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NOTE - This podcast was originally recorded in June, 2019 and because we’re sloppy, it got lost in the file cabinet somewhere :-). Here it is belatedly.

Transcript

- Prefab Review

Hi, my name is Michael Frank and this is the Prefab Pod presented by Prefab Review where we interview leading people and companies in the prefab and modular housing industry. Today I'm very excited to have Brian Gaudio, the founder of Module. So welcome to the podcast Brian.

- Module

Thank you. Thanks for having me.

- Prefab Review

So you're the first, we've done a handful of these, but you're the first real startup that we've had on this. So I wanted to start by asking you, “why did you start Module and what did that entail?”

- Module

 So my co-founders and I started Module in early 2016 and why we started it was, you know, my motivation really was, I was trained as an architect, worked in the field, and felt that the product that a lot of home builders and developers were putting out there in the market wasn't really in the best interest of today's home buyer. And so I saw this gap in the market where a lot of the developments that were going up were really top of the market; it was really targeted towards a luxury audience and there is this huge missing piece for people who needed housing but couldn't afford sort of the architect designed luxury product, and wanted something that was a little bit smaller than the typical home builder does and they weren't being served. So we started to serve that need and then ultimately you know our goal is to make really well-designed homes accessible to the average home buyer in the US. So what are their needs and how can we serve them? So that's really why we're doing what we're doing and how we got started was I was living abroad actually moved back to the city of Pittsburgh where I'm from, moved in you know back to my childhood home started working out of my parents basement working out of libraries and coffee shops and then we slowly started to build our team from there. We participated in a local startup accelerator and just started to get our funding under us in 2016. So it was you know, maybe not the glamorous startup life that people typically think about.

- Prefab Review

But that's cool. So it sounds like this is interesting because I thought that I'd read an article or two about you and thought that the key value proposition for you guys was really around sort of this house that sizes up with you. But it sounds like your first inspiration was around affordability and accessibility.

- Module

Yeah, you know the inspiration for this affordability came from working on a documentary film. So a friend and I - Abe Drexler, he's an  Architect at Keiren Timberlake, he and I were just finishing up school and we had got this fellowship to go research the housing crisis and the most innovative solutions that were being developed around the housing crisis in cities in South America. We traveled to Rio, Sao Paulo, Bogota, Lima, Santiago, and  interviewed architects, designers, and governments. People were coming up with different sorts of urban acupuncture projects and different concepts. But one of the really interesting concepts that was being executed in these cities in South America was this idea of incremental housing and there is this architecture firm there called, Elemental that was doing this incremental housing work and what that basically was is in Santiago, they only had so much government subsidy to go build public housing. So with that little amount of subsidy they could either build a house that was a normal sized house with really, really poor quality materials like the bottom of the barrel materials or what they decided to do was build half of the square footage of a typical house - so half of a good house but build it with really good materials. So they did that sort of thing, if you imagine just building half of a house, so a kitchen, bathroom, and maybe a space to sleep in. Then the residents would come in, live in the space, and then add on as their family grew and their needs changed. So this incremental housing, kind of pay as you go, I thought was a really cool concept and I said how could we apply that in a different, completely different, context in the US, so sort of the inspiration for starting Module. And what we've learned, we've spoken to more customers and just delivered our first house to a customer. While part of our value proposition is growing in your own space, there's actually a really huge need for people who are just looking for a smaller amount of space that's well designed and that's super energy efficient. So that expanded ability component is part of our value proposition but it's actually not what gets people in the door; who, you know, sign up on our website. They just really want something that they don't see for themselves in the current market.

- Prefab Review

 All right so let's talk about what you guys are actually building. Can you kind of explain this product so to speak or the kind of different options buyers have and what they cost?

- Module

So we're live in Pittsburgh. Right now we've gotten some requests from 20 something states and several countries about building a house there, which we will get to in this sort of mid-term future but for now we're working in the city of Pittsburgh and we're delivering an infill Single Family, attached or detached product. And we will work with both modular manufacturers and panelized manufacturers of 3D boxes or 2D wall panels. So we work with two types of manufacturers and we're delivering this infill housing solution. Our homes range from one bedroom, one bathroom, around 650 square feet up to three bedrooms, two baths and that's about fourteen-hundred square feet. And we even have this stacked duplex model where you can live above and then rent out a one bedroom one bathroom home below. And I believe that one's around seventeen hundred square feet. So we have a couple of different base models but really our designs are targeted for the Pittsburgh infill vacant lot. I was gonna say why we design, so most of our designs are 16 feet. They could be 16 or 18 feet wide but we've really sized them to the vacant lots that exist in Pittsburgh. And in Pittsburgh, our city is a rust belt town. We have about twenty seven thousand vacant lots in the urban core. These aren't out like in farmland you know an hour away from the city. This is like, five minutes to downtown, vacant lot. And so we have so many vacant lots because the steel industry left our city in the 80s and homes were torn down. So really, the customers that we're serving, we're helping them find a vacant piece of property, find the right starting unit, select that, select your lot, select your house, and then we will go coordinate the construction.

- Prefab Review

So you see you're actually helping people find land as well?

- Module 

That's correct. 

- Prefab Review

Interesting. And then what's the price point for these? So are homes like a two bedroom one and a half bathroom home?

- Module 

The pricing on our website is specific to Pittsburgh. But right now that starting price for a standard model is about $195,000 - $200,000 for a two bedroom unit. Now that doesn't include your site work, foundation and utilities and the cost of land. So we leave those out because that varies site by site whether you want a slab on grade, you want a crawl space, or you want a basement.

- Prefab Review

What is the typical range of site work in San Francisco for example? It's really expensive. Like I say it's typically like at the high end right, it can be 200 dollars per square foot. I assume it's not that in Pittsburgh so I'm just just curious.

- Module

Yeah we assume you know our kind of standard plug in there is around fifty thousand dollars for site work, utilities, and foundation it can go up too if you have a really bad site. You know, you can go up to a hundred thousand so that's kind of a range for site work right now. In Pittsburgh, we have this combined sewer system, so we have one giant sewer pipe that sits under the the roads and that's now illegal in most cities and so you know typically, you have separate stormwater and sewage but we have a combined pipe that was built in the seventeen hundreds eighteen hundreds in Pittsburgh. And so now every developer that does a new construction project has to dig from their property to separate trenches even though we have one combined sewer system to dig two separate trenches to get to that in the event that hopefully in the future the city adds another sewer pipe to separate storm and sewer water.

- Prefab Review

So let's sort of talk through that process of building. What parts does Module take care of? And what parts do you basically the people you work with, or just other parties, do later? Are you working with third party manufacturers? Are you GC? Or do buyers have to find their own GC? Or do you have a network of local contractors? What parts does Module sort of take care of and what parts do other people take care of?

- Module

So from the customer side, we're essentially holding their hand through the entire process as a turnkey solution so they'll log onto our website, they'll fill out a form: they give us some information about their current needs, future needs, and financial health, and we take that data and say “ here's the house, here's the lot that makes sense for you” and help them make those selections, and then we coordinate the entire construction. And so people can actually fill out you know, we have this web application on our website, If you don't own land you can sign up and we actually have available lots that we believe are good fits for our product. So customers can view that, but in terms of what do we do in-house versus out of house, as a startup company we had to be thoughtful about that because we're not a contractor, we're not someone who had started you know maybe flipping homes and moved into new construction. We started this as a startup company with the goal of building thousands of homes throughout the country. And you know compared to the typical software startup, you know home building is much more capital intensive than you know the distribution channel for an app right. Our distribution channel is actually going through zoning and permitting. It's not you know upload to IOS. And so when we think about how do we apply a startup mindset to our company structure it is instead of building our own manufacturing facility right out of the gate we're working with third party manufacturers. I know some of the other startups said you know we're gonna raise 10 million bucks and we're going to get a factory. You put some robots in that factory, they're gonna build some houses. I don't think we will go there until we have probably 200 homes a year. At that stage, it makes us sense for us to have our own factory. But until then we're working with third party panel manufacturers and modular manufacturers. So our first home we built was with a company called Bensonwood they're a panel manufacturer out of New Hampshire. They do really high quality panels. They were manufacturing but in terms of what we do in-house is going to be a little bit on the podcast. So our first home was built by them and so it's really really high quality in terms of the insulation value, the quality of the windows, and just the assembly. So we work with third party manufacturers. We work with third party GCs. So we have a network of preferred contractors in the city of Pittsburgh that understand how off-site works. And they care about you know, passive house design principles. So that's kind of how we vetted our contractors in the Pittsburgh market. So we will coordinate the manufacturer, we coordinate the contractor, and then in-house, we'll do a lot of the design work and take the customers from zoning approval that need a zoning variance, do that to get them to building permits, and then we'll sort of stay on as a project manager throughout the construction of it in Pittsburgh at least.

- Prefab Review

So why do you both panelized and modular? We've talked to a lot of prefab and modular companies and I'd say most people choose to do one or the other. What's the benefit of that?

- Module

 So really what it's come down to is with certain sites in the city of Pittsburgh you know there are some, if you've if you've ever visited Pittsburgh, there's these Mount Washington which is this sort of giant hill, and then there's three rivers that sit within the valley. And so certain sites have really difficult site access. And for instance on our first home it was basically built by someone who bought the vacant lot that sits behind their house. And the only way to access that lot was through an alley and it was a 50 foot 55 foot long building and we could not get a box that was 55 feet long through that alley and through the power lines. And so from panelized, you know, our sort of units that we're picking up from the crane were a lot smaller and that was one reason to go panelized on that project. But I would say why we work with both modular and panelized projects, certain projects are a good fit for modular certain are good fit for panelized. If a customer cares about pushing passive house standards then Bensonwood is the right manufacturer. If a customer is more price sensitive and they have a site that's fairly accessible, then modular makes sense. So we feel like at least on the single family residential detached we can get a better per square foot cost on modular, we can get to higher building performance standards on the panelized side. So it really depends on the project need.

- Prefab Review

Is pricing the same? I know Bensonwood is definitely not the cheapest, maybe the least expensive manufacturer out there.

- Module

No, pricing is different. And that depends again on the manufacturer that we use. So for customers who are more cost sensitive we try to modular-ize that particular project and/or help them select a site that makes sense for modular if they want to push to go to passive house, then panels could work for them.

- Prefab Review

I'm pretty interested in this sort of start up process. What modular provider providers do you use? Just because we talked to a lot of them. And sort of second, how did you decide who is the right fit for you?

- Module

Wow. So we've traveled a lot and visited a lot of manufacturing facilities in the Northeast. So we're working on our next project. It's a four unit mixed income housing project on vacant land that was owned by the public entities here in Pittsburgh. And for that project we're going to work with the manufacturer called Structural Modules Inc. SMI and they do some high performance modular stuff. All of our homes are designed for the Department of Energy zero energy ready Home program. And so it's this certification that the DOE puts out. So when we go look and talk to a manufacturer you know, as we're walking the line, we're looking 1 - for quality craftsmanship 2- for if they're willing to sort of bend on their typical wall assemblies. Right, some manufacturers are like, “these are the boxes that we build. You've got to build a two by four wall with X, Y, or Z and that's it.” But at our company stage, right now, we need to be working with manufacturers who are OK going outside of the box of their typical assemblies and their typical processes. So really, that's what we're looking for when we're looking for a manufacturing partner. It's not necessarily that they produce modular and manufacture it. It's someone who understands quality and cares about energy performance. So we've walked probably a dozen manufacturers throughout and there's a ton in Pennsylvania interestingly enough because a lot of the Pennsylvania mod manufacturers are servicing customers in upstate New York and it's just to set up a factory. So we thought a lot of them were members of who have been participating in the National Association of Homebuilders,  building systems council and a lot of the modular manufacturers are members of that particular kind of industry group.

- Prefab Review

So how do your customers find you and how many I know you guys recently built your first house right, how many houses are you planning to build this year?

- Module

So we just finished our first home in Pittsburgh on a vacant lot. It was 880 square feet one bed, one bath. We plan to build at least or start construction on at least another four this year. And we have several other projects in kind of we'll call it the pre-construction pipeline where they're going through zoning, land acquisition, but at least four units in that.

- Prefab Review

How are customers finding you?

- Module

They find us various ways. You know we've had as a startup company, we've been able to leverage our story. And so we've been written up on Forbes tech, crunch builder magazine, a lot of publications have written about this concept right. Of module, right-sized, expandable housing. And so I think people read about us through that and will come to our website. But then I would say that a lot of folks end up googling prefab homes and find their way to our Web site and then the other thing that we've been doing is we've been hosting some events in Pittsburgh. So we’ve hosted an event every year called defining the future of housing. And we get some folks to speak about the future of construction, the future real estate development, energy efficiency, and every year we have about 100 to 150 people attend that event. And that's been a good way to showcase it. You know, we just had it after we finished our first home. So it's a good way to get people through the house that we just built and then also to just talk about where the industry is headed. So we were fairly active in hosting larger events like our future housing event and then some of the smaller things we just do regionally here. That's big as well.

- Prefab Review

Cool. And then finally a list of the Module questions you guys consider just being a developer. Like I assume these homes probably, if you're building them at an affordable cost, they probably pencil in (meaning like the costs of land plus the cost of construction) is probably lower than the ARV - after repair value. Have you considered doing that as a way of kind of just scaling faster versus having consumers?

- Module

You're on the money there. The next four units that we're building we will act as developer on. So we see the ability to scale. You know while some people think of ability scale, let's set up a manufacturing facility and let's try to start pumping out homes. We see it as “how do we get customers faster?” And that is by going out and being a developer. Because the customer may come through your door and they may be like “Oh, I love the moonlight.” Right. Your three bedroom home and I don't have land yet. So that customer was a lead now turns into just an opportunity missed out on everything or I don't have enough money to pay for my own rent right now while also exactly right. So if we don't actually get financing. So we're going through the construction lending process and we work with the you know the Urban Redevelopment Authority of Pittsburgh to acquire property. And so we're hoping to start construction on that project in the fall. So we had to go talk to traditional construction lenders and as a startup company they’re like, “So what's your track record look like?” Well we've built this one House it's really beautiful. You should look at it. So we are stuck here in that thing. 

- Prefab Review

You're investing the equity out of your corporate balance sheet? 

- Module

We have several sources that we're using for that equity. Yeah, but it's different than the typical startup investor mentality where you know the folks who are raising financing for a real estate project are quite different than raising financing for a startup venture. Right. The risk profile.

- Prefab Review

So that means you're potentially using-up the balance sheet. It's not like you're sorry. This is my startup. I mean you're not like people who invest in your startup. That's not necessarily the same pool of capital as it is in these projects.

- Module

Correct. 

- Prefab Review

Got it. That makes sense. Yeah. Just because the return profile is pretty different as you're saying.

- Module

Yeah. And you'd be surprised that when you speak to startup investors right and they're willing to believe and take a chance on some company in Pittsburgh who built one home they're like yeah we'll put in money to go build a thousand. You know you guys can do a thousand homes. That's totally feasible. You go to those same types of investors and you say hey we're just going to build four houses right over there. Here's the sale price. It's actually a better deal than most of the new construction that's going up there. I don't know. That seems risky. It's pretty flat. Right. Like the mentality is different risk profiles.

- Prefab Review

Right. You're probably not going to 100x your housing thing. I guess maybe you'll do that with your company. Yeah. That's cool. That makes total sense. In terms of just moving away from Module, we sort of do a quick fire round on this. It's awesome to hear about Module but it's also good to sort of tap into experts like you about the industry. So just we'll give you a quick couple of questions trying to answer each in a minute or less if you can. So I guess the first question is for a prefab startup like yours. What's your business model look like? Basically where are you making a margin? A lot of companies I've talked to make like 10 percent margin on manufacturing and a little bit on labor. Obviously you guys aren’t doing manufacturing. So how does that look?

- Module

So our business model, you know we sort of have two types of models right. One is the custom built on your lot. And so essentially have a design build contract with them and see your margin on the design-build side. We typically have a Phase 1 design contract and then we turn that into a build contract. So that's the one business model for the individual home buyer who has property already. For the spec development It's essentially you know go raise the equity. Go get the construction financing and then you're making your margin on the end sale price to the customer. So there's sort of two business models I see in the future. This is sort of in the long term future, is once we develop our own tools, our digital platform that we're building out right now, in our network of manufacturers we could license those tools to other builders and developers who are working in other similar markets in these Tier ,2 Tier 3 cities. But that's not a business model we're exploring right now. For now it's like the one off homes. So design contract, and then build contract, and then for the homebuyer who wants to go buy a finished home that's one of our spec homes. It's just a margin on the sale price right.

- Prefab Review

How long does the prefab process take with let's say a motivated buyer in Pittsburgh?

- Module

When you say the prefab process can you…

- Prefab Review

How long does the process from, I bought a piece of land to I'm in my home take?

- Module

So the only reference point I have is our first customer. So we signed a Phase 1 contract with them and believe it was we started working with him in January of 2018 and had sort of our way to get zoning approvals, zoning variances permits, building permits and then started construction by demolishing - there was a garage on the property to demolish the garage in late October of 2018 and then we finished with construction in April of 2019. So it's about a six month construction process. The actual walls went up in two days. That was the fastest part of it. But I think it was around six months for construction and then we sort of had our first engagement with them as a Phase 1 contract, I believe it was in January of 2018 and then we officially started construction in October. As a first customer we hope that that process gets faster for our future customers.

- Prefab Review

Yeah makes sense. So for buyers tips on getting financing. Yeah. I assume you're going to help buyers with that. Or maybe. But do you have a suggestion on how they can do that.

- Module

So we actually spoke to a series of banks and met several lenders at these industry events right, so that NAHB building systems council there's a bunch of lenders that hang out because they specialize in modular residential construction loans and so we've just met a series of lenders. There is a one particular loan officer from Citizens Bank who does work nationally. There's a group called One trust Home Loans. It's out of the West Coast that does specific to modular (lending) so there's several lenders who want to specialize in modular construction. So we have them pre-qualify customers and we also have some local banks as well that we work with.

- Prefab Review

Have you found a good way to get, we work with say we have about two hundred, we have a concierge service, we have about maybe 100 to 200 clients a month. Have you figured out a way that works well in Pittsburgh for buyers to be able to finance land and the construction together? That's one of the issues we find all the time. Like do you do a land loan and then double close? Yeah. How do you do that?

- Module

Yeah that's tough. So you know our first client purchased the land already and so they were only doing the final deal to purchase the land with cash it's a little easier. Exactly. There is a bank there that we spoke to locally that'll do a one-time close. So for pre-sale for instance. So let's say we have a property going up in Lawrenceville, Pittsburgh one of the hotter neighborhoods, and marketed on Zillow as a pre-construction sort of listing. And there is a way with this particular bank to do a single close. There's a contract for the land and a contract for the build. And those are two separate contracts but it's closed as one at the closing. So I'm happy to share that particular lender's information with you if you want.

- Prefab Review

Yeah. Just curious and this is going to be in the fire round. Do you guys have permitting on that beforehand? Because generally what we see is once there's permitting there's no problem.

- Module

 That's a good question. They were talking about another project they did where they didn't. That builder who had that land contract and the build contract did not have building permits at that point. And that can get dicey a little bit. Right. The whole timing of that. So I don't know that I have the right answer there but I remember that particular project there it was a spec home project it was being pre-sold and the builder didn't have the permits yet but it was sort of contingent on them getting that. So I don't know, it's like what domino do you knock first?

- Prefab Review

Yeah.I'm hoping more lenders do it and we're able to find them because it would help buyers get into more of these homes. And it seems like they should be able to because most of these construction lenders are giving money as draws anyway so. Right. You sort of have to hit check points either way along the course. Right. It's not like they're getting lump sum installments but we'll see. All right. Last fire round question. What do you see as the major trade-offs between kind of custom versus non custom when it comes to house bilbuilding? 

- Module

Time and cost. Custom - it's going to cost more. It's going to take longer.

- Prefab Review

It costs more of the manufacturing fee as well or mostly just on the design contract?

- Module

Mostly on the design contract. I would say, I mean our first project was panelized so that we had the opportunity to do more custom stuff inside the home. And you know the question is, as a home as a prospective home buyer what things do you value? Are you someone who wanted to be an architect when you were younger and this is your opportunity to do that then maybe you know and you have the budget to do it. And then custom might make sense but if you're in sort of a practical time pinch then trying to hold back is really important to me and working with the right builder who understands where you are as a buyer and what your needs are I think is really important. That's what I would say. I think you can have a non custom but beautifully designed space just because you've customized something doesn't mean it's a better design. It means it's been customized.

- Prefab Review

All right. That makes sense. Well Brian, it's been amazing having you on this podcast. We ask everyone the same final question and that's what you are most excited about for your company or the industry for the near future?

- Module

Let's see. I'm most excited about one, working on this mixed income housing project for the city of Pittsburgh. We have a nonprofit partner. So we're being co-developers. This non-profit delivers one of our homes to an affordable buyer. That's really exciting because that hits at the core of our mission. So that's one thing I'm really excited about. And then the other is this conversation we had about our offsite, not literally offsite construction, but our strategic offsite with our management team and thinking about how to de-commoditize housing and real estate. You know we look at coffee and beer or these two things that people know used to be in Pittsburgh. You got an Iron City Light, you got a Yuengling and now there's all of these other options for people. And people understand quality so I'm excited to do the same thing but on the housing side on the residential housing side to sort de-commodify that and show the true value of a really well-designed, thermally comfortable space for customers so that's what I'm excited about.

- Prefab Review

That's awesome. Well Brian Thanks again. I don't think we can have enough sort of smart, innovative people working in this space so it's great that you are. For people listening. If you want to learn more about Module, modulehousing.com we're obviously at prefabreview.com. Thanks again Brian. Best of luck.

- Module

Thank you. Enjoyed it.