Want a taste of our vision? Some future ideas in our pipeline for our A.I. (we call it the Butler)…looking at images of listings to find those that fit our top-performing aesthetics, categorizing homes based on image recognition or text extraction of features that matter (quartz counters, exposed wood beams, brick exterior), looking at permits programmatically for improvements, looking at Google Street View to gauge neighborhood synergies with the target home and many more.
Less than 1% of available homes make it through the first A in the Mansion APPROACH to the more human-centric evaluation criteria.
Proprietary attributes may sound broad, but this is a crucial factor in our criteria. Simply put, what makes this house unique and what qualities does it have to make it stand out from the competition? Sometimes this could be a home with no HOA restrictions where all the neighboring homes restrict rentals. It could be a home that had a famous architect. It could be a unique style. It could be that it’s more beautiful than any other home. It could have a spa-like pool/hot tub in the back. It could be nearby an incredible venue or playground. Maybe we know a beautiful new development will be next door in a year.
We won’t share all of our target criteria, but if it isn’t a standout, we likely aren’t interested.
The Partnerships P comes out in a couple of different ways. 1. Can finance or bank partners provide improved terms for this home (market or style)? 2. Is the developer/builder a Mansion partner who can provide beneficial HOA or Finance timing terms? 3. Are there community businesses that would make strong partners and advocates for Mansion if we joined the community?
Partnerships can make or break the long-term success of a rental property both from financial, regulatory, and community standpoints. We take a proactive approach to seeking cooperation before acquisition vs. an ask-for-forgiveness system.
To be noticed, we have an extensive checklist of what this specific Home can do to reduce the risk of underperforming our model. We look at the quality of appliances, the roof’s age, neighbors’ buy-in, historical hotel prices nearby, finance terms, market performance, attribute impacts, and more. No home checks every box, but the more we can check (and our list keeps growing), the more confidence we have to pursue a house.
Mansion has some secret sauce to help our homes outperform, but we never want to rely solely on that. Our investors want confidence that their real estate investment would still be good if Mansion ever went away. We can’t make any guarantees, but looking at organic growth trends at a neighborhood level, including development permits, supply vs. demand in the area, appreciation estimates, migration facts, new employers, and events that may bring tourists, is vital to check this box.
As you may have seen from the first five steps, data, checklists, insights, and feedback are gathered across various digital and in-person sources. After this aggregation phase, we have three or more team members with years of experience in real estate evaluate the opportunity. If there is consensus, one of the three will own the final two steps of the process. If there is debate, the group will present their thesis to work towards a consensus. If one can’t be reached, we pass.
Going into the contract isn’t a black-or-white process. The leader works with our brokerage team to finalize the terms, price and asks of the seller and navigates the contract process on the purchase and any other contracts with vendors, etc., necessary to get to close and beyond.
Owning the real estate asset is just the beginning. The final part is working to make the models a reality. The exact process owner is responsible for working with our pricing, operations, hospitality, and design teams to get the Home up to the Mansion standard during the process. This process includes setting up utilities, handling renovations or paint, interior design, photography, smart home technology setups, listing generation, hospitality training, and finance/accounting setups.
We then take an outside team member or friend of Mansion through the process from booking to check-in to stay and post-stay to find any issues. We often provide early stay discounts to generate revenue for our investors while still working on perfecting the Home.
It may sound like a lot, or perhaps not enough. Our APPROACH is a work in progress and likely always will be as we work to ensure a significant and consistent product for guests and investors alike.
For those interested in diving deeper, we’re also happy to share some of our fancy Google Sheets that walk through the financial projections, IRR expectations, etc., for a property that enters this approach, including comp data. Just reach out to investorinfo@mansion.io.
The Content is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Please consult your financial advisor or tax professional regarding your investment strategy.
