Image source: UnsplashDream Finders Homes Inc. (DFH) operates as a homebuilder focusing on affordable, customizable homes in high-growth markets across the United States. They primarily focus on entry-level homes, advises Pieter Slegers, editor of Compounding Quality.So, what’s important to understand? Homebuilders like Dream Finders Homes don’t build homes all by themselves. They act as a coordinator to combine all the pieces needed to make a house.Patrick Zalupski founded Dream Finders Homes in 2008. Amid the Financial Crisis, Patrick took out a $200,000 loan and bought three lands. Back then, some lands that were trading for around $80,000 before were now sold for $20,000-$30,000. He convinced the landowner to not pay him until the three homes they wanted to build on that land were sold. That’s how the company was born. This capital-light approach, buying land only when ready to build, became the foundation of Dream Finders Homes. In total, insiders own 70.7% of the company, and founder Patric Zalupski is still the CEO today. We are clearly talking about an Owner-Operator stock here.Dream Finders Homes uses a land-option model, a business model they copied from NVR Inc. (NVR). In the land-option model, a homebuilder pays a small fee (usually 10%) of the total value of the land to “reserve” a piece of land instead of buying it immediately. This reservation, or option, gives them the right to build on the land later without fully owning it yet. The homebuilding market in the United States looks attractive. Currently, there is a housing shortage of four million. Dream Finders Homes is currently the 14th largest homebuilder in the US. The residential construction market is expected to grow 4.5% per year over the next four years. The market is still very fragmented, and this provides a lot of opportunities and scale economies for the best homebuilders in town.In general, there are three main risks for Dream Finders Homes:
There is a relatively high level of client complaints
Founder and CEO Zalupski is selling shares, while he said he didn’t have any intention to do so in his 2022 and 2021 shareholder letters
While Dream Finders Homes uses the land-option model, they are still less efficient than NVR
But Dream Finders Homes has a healthy balance sheet (Net Debt/EBITDA: 3x) and requires very little capital to operate (CAPEX/Operating Cash Flow: 1.3%). The company has an attractive ROE of 27.1% (consistently above peers) and focuses mainly on growing its pipeline in existing markets and expanding into new markets.
About the Author
Pieter Slegers has a true passion for investing and helping other investors. He aims to invest in the best companies in the world, as it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. He used to work as a professional investor but left his job to help investors with his newsletter. The main reason for this? He was sick of the short-term mindset of Wall Street, and he wanted to genuinely do the right thing.More By This Author:Top Picks 2025: Ambev SATop Picks 2025: Altria GroupTop Picks For 2025: Heico Corp.
