Digitizing construction finance with Rabbet’s Will Mitchell
- The construction finance industry is abound with antiquated processes.
- Rabbet plans to change all that, connecting borrowers, lenders, and payments.
Today’s guest on the podcast is Will Mitchell, co-founder and CEO of Rabbet. He’s built a construction finance platform that services construction lenders and real estate developers through the draw process.
Construction finance is new to me and Will explains that because there’s no collateral, it’s one of the riskiest types of loans. To mitigate that, there’s this complicated draw process that’s made up of a lot of documentation, milestones, and consecutive disbursements. Rabbet’s meant to manage construction finance in a modern way, digitizing information that helps lenders make better, faster investment decisions.
Goldman Sachs began as a client and eventually joined a recent investment round in Rabbet. Buckle up for a whirlwind tour of the cutting edge of construction finance.
Give us Construction Finance 101. How does a construction loan work?
We provide construction finance software to help financial institutions, equity partners, real estate developers manage the complex, monthly construction draw process.
If you think about a typical bank loan, the collateral exists and they just lend against the collateral. But with a real estate construction loan, the collateral is being built with the proceeds from the loan. As a result, it’s one of the riskiest things that banks do. They track the process closely through this draw process. Every month, they’ll send over a package of documents from the borrower to the lender to disburse funds from the loan. Our software helps track that complicated documentation, approval, and payment process for a pretty large industry.
My background is all in real estate. I studied architecture and structural engineering at the University of Virginia. I did multi-family development primarily in Washington D.C. I’ve loved buildings and seeing building come together since I was a kid. I got AutoCAD when I was in seventh grade. I love how man interacts with nature and this has been a passion of mine forever.
Post financial crisis, I saw that there was a huge opportunity for technology to change a massive industry. About nine years now, I started making the journey from real estate development into technology. I came to Austin, Texas and got my MBA and started building tech for the construction space almost six years ago. I got more involved in payments and banking, too.
Huge industry, little standardization
We work closely with our partners to build a workflow that works for them. One of the struggles in the industry is that there’s no standardization, even within a financial institution. You’ll have a company with 20 branches and each branch handles things differently. That’s internal — lenders also receive documentation from their borrowers that isn’t standardized.
For a large institution that’s getting 2000 draws a month, you could have 400 different formats in there. I had a top ten lender telling me that her team spends 30 percent of its time moving information from one system to another. It’s all trapped in PDF and Excel.
At the end of the day, everyone’s trying to satisfy the requirements of the construction loan. These are big commercial loans with a number of covenants that need to be satisfied throughout the course of the loan disbursement. The developer spends a lot of time putting together the documentation necessary to get the lender to release the funds. These documents can end up being hundreds of pages. I spoke to one developer last week and their draw packages average between 2500 and 6000 pages. And that’s just for one loan!
Putting together these packages are complicated. I like to use the TurboTax analogy. You have to go and satisfy all the IRS requirements but guiding yourself through that process is complicated. So, Rabbet guides you through that process in order to get that draw package submitted as quickly and painlessly as possible. On the lender side, just like the IRS, instead of getting a gobbledygook of PDFs and Excel, they receive structured information that they can layer on automatic rules, they can coordinate digital approvals and centralize all their reporting and auditing in a way that they couldn’t before.
Building a fintech company in Austin
We’ve got a good little group of fintech companies here. They are close friends that kind of hangout. We have Rocket Dollar and SelfLender, but it’s not like New York of San Francisco. We like to think of ourselves as bigger fish in a smaller pond. Austin is such a great place to live and people are excited to get to a more affordable city.
We had three new people start this morning — a 15 percent increase in the company. We’ve been lucky to recruit talent from around the country: Detroit, Denver and Houston. We can be selective to bring in the best and we can do that in Austin. We made a concerted decision to not do a distributed workforce.
Coming from construction, my first boss said you had to go to the worksite to be able to solve problems. That’s a mindset I haven’t left. People emailing, slacking — get in a room and talk about it. Having the team in one place is something we’ve invested in. We’ve lost some people who couldn’t co-locate but the value of it far exceeds the negative.
Goldman Sachs joins as a client and investor
Goldman Sachs did a deal with an earlier investor in Rabbet who introduced us to their investment group. Goldman forwarded our information on to their real estate group who then vetted us as not just a good solution but the best on the market. That’s when they said they would move forward using us for their real estate. We had a term sheet on the table from QED and said, well, if you’re going to use us the solution, you should invest. It was fortuitous it all came together. It’s advantageous for us to have them as a partner.