Let’s Build More Homes Together
Rigor decentralizes lending and coordinates payment flows with construction logistics so that we can build more homes.
Highlights:
- Rigor decentralizes lending into new home construction and provides the entire supply chain with tools that coordinate lending flows with on-the-ground construction logistics and payment management, a challenge uniquely suited to a blockchain solution.
- Built on the Ethereum network, Rigor revitalizes the home construction asset class, minimizing risk for lenders and growing productivity for homebuilders. With Rigor, lenders gain a platform to find and fund quality homebuilding projects, pool capital with other lenders, and get repaid. Homebuilders manage the work those funds pay for with task-level budgets paid directly to subcontractors and vendors as tasks are completed throughout a build.
- Rigor offers these novel capabilities at a time when the US faces a housing shortage of up to 6.8 million homes, the result of decades of underbuilding. Housing starts as a share of the population have decreased since 1970, falling 39% since 2006 alone. As a result, more people than ever are excluded from home ownership as home prices rise faster than wages in 80% of US metros.
- The lack of output owes primarily to investor reluctance to take on the risks endemic to the home construction industry’s notoriously opaque supply chain — rife with misaligned incentives. In the US, only three percent of all real estate financing supports new home construction.
- Rigor harmonizes the entire homebuilding supply chain enabling us to build more homes for people.
There aren’t enough homes for people
The dream of home ownership and its associated wealth creation is becoming a fantasy for more and more of us. Significant housing price increases during the COVID pandemic have exacerbated the longstanding, growing and profound housing shortage in the US, where demand for new homes has exceeded output for decades. Housing starts as a share of the population have been decreasing since at least 1970, and the pace of the decrease has compounded over the last 10–15 years. Since 2006, housing starts as a share of the population have fallen by 39%, which has led to a shortage nationally of as many as six million homes. This massive shortfall is especially severe in the critical entry-level price-range, which accounted for 35% of all housing completions in 1970 and now makes up less than 10%, barring large swaths of people from entering the market entirely.
The pandemic made all of this worse. According to a September 2021 White House Report, home prices nationally increased by 7–19% (year-over-year) every month from September 2020 to June 2021 while the national home price-to-income ratio rose to 4.4, the highest level since 2006. While COVID undoubtedly shocked the system with a surge in demand, the pandemic’s impact on housing affordability merely exposed longstanding underlying supply-demand imbalances.
Despite the pronounced demand, new housing starts today remain only about half that of their peak in 2006. Capital for new construction tends to be less accessible and more fragmented than other loan types, and has been estimated to constitute a meager 3% of all real estate financing, leading to the severe reduction in homebuilding projects.
These dynamics have propelled housing prices to rise faster than wages in 80% of metro areas, leaving prospective homebuyers abandoned, demoralized and unable to enjoy the generational wealth creation benefits home ownership has historically enabled: the Federal Reserve reports that homeowners have a staggering 44.5x the net worth of renters.
Making matters more aggravating for homebuyers, these issues are collectively referred to as an “affordability crisis,” a term that at once describes the realities of homebuying for too many Americans while also implying that the reason prospective homeowners cannot afford homes is because they cannot afford them. (Huh?)
So what’s going on here?
The $600B market for new homes is complex and faces multiple simultaneous and interrelated challenges. While some of this can be attributed to intensified regulatory scrutiny in response to the Great Recession, the enduring characteristics of this asset class may be more to blame: home construction loans are riddled with risk and are costly to administer.
As technologists and homebuilders ourselves, we believe that’s because residential home construction has not undergone meaningful, systemic technological transformation in the way that other industries (think: telecommunications, medicine, advertising, financial services, consumer retail, etc.) have done. It is routine for field operations and their crews to rely on whiteboards, paper contracts, text messages, fax machines, paper checks, and burdensome, manual capital administration. Despite the reality that construction crews and hardware vendors from across disciplines need to operate in lockstep to complete builds, it’s routinely the case that they operate in silos. As a consequence, homebuilding supply chains are profoundly uncoordinated and operationally opaque despite the best efforts of their operators. A lack of transparency into the construction process adds costly friction to an already complex coordination effort among lenders, builders, inspectors and the workers on the ground.
Compounding the friction, lending flows to the supply chain are entirely disjointed from work on the ground, delaying payments to the supply chain. This leads to both frustration and mistrust on the ground, and also forces small businesses to finance their day-to-day operations at significant cost — cost that eventually makes its way into the price of a new home. According to the 2020 National Construction Payment Reports, 84% of the 540 building professionals surveyed indicated that they experience delays in project completion leading to lost revenues, and believe those delays could be largely prevented with better coordination and more timely payments.
While accounts receivable crises are not unique to any particular industry, slow payment flows off of home construction loans do have a common cause that arise from the unique dynamics of construction loan disbursement. Unlike loans in other industries that are paid up-front as a lump-sum, construction loans are paid in arrears through a series of “draws,’’ or installments, as work is completed. A typical home construction project may have four or five draws throughout a multi-month build. The theory is that disbursing loans incrementally on the basis of the fraction of the work completed, reduces financing risk on a lender’s total loan commitment for an unfinished asset.
However, the draw system has the practical effect of slowing builds dramatically and increasing lending risk. Indeed, each time a draw payment comes due, operators must confront all of the systemic inefficiencies of an uncoordinated supply chain. Disparate information, in paper and electronic formats, across dozens of vendors and work orders need to be compiled and match up precisely; liens filed by vendors for lack of payment need to be resolved; inspections data (often from multiple inspectors performing duplicative inspections) need to be aggregated and made available. Making matters worse for homebuilders, many home construction loans accrue interest on the entirety of the loan amount, even though homebuilders only have access to a fraction of the total amount at any given time.
These sporadic lending flows create a culture of mistrust on the ground, and contribute to labor churn by those workers expecting to be paid within a reasonable time frame for work they’ve performed. Unfortunately, these dynamics contribute mightily to inefficiencies: in an effort to hasten receipt of revenues, contractors, subcontractors and vendors will routinely redeploy resources to projects that promise to pay them sooner, which can have compounding effects on the progress of projects they leave behind.
These dynamics combine contribute to delays or abandonment, which increase lender risk.
The Cycle is Vicious, and it’s Getting Worse
The vicious cycle proceeds: lenders, already underinvesting in the asset class in light of historic demand, feel they have no way to reduce risk apart from insisting on cumbersome, manual loan administration processes, including strict rules on access to committed capital — a unique and unwelcome feature of the asset class for borrowers — which contribute to further project delays and generate further evidence of capital inefficiency and risk.
It’s clear the current construction lifecycle is highly complex, rife with archaic administrative burdens and procedural waste with scant process harmonization. We note, however, for most construction professionals, these issues exist despite their active investment in software solutions. Construction professionals report using a patchwork of point solutions focused on planning and workflow. Others help homebuilders to make more slightly more efficient the inefficient loan draw process.
And yet the shortage of homes persists, with productivity gaps widening.
Team Rigor believes that existing software solutions ultimately fail to meet the unique needs of this industry, specifically by failing to integrate lending flows, workflows, and payment management in a way that solves for the root challenges facing the sector — challenges that only recently can be addressed owing to exciting advances in digital payment and coordination technology.
>>Read about how Rigor came to be here.
We are building a better way
Rigor decentralizes lending into new home construction and provides the entire supply chain with tools that coordinate transparent capital flows with on-the-ground construction logistics, a technical challenge uniquely suited to a blockchain solution.
Built on the Ethereum blockchain, Rigor starts by giving homebuilders an easy-to-use web application with which to publish their projects directly to lenders seeking investment opportunities. Project details are open and transparent to everyone involved throughout the build. Most critically, those details are transparent to lenders, who are able to understand how, where, when and to whom their monies flow, mitigating risk and fraud associated with today’s notoriously murky supply chains. Homebuilders and their supply chains generate on-chain, task-level, real-time detail on a project’s progress for everyone involved in a build — detail all are incentivized to provide to keep the build moving and to facilitate quick payment.
Having established a definitive record of ongoing payments and construction logistics to which all parties have access, for lenders, Rigor revitalizes home construction as an asset class, demystifies its workings, and lowers the barrier to entry for investors seeking exposure to the category. With Rigor, anyone with a digital wallet can fund new homes. Lending communities of all stripes gain a means to find and fund quality homebuilding projects, transparently and at scale.
Rigor harmonizes capital coordination with work coordination toward truly seamless construction management. Loaned funds are held in digital escrow and begin earning interest when they are committed to a project. Because the application inextricably pairs lending flows to task-level, budgeted work orders; when work is verified by the construction management team specified by the lender, budgeted payments flow automatically via smart contracts directly from the lender to the intended party in the supply chain, without intermediaries and hefty administrative burdens.
This is where the power of DeFi truly shines: a lender’s risk management no longer relies on clunky post-facto, draw payment management. With smart contract technology, tasks are paid for only if the terms of the smart contract are fulfilled and verified. Each task and its associated budget are paired and immutably written to the blockchain, creating a definitive record of cash flows. Rigor makes financing bottlenecks and their downstream consequences a thing of the past.
The Benefits of Building with Rigor
When you build homes with Rigor, home construction is more coordinated, more affordable and more profitable, so you can build more of them. With Rigor, homebuilders, general contractors, subcontractors, vendors and lenders can expect:
- Greater confidence in the asset class and more capital inflows to finally meet historic demand for new homes
- Increased capital inflows funding new home construction from a broader investor base seeking reliable yield
- Reduced cost, risk and complexity of construction lending, and increased capital efficiency
- A harmonized supply chain that offers visibility into work plans, needs and deadlines, reducing rampant resource waste and inefficiency
- Transparent lending flows and a guarantee that funds go directly to subcontractors and vendors once work is verified, eliminating “misaligned capital,” fraud and “slow pay”
- Ease of loan administration for lenders and homebuilders
- Payments automation for the home construction supply chain
- Restoration of the dignity of work for small businesses and their laborers who power the homebuilding ecosystem and
- A meaningful application of the real-world impact of permissionless crypto technology.
You can find the full list of available features in beta here and check out our demos here.
We’re building more homes, right now!
To demonstrate the promise and potential of this new model, Rigor is currently being used in private beta to build its first 100 homes in Central Florida with a supply chain intent on upending current market dynamics. Learn more about here.
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