In any uncertain venture, there’s a relationship between risk and reward. Risk has to be compensated for. Risky projects will be more profitable, and fewer in number, than safer ones.

The construction industry is riddled with risk. The usual macroeconomic risks are amplified, because construction depends on investment cycles which are even more volatile than the rest of the economy.

Then there’s the panoply of construction-specific risks. The risk the planning system will sink the project. The capital at risk during the construction phase, before a unit is sold. The risk of what will be found underground, once shovels go into the dirt. The risk from rising raw materials costs. The risk of building in a rural area where the market for homes is thin.

Builders’ financial backers know about all these risks. And in Ireland, financial backers in general are unusually risk-averse. After the last financial crisis, the banks have largely gotten out of the business of lending to property developers. Too risky! 

Colm Casey is the founder of a startup called HomeBuyer’s Hero. And he has a plan to strip risk out the development process.

If he’s right — and the risk can be removed — it should in theory open up much more development. Lots of homes that aren’t currently viable, should become viable. Some developments not getting through planning, should go through. Some people waiting on a house, should get a house.

The solution

The basic problem with the current system, as Casey sees it, is that a lot of capital is at risk for years before a developer sells his first house. The developer, and his backers, only learn whether the project was worthwhile when the scheme is finished.

HH is Colm Casey’s system for cutting out that risk. Here’s how it works.

A developer and designer come up with a scheme. It might be for a single house, or for a  bigger development. They design it up and create a cool detailed 3D model of the finished product — like the ones on the TV renovation programmes. They put a price on the home. 

Qualified buyers (ie, with the demonstrated means to buy) go on the HH platform take a look. If they like the home, and the price, they buy an option to buy it. The option is expected to cost about three per cent of the price of the home. The option gives them the right, but not the obligation, to buy it at the pre-agreed price.

Say the developer wants to build ten houses. She goes to the bank and says she has ten people signed up and showing interest in buying the houses, at a price that guarantees profit. She also can see a queue of qualified buyers behind the ten who secured the options. The bank can take comfort that there’s proven in interest in the scheme, at the price on offer. It makes funding it much less speculative.

The current system is a particularly bad fit for rural areas. Builders in rural areas can’t get development finance because it’s hard to a) satisfy the lenders that there’s demand at a given price and b) satisfy the lenders that there’s a good secondary market, should the scheme go bust and the lender have to sell the houses.

If the buyer on the system has the right but not the obligation to buy, why would the developer or the bank trust that they’ll stick around to buy it? That’s because the system facilitates, not just one buyer, but a queue of potential buyers. If for some reason the person who owns the option to buy the house drops out, there are others ready to take their place.

HH founder Colm Casey is second-generation estate agent from, county Mayo. HH was inspired by problems in the Mayo housing market, specifically, where development finance is hard to come by. 

Colm Casey

The goal here is that this pre-commitment mechanism will de-risk the whole construction process and make many more schemes viable. A big part of it unlocking development finance.

Right now, the lending decision is based on recent sales in the area. In a rural area, with relatively few home sales, the property price register might indicate that three bed homes go for €300,000. But locals might have the income, the finance, and the willingness to pay €375,000. The HH system can demonstrate to the funder and the developer the real, up to date level of market demand.

In the current system, if a developer wants to build houses in Ballina, they need to first prove to the bank that there’s demand for the scheme. As we’ve seen, can be tricky in thinly traded markets.

If the builder can get approved, they’ll get 60 per cent financing from the bank. The remaining 40 per cent they have to find themselves. Even at that, banks will only back the biggest builders. Small builders have to use alternative finance, which is more expensive (small builders are riskier!). The small builder dealing with alternative finance will probably be on the hook for a personal guarantee. 

The state-backed building finance company, Home Building Finance Ireland, can back projects at 80 per cent loan to value. The gearing is significant because the more money the lender is willing to put up, the more builders will step up and build. Ultimately, Casey is hopeful that the de-risking provided by HH will allow developments at 90 per cent loan to value. That would be good for developers and lenders, but good for buyers too, because it would make many more developments viable. 

HH founder Colm Casey said: “A homebuilder isn’t going to put anything on the line if they’re putting up 40 per cent in an area where they themselves fear the demand issue. At 40 per cent, no builders can tackle it. At 20 per cent, you get people interested. It’s like a switch.”

The aggregator

Another bottleneck in Ireland is the planning process. Casey said HH will play a part here too. Normally, when a project is at planning stage, there are no buyers — just the developer and the objectors. HH would make the schemes under consideration more tangible to the planner. To the planning application, there would be attached a real person. 

The HH system could be a good fit for refurbishment projects. Lots of buyers like the idea of refurbishing and moving into an old home. But the process is highly risky and laborious. HH offers refurb buyers a way to get a refurbed property, without requiring that they fund and project manage the project personally.

What if the developer and homebuyer agree a price on HH in 2022, and the price of steel goes through the roof in 2023, and the developer can no longer build the thing profitably? There are carve outs that give the developer a certain amount of leeway, in the event of raw materials prices going up. So the buyer can be quite certain — but not fully certain — of what the house will cost them.

Casey is starting with thinly traded markets in Mayo, but his goal is for every new home in the country to be transacted on his system. For it to scale, it needs automation. Right now it connects directly to buyers’ bank accounts using open banking. It then uses machine learning to determine whether the buyer is entitled to approval in principle. It automatically tests for buyers’ eligibility all through the process. 

Casey is very careful with how HH is positioned. He says there’s a problem with lots of proptech companies: they tend to serve the interest of the property industry, rather than the buyers. 

If they buyer commits before the project is built, is there an incentive for the builder to build the house at the lowest allowable quality? Casey said builders will have a duty of care to the HH platform, as well as the buyer. HH will have sight and control over design professionals. It will collect feedback. And, said Casey, if necessary it will kick bad builders off the platform.

HH is still in beta mode. It’s currently in the middle of its first development. But Casey has bigger plans. In time, he hopes, small developers who use his platform will be building enough homes that they’ll be able to squeeze suppliers and earn a premium. Ultimately, he’s aiming for it to be the platform for all new-build development, and not just in Ireland. “This is a future unicorn,” he says, and it’s clear he believes it.