How One Firm Built and Sold Homes in Mortgage-less West Africa

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American Homebuilders' Robert Hornsby and colleague Ameet Dhillon explain how they built a mortgage industry from scratch.

Taking out a mortgage to buy a home is a commonplace transaction in many parts of the world, but there are regions such as West Africa where the basic infrastructure for such a deal is patchy at best. Former Peace Corps volunteer Robert Hornsby saw a business opportunity with a strong social impact component: Create a mortgage industry from scratch that puts locals in homes and provides foreign investors with a healthy return. In 2014, Hornsby co-founded American Homebuilders of West Africa (AHWA), where he is currently CFO. He works in collaboration with Ameet Dhillon, managing director of US-Africa Housing Finance, which provides financing for AHWA homes. They recently spoke about the project on the Knowledge@Wharton show, which airs on SiriusXM.

An edited transcript of the conversation follows.

Knowledge@Wharton: Could you give us some background on how you got started and where in West Africa you work?

Robert Hornsby: Our business is now in Conakry, Guinea, and we’re looking to expand this year into a couple of other countries. But this project goes back years before my time at business school. My business partner, Jonathan [Halloran], and I were Peace Corps volunteers in Côte d’Ivoire from 1993 to 1995. It was there that we first noticed a problem in the housing market. It was mostly Jonathan who zeroed in on this. Wherever you go in that part of the world, you often see houses in varying stages of completion, and they never seem to get done. You watch it for a year, two years, three years, and they rarely get finished. Or if they do get finished, it has taken so much time that you can just count the material waste as they go through several rainy seasons before they even get a roof on them.

Jonathan and I stayed in touch over the years. He went to business school at INSEAD and did a business plan related to housing in West Africa. Then we got our heads together and had a meeting of the minds in late 2013, early 2014 about how we could improve the way houses are built in that part of the world — that we could deliver something higher quality, faster, and do it with a production method so that you get the efficiencies of building several houses at a time, instead of just one-offs here and there.

Knowledge@Wharton: Was reaching out to Ameet’s organization part of that next step?

Hornsby: As with a lot of business in that part of the world, in some ways when you decide to work in sub-Saharan Africa, you are signing up to build your own infrastructure. A lot of what typically needs to happen for business to work doesn’t exist there or doesn’t exist in a format that makes it possible to do it the way we do [in developed countries].

After World War II, the U.S. government created a way to support banks that would lend to homeowners, and that’s really the beginning of the housing market explosion here. Go to a place like sub-Saharan Africa, and most places don’t even have a functioning mortgage industry. From the very beginning, we realized we had a good product solution from a housing standpoint and a service solution in terms of being able to give West Africans a reliable partner to get this work done in a professional manner. What was missing was the financing piece. This is where you get into that “build your own infrastructure.”

“When you decide to work in Sub-Saharan Africa, you are signing up to build your own infrastructure.” –Robert Hornsby

We decided that nobody else was going to do it, so we needed to do it. Ameet was an investor in American Homebuilders of West Africa. He was keen to work with us to help find a solution to this, and that’s what US-Africa Housing Finance grew out of. It was realizing that, particularly for members of the West African diaspora who may be living in Europe or Canada or the U.S. or Australia, there are no banks [in those locations] that are going to lend to them to build a home in West Africa. And the industry over there just can’t support it.

Knowledge@Wharton: Ameet, what Bob just described tells me that the housing market in this part of the world is significantly in need of the processes that we consider to be traditional in our housing market in the United States.

Ameet Dhillon: Absolutely. There’s that old saying, “Necessity is the mother of invention,” and that’s really the case here. In order for American Homebuilders to succeed, there had to be a viable mechanism to provide some sort of finances for these houses, and that just didn’t exist. It doesn’t exist in Africa itself — in Guinea or really in any other country there. No U.S. bank was going to lend for houses built in West Africa, so we essentially had to build it ourselves, which is why we created US-Africa Housing Finance.

Knowledge@Wharton: What is the state of the housing sector in that part of the world now?

Dhillon: From the financing perspective, it’s fair to say there is no mortgage or home-lending market to speak of. American Homebuilders had to work very hard to create the housing, the infrastructure and the marketing. It became abundantly clear that they could build the best houses in the world, but if you don’t have some mechanism to finance them, you aren’t going to be able to sell those houses. That’s really where we had to develop US-Africa Housing Finance.

At its heart, it’s not all that complicated a scheme in the sense that it’s really taking private equity or private investor money — largely here in the United States — and using that to finance houses. There’s an underwriting process that we have to go through to make sure we’re lending appropriately. We take the proceeds from those finance contracts that we originate and give those out to investors.

Knowledge@Wharton: Trust is important, because money may be sent to West Africa to build homes, but there are no guarantees the homes will be built.

Hornsby: By some measures, there is as much as $25 billion in remittances that goes back into West Africa every year from West Africans who have left home to earn their fortunes abroad. Much of that money is targeted at real estate projects. For many people in the diaspora, the one core dream is to be able to go back to your home country, have a nice home to retire to and let your community know, “I did it. It was worth it. I made these sacrifices, but now I’ve come back. I’ve invested in my country. I’ve created something beautiful. I’ve created wealth. I’ve created employment opportunities for all the people involved in building this home.”

“There is no mortgage or home-lending market to speak of [in West Africa].” –Ameet Dhillon

We hear stories time and time again of people who have sent money over to a trusted relative or a trusted friend — it could be an uncle, a brother-in-law. It almost always ends in heartbreak because the person has simply lied to them and over the years will send them pictures and say, “The walls are going up. The roof is going up.” They don’t want to travel over there too often, because every trip you take to try to supervise construction is that much less money you can invest in the house you’re trying to build. So, they may wait five years or 10 years to go look at the finished product, and they get there and find nothing. That’s the worst-case scenario.

There are other bad-case scenarios in the interim. If you can find somebody you can trust with your money, the chances of that person also being expert at clearing title to a piece of land, at managing a construction project, managing and supervising subcontractors on a site — those are all professional capabilities that require a complicated set of knowledge and skills that not everybody has. So, even the people who get something built are often disappointed with the quality and with how long it takes.

What we’re doing is taking a homebuilding process and implementing it there and giving buyers in the diaspora an entity here in the U.S. that they can interface with. They can contact us any time they want. They can see daily pictures from the construction site through our project management tool. It gives them a way to know that their money is going towards what they intended, not to exist in this zone of not knowing and crossing their fingers and hoping that something is going to happen.

Knowledge@Wharton: Who are your clients?

Hornsby: Right now, almost all of our clients are West Africans living outside of West Africa, who have been saving up money to build a home back in their home country. We sell homes ranging from $32,000 for a two-bedroom, one-bath twin, up to $200,000 or more for a very large villa. Most of our sales are happening in the $55,000 to $75,000 range, which is a three-bedroom, two-bath villa or a four-bedroom, three-bath twin row-home.

We would love to be doing more work for the middle-income part of the market and the lower-income part of the market in that part of the world. To do that, you really have to have a local government that’s committed not only to making land available and supporting foreign investors who want to come in and service that part of the market, but also you need to have a government that’s credibly committed to dealing with the housing finance issue. Because if you can’t offer somebody financing terms over 15, 20, 25, 30 years at an interest rate that’s reasonable, it almost doesn’t matter how inexpensive you make the house. The earning power in that part of the world is such that you can’t make it work without some sort of commitment to financing over the long-term.

Knowledge@Wharton: Ameet, it sounds like from the finance side of things, in many cases the conversations that Bob just laid out are truly foreign. They don’t even occur between financial entities and governments.

Dhillon: That’s exactly right. We typically are able to finance about 70% of the cost, so the buyer comes up with about 30% down. … Because there traditionally wasn’t any financing available, these houses that Bob described that are built over five or 10 years, you can imagine they were built very piecemeal because they were built when the person here had money. Maybe you have $2,000 this year and $3,000 next year, so you get this house built piecemeal over time.

“We decided that nobody else was going to do it, so we needed to do it.” –Robert Hornsby

From a finance perspective, we’re taking these best practices from the U.S. and other parts of the world and trying to apply them there. And you’re absolutely right, these are concepts that really just don’t exist in-country. There’s a lot of education or really just getting people up to speed, certainly on the finance side but even on the housing side in terms of expectations of quality or how quickly it will be built or what the process is to get the keys to it. Personally, that’s one of the things that I find very fascinating here, these things that we take for granted living in the United States. “Oh, I just walk down to the Bank of America. I get a mortgage, and off I go.” That’s not the way it works there. In some sense, we’re having to reinvent the wheel, but it’s actually a lot of fun to try to reinvent the wheel in this case.

Knowledge@Wharton: How realistic is it to have these significant conversations with government entities in this part of the world?

Hornsby: It is realistic. We are engaged in discussions with the government of Guinea and have looked at the government programs in some of the other countries in the region. Some are further along than others. Senegal has a housing bank that has branches in Columbus, Ohio, and New York and Philadelphia. They have done some work to reach out to members of the Senegalese diaspora and support buyer financing for some projects there.

There are some countries moving in an encouraging direction; there are other places where there’s a lot of work to be done. The problem for people who want to build in that part of the world often starts with the land title. When you buy a house here, you get a mortgage, there’s a little line in there somewhere about your title insurance, and it all just kind of gets absorbed in. Title insurance is just a money-printing machine here because everybody pays it and nobody ever collects. In that part of the world, builders have to self-insure by doing the legwork, doing the homework. It all depends on the local administrative infrastructure.

In Guinea, it follows the French system of prefecture and super-prefecture and minister-level verification. We go at the super-prefecture, which is the county level, to verify that nobody else has a claim to any land before we buy it. We do it at the prefecture, which is like the state level, and do it at the National Ministry [level]. And then we go around to the community members to make sure that there’s no traditional land claim from tribal history that would cause a problem with building on this land.

There are some governments that are taking steps to protect legitimate title claims in a way that makes it easier for foreign investors to come in and do the kind of thing that we’re doing. There are other countries that look the other way when someone has a legitimate title claim, and a squatter comes in and starts building on it. That’s what we look at when we look at expanding: Where can we find a government that’s really committed to supporting legitimate title claim, really committed to supporting initiatives for financing buyers — and where there’s also some sort of international player who’s going to help fill in some pieces of the puzzle?

“It’s got a very respectable dollar-denominated 9% return, which should be reason enough to want to invest.” –Ameet Dhillon

People are doing this. There’s a fund that was set up by the Dutch Development Bank to be a local currency bond fund that would make financing available in different parts of West Africa using local currency. When you have those multilateral development institutions that are stepping up to put some financing muscle behind initiatives like that, then your options start to open up. But you really have to have all of these pieces of the puzzle fit together.

Knowledge@Wharton: How much has the construction of these homes laid the groundwork for trust?

Hornsby: It has made a big difference. We’ve realized that getting somebody into a home is what cracks open wide the door to growth for our business because word of mouth in the West African diaspora community is a really powerful tool. Three years ago, we would call people on our lead list, and half of them assumed that we were some kind of scam just because they’ve seen so many people scammed. Now we get callers saying, “My sister-in-law bought a house with you,” or “My cousin knows somebody who bought a house with you. Where have you been all my life?” Once people know that this is possible, that there is somebody that you can trust to do it, the floodgates really begin to open up.

Knowledge@Wharton: This must have wider economic benefits for the region?

Dhillon: Obviously, we run this as a for-profit business, but there’s a social-impact angle to this, which we obviously take very seriously. Take US-Africa Housing Finance: When I talk to investors here in the U.S. to invest in the fund, I lead with the fact that it’s got a very respectable dollar-denominated 9% return, which should be reason enough to want to invest. Beyond that, we’re not only helping that part of the world to adopt sort of Western standards in terms of borrowing and so forth, but also [boosting] employment.… All the houses that are built right now in Guinea are all done with local labor. These are independent contractors who are building these houses. American Homebuilders has got employees on the ground there who are paid.

As you start to build infrastructure, you build essentially subdivisions, which is what we’re building there, then you’ve got businesses that pop up around that. So, you’ve got this secondary effect, and this is what we believe is really powerful in propelling the other business model forward and getting local governments to understand that we’re here to have a profitable business, but we’re doing something that’s very positive for the local community and the country. We started small — we’re still just in one country — but we can see [the business] expanding very rapidly to neighboring countries and taking the finance aspect and the building aspect and moving them forward.

Knowledge@Wharton: When you talk to potential investors, do they have an initial reaction of concern or wanting a fuller understanding of what’s going on with business in that part of the world?

Dhillon: Yes, absolutely. I tend to get one of two reactions. You’ll get people who, the moment I mention Africa, just shut down and say, “No, I don’t want to have anything to do with that.” Then you’ll get folks who tend to be more adventurous, who look at us and go, “That’s interesting. Let me understand a little bit more about that.”

What I’ve found is if you get somebody to spend 15, 20 minutes with me and let me lay out what this investment is all about and how we’re going about financing these houses — the underwriting criteria and so forth — then people’s eyes start to open. They go, “This is quite interesting.” You get the standard questions like, “Are there currency risks?” You tick through all the standard things that an investor would start to look at from a risk perspective, and people quickly come to the realization that, “This isn’t anywhere near as risky as we thought,” because we’ve been very careful in terms of how we underwrite these loans. We require 30% down. If you put 30% down on something, you’re not going to default very easily. You’re going to really be careful.

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How One Firm Built and Sold Homes in Mortgage-less West Africa. Knowledge@Wharton (2018, August 23). Retrieved from http://knowledge.wharton.upenn.edu/article/how-one-firm-sold-homes-in-mortgage-less-west-africa/

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