Sound Capital CEO David Huey discusses why dependable, purpose-built capital is now essential for builders navigating margin pressure, tighter bank lending and the push to scale in 2026.
#ConstructionFinance #BuilderReliability #CapitalAccess
#ConstructionFinance #BuilderReliability #CapitalAccess
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00:07Reliability is the word that comes to mind. It's exactly the issue that so many builders
00:11are facing. They walk into a situation, maybe they've got a local real estate agent who brings
00:19them an opportunity and they want to make an offer on this land. Well, reliability steps in
00:25right off the bat. If you're not certain whether your capital is there for you, can you really make
00:31a confident offer? And then you get, maybe you funded a loan at this point and maybe the lender
00:38gave you fantastic terms that you feel really great about. But at the very next minute, you're
00:44concerned about, gosh, are they going to make my draws? Is it going to take them a month or three
00:49months to process my draws? And so again, reliability becomes a major factor. And the other
00:56end of the, to add to that, I should say, let's say you've got a lender that uses warehouse financing
01:05and that warehouse financing is provided by a bank that's controlled by a regulator, as of course,
01:11they all are. And that regulator realizes that that bank is above their real estate, the regulatory
01:18limit. And they get their warehouse lines cut. So the lender that you worked with may not have any
01:26financial struggle whatsoever, but if their warehouse line gets cut, your draws got cut. So there's so
01:32many areas in which reliability becomes paramount and, and, and truly a key to a necessary step to
01:41survive, let alone thrive. The word that comes to mind is consistency. Um, if you're a production
01:52builder, you've got projects constantly in your pipeline and the ability to consistently, and I'll
02:01swing back to reliability again, but consistently and reliably depend on your capital partners to be
02:08as you continue to grow and scale your business. We had a situation, um, gosh, it's probably been a
02:14year ago now, but, uh, I'm not very good at keeping track of time sometimes. So, uh, but we had
02:19a builder
02:20who had successfully completed and a hundred percent exited 89 straight projects. Number 90 comes along,
02:27it's a $24 million project. And the bank says, yes, no problem. And they get to be just a few
02:33weeks
02:34before closing and the bank's like, we can't do it. And these guys had already dropped this number.
02:41I don't remember, but we're going to say $2 million in feasibility and engineering and all the things
02:47that a builder has to invest in upfront to get it, to, to make sure they've got a project that,
02:52that's going to work for them and pencil. And they had no choice, but to move outside of their banking
02:58relationship. And, and we stepped in and funded that loan. And we've since funded three more loans
03:03with these guys, but they had never used a private lender. They had only used that local community
03:08bank and they had a great relationship with them. But when that bank couldn't perform, they had to
03:14scramble and being in a situation in which you have to scramble is not good for one's stress levels.
03:26Cash to close is, um, becoming a bigger and bigger and bigger issue over the last, you know,
03:32six months to a year. And it's becoming a bigger issue because of, uh, banks are increasing deposit
03:40requirements. They're increasing liquidity requirements and they're decreasing loan to
03:46cost loan to value ratios at the exact same time. So what that means is a builder has to come
03:51in with
03:51more cash to close and more cash to close is, is not an easy thing to overcome because most builders
03:58manage their business really a little bit more based on cashflow. And what do I have available?
04:05Where can I invest it? Where do I need to deploy it? Where do I need to place it? And
04:08anything that
04:09locks up or reduces that availability of, of cash has a very direct negative impact on their ability to
04:17scale because instead of doing two, four, or, you know, 10 projects, depending on the size of,
04:24of, of, of your, uh, operation, you're now only going to be able to do, you know, one, two, or
04:30three,
04:30because if you've got to double the amount of cash that you drop into a single project or your deposit
04:36requirements or your liquidity requirements, or any of these things are increased by your current
04:41financing, that's that much less cash you've got to deploy. And therefore that's that many fewer
04:47projects that you can step into. And, you know, talk about being on a rat race, right? Where you
04:54can never get ahead because the cash requirements just keep going up and up and up. And you can
05:00therefore never scale your business because you can't go from doing, you know, let's just say three
05:05projects at a time to doing four or five because of that cash to close. And it really is becoming,
05:11I think the, the most important issue for a lot of builders out there that are trying to scale,
05:18um, you know, and, and maybe they've had a great experience and they've got a reliable lender
05:22and they've, they've found someone who has performed for them historically. But again,
05:27as those cash to close constraints, um, get tighter and tighter and tighter, meaning that they've
05:33got to bring in more cash to close, that's going to reduce their ability to scale.
05:42Unfortunately, it doesn't just start post-close. Um, one of the biggest fears that our industry
05:49struggles with is this bait and switch concept where, um, uh, maybe a less, um, sophisticated
05:57lender will put together a term sheet that they can't actually execute on. And you get to the closing
06:05table and the terms are dramatically different, but you have no choice at that point, right? It's,
06:11too late for you to pivot. Um, so unfortunately it doesn't even just start after the close,
06:16but after the close, the fear becomes again, draws. And I can't tell you how many stories and how many,
06:23how many borrowers come to us after a really bad experience with a lender. And if you can't make
06:29your, make your draws, then you've got to come cash out of pocket to pay your subcontractors.
06:34If you've planned your cashflow and you've, you've, you've deployed your cash so that you can
06:40maximize the number of homes you're building. Cause we all know we have a shortage in housing
06:44today. And so it's the right thing to do from a moral standpoint, let alone from a business growth
06:49standpoint to have your cash deployed and, and steps right back into the cash to close issue we
06:55just discussed. But if you've got your cash deployed in order to build as many homes as your
07:00market will absorb, then you get a situation where a lender can't or won't, or there's such delays with
07:07your draws that you run the risk of subcontractors walking off the job site. And it's not quite as bad
07:14from a labor market standpoint today as it's been over the last five years, but that subcontractor in
07:19many cases can literally walk across the street. We'll have a job in 15 minutes and you may not get
07:25them back and talk about a stressor, a stress factor is an inability to, I don't know, let's make up
07:34an
07:34example, but an inability to get your finished plumbing done. You're not going to sell a house
07:40until the plumbing's done. And the carrying cost of that loan can be absolutely crushing,
07:46let alone the risk to your subcontractor base. The thing that comes to mind immediately is hope
07:58springs eternal. And I think with a lot of builders out there, they walk into a situation hoping
08:06that everything will work out, hoping that their capital is reliable, hoping that their subcontractors,
08:13their suppliers, all those things are going to be reliable. And unfortunately, hope is not a
08:20strategy, not to make this all about cliches, but if you can walk in with confidence and clarity,
08:28that's the difference between a builder who is able to scale and a builder who is stuck in this
08:35cycle of hope. And the risk and the stress that comes with building a business around hope
08:45really draws into question whether it's worth it. So if a builder can really focus on consistency,
08:55reliability, and I don't know what the right word is, but the right execution with a partner they can
09:03trust who is going to be there with them through thick or thin. And that thought raises another point.
09:11A lot of lenders come into ground-up construction lending who have a fix-and-flip background.
09:16And we have a fix-and-flip background as well. Now, we moved on from fix-and-flip, oh boy,
09:22many years ago,
09:23many, many years ago. And there are a lot of lenders today that think that ground-up lending is
09:28almost the same as fix-and-flip, and they roll into ground-up, not realizing how incredibly
09:36different it is. Everything is different. It seems so simple to think, well, I do draws already.
09:46How hard could it be if you're a fix-and-flip lender? But you might do one or two draws.
09:51You're not doing a draw every week. We do 400 draws a month right now. Which reminds me,
09:58by the way, whoever gave you the data at $2.1 billion, we're now at $3.1 billion. So we've
10:04funded another billion dollars since that data you were provided. So I'm pretty proud of that.
10:10But the point, again, comes back to reliability and consistency are so necessary and critical to
10:18scale. And the difference is going to be a lender who really does understand ground-up construction,
10:24not necessarily a lender who does 80%, 90% of their business in fix-and-flip. And I'm not suggesting
10:29they can't get there. They can do the things we've done of investing millions of dollars in technology
10:36and systems and processes and bringing in true experts with 20, 30-plus years experience in the
10:42space. And we really understand builders. Our president was a former builder. He's been in
10:49finance, not just finance, but ground-up construction finance for 30 years. So we actually
10:55really understand the business at a different level than most people in our space. And so one of the
11:02keys, again, is finding a lender that really understands ground-up as opposed to finding a lender
11:07that either does everything and has a little segment of their business doing ground-up, which would imply
11:13that they're not as committed to it or not as knowledgeable, or a lender that focuses on a different
11:18segment of the business and is adding ground-up, they might provide great pricing today in order to buy
11:25market share. But if you don't get reliability and consistency and performance, you don't even know the
11:33real cost. And the real cost will be, unfortunately, a hard-learned lesson down the road.
11:46Well, we say all the time, go, do it, right? Try it out, because we know you'll be back.
11:55Um, and, uh, speed of execution is always important, right? The ability to make decisions
12:01quickly is a, is truly a value add to every business. And it's a necessary part of being a
12:07CEO and running a company. At the same time, haphazardly or foolhardly racing into a bad
12:14situation, uh, that never pays in the end. And so, uh, speed is important. And it's certainly one of
12:22the value propositions that all private lenders offer over bank, uh, uh, facilities. Um, but
12:29that's not really as important as, again, reliability and consistency, consistency and
12:36performance. Speed is good. Again, don't get me wrong. Speed is a good thing, but a lender who
12:42doesn't have a good draw system set up for a builder that's doing a draw a week or a draw
12:47a month and
12:48hundreds of them a week or hundreds of them a month, you're going to find yourself in a situation
12:52where, uh, your draws are not getting processed. And if you get in that situation and if you're
13:00pushing from, uh, from a speed to execute standpoint, that would imply you're likely pushing from,
13:07um, a cash flow standpoint as well, a cash deployment standpoint. And you might just in fact,
13:12find yourself in the exact situation I described earlier where you can't pay your subcontractors.
13:18And, uh, and that, that can result in bankruptcy for a builder. So speed is absolutely important.
13:24It's one of the core advantages that private lenders offer over, over most bank situations. Um,
13:30but prudent speed and reliable speed and practiced speed. We say all the time when we're,
13:40when we're addressing a situation or a challenge that we've seen this movie before,
13:46right? So we know how it's going to play out. And so we know how to address situations prudently
13:50and quickly, but that doesn't mean haphazardly. And, and I think that's the real difference right there.
14:01It's been many years since we focused on fix and flip, but we, we got our start in the great
14:06financial crisis purposefully. We recognized a need and an opportunity to help. And we focused
14:12on, uh, foreclosure construction purchases. And in that space, you've got 20 minutes to make a
14:18decision when you know that a property is going to go to auction and you've got to do all your
14:22underwriting. And so we cut our teeth and, and granted, you know, this is what 15 years ago or
14:28whatever, whatever the math would be. Um, but we cut our teeth in that speed of execution. So we
14:32learned how to do really good underwriting and, and all the things that we needed to do to feel safe
14:39in, in our lending. And, and also frankly, to protect our, our borrowers, uh, from circumstances
14:46because we've had back in the day, we've had many cases where somebody almost accidentally bought a
14:50second and our work and our diligence to be able to quickly, um, ferret out those sorts of challenges
14:57proved to save our borrowers from many situations. But fast forward to today, we've not forgotten that
15:05speed of execution. We've not forgotten how to, um, how to, what the things that really need to be
15:12focused on, uh, that are the most important things. And so, um, gosh, unfortunately a specific example
15:21doesn't come to mind, but the, the, the kind of thing that, that would be a situation in which someone
15:27raced to close because they've got to get this deal closed would be, they find out after the fact that
15:32it's Dutch interest. Well, that can be crushing for a builder loan because Dutch interest while being
15:41fine, Dutch interest, just for those who maybe don't know that term, Dutch interest means you're paying
15:46interest on the entire balance, whether drawn or not. Dutch interest was very common in the fix and
15:52flip world. And that made sense because in the fix and flip world, you were doing, uh, well, let's make
15:57up numbers. Let's say 80% of the note amount was deployed at the initial advance for the purchase of
16:03the home. And then there's 20% of the note amount that was held back for construction. So if you're
16:09paying
16:09Dutch interest, you're paying interest on the entire balance, but 80% of that balance is deployed
16:15so it's really only that extra 20% that you're paying interest on that you don't have yet. That's not
16:22good, but it's not, it's not crushing. It's not project destroying. Now you, you do a ground up
16:28construction loan and let's say you deploy 20% at the time of closing and 80% is held back
16:35for
16:36construction. Now that Dutch interest can absolutely, it's not just can, it will absolutely crush your
16:44project and your profitability. So racing into a situation without understanding your lender,
16:51without understanding the terms, um, can be incredibly dangerous.
16:59We're in this for the longterm. Um, we're in this because we thoroughly believe in the thesis
17:07that we've got a shortage of housing in America and the affordability challenges that we're all hearing
17:12about and witnessing and, and, and in some cases personally struggling with are a perfect example
17:17of that. So we're here to build more houses and to do our part in helping to build more houses.
17:28By being in it for the longterm, it really changes your decision-making about how you run your business.
17:34We're not in it to let's make as much money as fast as we can. We're not in the transactional
17:41business. We don't focus as much on short-term buying market share. So then we can raise prices
17:47later after we've, we've won a builder. We're focused on building more houses because we're
17:52focused on improving our community and improving homeownership. We, we really believe in the studies
17:59that have been done that show a direct correlation between the, the percentage of homeownership and,
18:05and crime and, and not just crime, but violent crime. So we also have 20 something kids who are
18:12going to struggle to buy homes, uh, without help from mom and dad. And that's not the way it should,
18:17should be. And that's not the way it was. I bought my first home at, you know, I don't,
18:22I don't even remember 23, 24, 25, something like that. And, and I worked hard and I saved my money
18:27and,
18:27and, and I really focused on the ability to buy a home because it was important to me. I grew
18:32up on a farm
18:33in Indiana and the living in an apartment, uh, in, in the small space of an apartment, uh, wasn't for
18:40me. And so even though the house I bought wasn't much bigger than the apartment I lived in, having
18:45a little bit more space was important to me and seeing the average age of a new home buyer, new
18:51home
18:52buyer. Uh, I don't even know what it is. Like, I think the last data I heard was 43. Um,
18:58but don't
18:58hold me to that, but seeing people who are not buying a home for 10 and 20 years longer than
19:05my
19:05generation, uh, or at least me personally, um, is really concerning because I think home ownership is
19:12truly the number one, most important element toward, uh, use the word wealth creation and different
19:21people have different definitions of what wealth means. Um, but when you own your home and you make that
19:27mortgage payment every month and, and I'm not suggesting that it's not hard sometimes to make
19:31that mortgage payment, but when you make that mortgage payment every month, a piece of that
19:36mortgage payment is going into equity and it's like a forced savings plan. And when times are tough,
19:43if you keep making that mortgage payment, you're building equity and you're putting away a little
19:48bit of money every month that someday down the road, you're going to be rewarded for that diligence and
19:53that, that struggle during, during those times. And so again, I believe the biggest difference between,
20:00you know, I hate to use the word wealth, but you know, but between wealth and struggling to build wealth
20:07is whether you're a homeowner or not. And I really am concerned about the path that we're heading down
20:14in terms of home ownership and affordability in our country. And I, I, I, in my heart and in my
20:21gut and
20:21in my soul, I believe in this thesis that we have to build more houses.
20:32There's so many ways to address that. Um, you know, again, reliability and consistency,
20:37I know I've, I've, I've touched on those topics over and over and over and, and your opening question
20:42mentioned reliability. You've got to have a lender that understands your business. You've got to have
20:51a lender that's there for the longterm. You've got to have a lender that specializes in ground
20:56up construction lending. Uh, because if you don't have those things, you're not going to be able to
21:02scale because, um, I I've said for many years that all forms of investing has a certain number of big
21:09rocks that can trip people up. Um, but one of the hard things about ground up construction lending is
21:15there's a million little things, a million little rocks that you can stumble on. And we believe
21:20that the only way you can learn those million little things is by having stubbed your toes
21:24over and over and over. And so repeat customer business is really important to us. Uh, last time
21:30we did the, uh, a true study and, and, and val, uh, validated the data, we had 95.3%
21:37repeat customer
21:38business, meaning that our customers were coming back to us over and over and over. And that's a really
21:43important part of our business because it allows us to be more efficient and more effective for the
21:49builders we do serve. It also allows us to, uh, to be more reliable in the sense that we don't
21:57have to
21:57do as much work with a repeat builder as we do with a brand new builder. And that allows us
22:05to pass the
22:06savings on to the builders that we choose to work with and the business that we choose to do.
22:12The other side of that question though, is why it's so important to have a relationship based lender
22:18is, uh, a lot of builders right now are struggling with their 2022 vintages. Still, um, they bought
22:25land at the top of the market where prices really high. It was really competitive. We were coming out
22:29of COVID and, uh, there's, there, there are a lot of challenging transactions. And as every experienced
22:37builder knows the most important thing from the physical property standpoint is how much you're
22:45into your land for, because if you're into the land too high, you're stuck in a situation where
22:52you've got to build a bigger house than maybe the market will bear. If you've got to build a bigger
22:56house than the market or bear, your cost of construction is going to be higher and therefore
23:01your sale price is going to have to be higher. Therefore you're carrying terms,
23:05your carrying time is going to be longer and it can absolutely not just crush your profits,
23:10but you can end up in a situation where you're upside down very quickly.
23:14And so the land purchase is so important. The reason I bring that up in this context is we have
23:20builders because again, 95.3% of our businesses repeat customer. Most of our builders we've worked with
23:26for years and years and years. And so we're struggling through them, those 2022 vintages
23:32right alongside them, right? We're not looking at it as a transaction that is at risk of failing.
23:40We're looking at a builder relationship and saying, how can we make sure this builder doesn't fail?
23:46How can we make sure this relationship doesn't fail? How can we be there to support this builder
23:51through this tough transaction? How can we help them exit that as close to successfully as possible
23:58so that they can continue moving forward and our relationship can continue moving forward?
24:04It's such a different mindset. And there are a lot of people in our space that come from
24:10the non-performing loan segment where they don't understand the power of repeat customers. And if you
24:17come from the NPL segment, every transaction is a unicorn, every single borrower is a unicorn. You've
24:25got one house for a consumer that you bought at an auction or whatever the circumstances where you
24:32financed it or however they got it. But you don't look at that person as a repeat customer. And therefore,
24:40your goal is how can I maximize the amount of revenue I generate on a per borrower basis? Because
24:49if I've got a borrower that has any positive cash flow, I've got to maximize it because I know I've
24:55got all these borrowers over here that are going to lose all this money. And so it's a completely
25:00different mindset for how you treat your customers. We don't treat a customer as a single transaction
25:07customer. We treat a customer as a long-term business relationship. And we recognize that
25:14not every transaction within a long-term business is going to be Pollyanna and perfect. And so we're
25:23trying to help builders not only maximize their cash flow, but we're trying to help them minimize the
25:29number of bad transactions. At the same time, we're trying to help them minimize the pain or loss
25:36associated with a bad transaction so they can get back to doing more profitable transactions.
25:46We're right there in it with you, I think is the most important message. Again,
25:51this is a long-term play. I owned a software company. I made a little bit of money in my
25:55twenties and maybe early thirties and eventually hired a wealth manager. Blue chip all the way. I was
26:04young enough that I knew I didn't want to retire. I knew I'd go back to work. And so when
26:09I hired this,
26:09uh, this gentleman who, who's had, who has still to this day, a great career and is doing great work.
26:15But I said to him, I was 32 at the time. I remember that now I was 32 years old.
26:20I was like, uh, I will
26:24go back to work. I know I'm not working now. I'm taking some time off to figure out what I
26:27want to do
26:27next. I will go back to work. So I'm going to focus on building a revenue stream and building
26:32a business that makes money. My only ask for you is just don't lose it. That's it. I just don't
26:38lose
26:38it. Like that's the one thing I need you to do. And less than six months later, he had the
26:44great
26:44displeasure of calling me to admit that we had lost a million and a half dollars that day,
26:51as you said earlier. And it was crushing for me because as a, a 20 something building a software
27:00company, I all of every dime I made was rolled into building that company. Um, you know, I was
27:07living paycheck to paycheck because every single penny I could spare, I was reinvesting into that
27:14business. And I never made a million and a half dollars in a year. I'm not sure I made a
27:19million
27:19a half dollars in 10 years combined. I'd have to go back and look at it, but to lose that
27:24amount
27:25of money in a single day in an asset class that I didn't really understand was, was the absolute
27:31turning point in why I started this company, because I was seeking a capital preservation vehicle.
27:37And it started out honestly as a capital preservation vehicle for myself, but we so quickly recognize the,
27:44the need in the marketplace and the need for reliability and the need for someone who
27:48wasn't just solely focused on profitability, but was focused on a bigger, longer term strategic
27:56direction. And for us at that time, that strategic direction was capital preservation.
28:01When you're focused on capital preservation, you make long-term decisions, not short-term decisions.
28:07And then over time, as, as the housing market changed and this affordability crisis
28:12became as strong as it is today, our mission is still capital preservation. And that capital
28:18preservation applies not just to me, but our investors, but it also extends to our builders.
28:24We're helping people build wealth in their business and we're helping them do that by building something
28:31that our marketplace needs, which is more homes. So then the mission, while still focused on capital
28:39capital preservation evolved, I guess, from just capital preservation into, we need to do something
28:47about affordability. So again, we're in this for the long haul. I hope to be running this in 20, 30
28:53years,
28:54God willing. But that changes everything about the way we make our, the way we run our business. We're not
29:03in the transaction business. We're not in the quarter by quarter business. We're in the multi-year,
29:08multi-decade business and long-term decisions. And that focus on long-term decision making completely
29:15changes the way you behave, but also the way you treat your customers and the way you're there for
29:22your customers. So circling back to the opening point, we're there with you, right? We're there with
29:27you. We want to help you grow. We want to help you build your business. We want to help you
29:32help our
29:33our country by building more houses.
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