Scholastic Capital Update #11: We're Buying Homes

It’s been a long time coming, but Scholastic Capital is now active and buying homes.

Depending on how you define the start, Scholastic has been years in the making:

• I (Sean) had the idea as a teenager. I moved 22 times before college and noticed that everywhere I lived, there was a great school parents really wanted their kids to go too

• My wife and I bought 4 homes ourself the past few years to test the thesis

• The legal formation process for Scholastic started a year and change ago

So depending on what the “start” of Scholastic is, this update is at least 1 year in the making and arguably a decade.

Today we’ll talk about the homes under contract, interest rates, and fund updates.

To note: this is our public facing newsletter. Our investors get much more detailed and much more frequent updates.

The below information was provided to our investors about two weeks ago.

Acquisition Update

As of May 3rd, we were under contract on 5 homes across WI, IL, and IN.

(Today, we’re under contract on ten! Details on the second five homes will be provided first to our investors and will be in our next public facing update)

To get to those first five homes, the funnel looked like:

• Offers on 11 homes

• 6 offers were accepted

• 5 homes passed inspection

This offer acceptance rate of 55% is slightly higher than expected. To our knowledge, Scholastic has consistently been the first offer on the homes.

That is intentional, as this speed-to-offer has long been a key hypothesis for how we can win great homes at good prices.

Thus far, that hypothesis appears to be bearing out.

The value of being first

We’ve had agents tell us, unprompted, that the sellers received a higher dollar offer for at least 3 of the 6 homes after they were already under contract with us.

For example, the first house Scholastic offered on hit the market mid-day. We moved quickly to get it under contract by late that night at $460,000.

According to the listing agent, they then got an offer for $490,000 the next morning from a buyer who thought it was still available.

This is still very early days, but the optimistic lens is that we may be winning offers and picking these homes up for slightly below their true market worth by moving quickly.

Financials Update

From a financial perspective, and accurate through May 3rd as well:

• The average asking price of a home we offered on is $471,691

• The average offer made is $455,845

• The average under contract price is $457,050

• The average “Zestiamte” at offer time is $497,089

Thus far, pricing is largely in line with the $450K per house estimate we anticipated coming into this summer.

To note: we don’t put a lot of stock into the “Zestimates.” They are likely directionally accurate at best.

However, the fact that the Zesimate is a fair amount higher than our price under contract could help support the belief that moving fast is working to get homes slightly below true market value.

Location impact

The offer dollar number is highly sensitive to where the home is located. Homes in Indiana, for example, are materially less expensive than homes in Illinois.

If high-quality inventory turns out to be stronger in one state vs the other, we’ll see it impact the financial offer numbers the most.

That will then impact the sheer number of homes Scholastic owns. We’ll own more homes if the average purchase price is $400K and less if the average purchase price is $500K.

Interest Rate Update

As of 5/1, Mortgage Daily News quoted a 7.43% interest rate for a 30 year mortgage. (It’s now closer to 7.1% today as of 5/14.)

That was materially higher than the Scholastic model, which has assumed 6.75% interest rates for the life of the fund.

Our new mortgage right now are a weighted average of 6.68%, with the weighting done based on the size of the respective mortgages.

While we are happy that mortgage rates are well below market and slightly lower than forecast, there’s a little bit of disappointment here. There was a time in April when we were getting quoted 5.99%!

As a reminder, Scholastic uses 30 year fixed debt, and that is one thing we will not compromise on. We have no interest in taking on riskier debt (read: floating debt, 10 year debt, etc.)

If you include the existing test homes that were locked at lower debt rates, our weighted average debt rate across the fund is now 5.73%.

This is a critical KPI that will always be included in every summer update and always tracked by Scholastic.

Fundraising Update

Scholastic is not putting any time into fundraising at all right now. The focus is entirely on making sure we properly invest the money we’ve already raised.

If new investors want to join Scholastic now, we would certainly welcome them into the fund. However, we would have less time for meetings about their investment.

This upcoming winter, once we are stabilized with this summer’s investments, will be when fundraising kicks off again.

Next Steps

The next month is going to be a lot more of the same:

• Evaluating and offering on homes

• Closing those homs

• And starting shortly, leasing those homes

If we stick on plan, we should be stabilized by the end of the summer and able to begin distributions this fall to our investors!

Wishing you all the best!

Other posts:

We’ve now written a decent number of posts regarding real estate, Scholastic, and our approach to investing. If of interest (or if you’re new here!), you can find all of them at the below link!