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Home builders discuss key lessons learned from the downturn
Now in year five of the worst housing market downturn since the Great Depression, most builders by now have faced monumental challenges to keep their doors open. In an effort to explore the key takeaways and lessons learned from this downturn, we sat down with three builders to discuss the impacts of the economy on their businesses.
Now in year five of the worst housing market downturn since the Great Depression, most home builders by now have faced countless monumental challenges to keep their doors open. In an effort to explore the key takeaways and lessons learned from this downturn, Glenn Singer, CEO of industry consultant Singer and Associates, West Chester, Pa., sat down with three home builders to discuss the impacts of the economy on their businesses — Jamie Bigelow, president, Bigelow Homes, Aurora, Ill.; Jim Deitch, COO, Southern Crafted Homes, Tampa, Fla.; and Cindy Thomasson, executive vice president, PCS Homes, Millersville, Md. Here’s a recap of the roundtable discussion.
Looking back, what was the biggest mistake you made prior to the market crash?
Cindy Thomasson: I think we should have held back on borrowing. Money was cheap, and borrowing was the thing to do. We borrowed everything because we were making more money if we put the product out the door.
Jaime Bigelow: We should have gotten SG&A (selling, general, and administrative expenses) down faster than we did. We were rather slow, but you know what, we’re home builders and our employees are family, so I don’t really regret that. However, we simply held on too long as we saw the market go down.
What changes have you made in your organization as a result of the downturn?
Thomasson: We took a hard look at our portfolio of products for ways to shrink the houses and streamline our processes. For instance, we’re now 100-percent purchase orders. We also moved marketing and sales in-house to help build a sense of family and loyalty.
Bigelow: During the good times, we got away from guerrilla marketing, and it’s something that has helped us more recently. Our marketing initiatives include sending brochures to apartment renters, contacting local employment centers to see who’s hiring, targeted cable TV ads, ads in local real estate books, sales follow-up monitoring and measurement, and customer satisfaction programs to help drive referrals.
Jim Deitch: We began assessing our organization in 2005 as we watched other builders take part in the madness of the investor frenzy. We knew it was unsustainable, and our own business model didn’t allow much room for investor purchases. Prior to 2006, we allowed a modest percentage of investor purchases, but we shut it down completely in ’06. Also, in the first quarter of that year, we adopted a Lean strategy and reorganized our company from top to bottom to create an environment of efficient and effective resource management.
Did you expand into new markets, such as remodeling or commercial?
Thomasson: No, if anything we’re more focused on our core market — first-time home buyers. Prior to the downturn, we dabbled in semi-custom homes and hotel work, but now we’re back in focus.
Bigelow: The same goes for us. It’s been hard enough just to survive. It’s one thing if you go under and reinvent yourself with remodeling or foreclosure business, but we were still alive so we needed to focus on what we do best to survive.
Deitch: We did not change our business plan or our product offerings. Instead, we worked to bring more value to the product. In the fourth quarter of 2008, we re-tooled the product to be Energy Star certified and launched our Eco-Crafted brand in early 2009. This brand included Energy Star and Florida Green Building Coalition certification. The new brand included several thousand dollars worth of upgrades to the home as standard features. This was at a time when most builders were stripping down their features to shave dollars off the price.
What’s the biggest lesson learned from the downturn?
Thomasson: The lavish lifestyle is gone. People want energy efficiency and more bang for their buck. Buyers, even first-time buyers, are much more educated about the home-buying process. They’re more aware of their credit scores and overall financial situation, and they actually have savings accounts.
Bigelow: Don’t lose discipline during the boom times. We lost some discipline, but not much. We didn’t start ancillary companies that ended up being a drain on the core business. We paid employees on performance and profits, so we didn’t have salary creep. We didn’t load up our homes with a bunch of gadgets because salespeople told us that is what buyers want. And we didn’t buy land that didn’t pencil out. It’s very difficult to stay disciplined during the boom times, but it certainly helps you through the lean times.
Deitch: The biggest lesson for us is to never forget that the further the pendulum swings in times of prosperity one should expect it to swing just as far in the opposite direction during the downturn. We, as an industry, need to do a better job of keeping ourselves in check and staying tuned-in to the impact we have on the overall economy. It’s vital that we have viable financial models and that, for the sake of our customers, we remain profitable. Otherwise, builders leave customers without a lifeline. There were major players that went out of business during the downturn. Some were staples of the industry, and it never occurred to us that they could not survive.
We, as a company, stayed true to our business model and business plan. We watched many builders abandon what they’re known for in favor of chasing the pricing of the market. That’s a rabbit hole we didn’t want to run down. After 20 years of being known for service, the quality of our product, and the overall customer experience, we knew our customers and the Realtors would not forgive us if we abandoned those core principles.
Are you doing anything different today in terms of trying to read the market?
Bigelow: The market is so tight that we can’t get information fast enough. We still look at general information, such as starts, but we’ve added more “feet on the street” data. I go to Realtor meetings whenever I can to ask them how their markets are doing and who their buyers are. I also show up at the competition to see what’s selling and who’s buying.
Also, because no banks will give us loans, we’re building homes with cash. This caused us to look at cash flow on a monthly and sometimes weekly basis. When you’re building with cash you want to know if things are selling or not so you can quickly react. For example, there was a sudden downturn in the Austin, Texas, market and I stopped about 20 homes at foundation. I was able to move quickly on that decision because I was pounding the pavement, talking to everyone I could to find out what’s going on in the market.
What’s your strategy for dealing with lenders?
Thomasson: We’re looking for local lenders rather than the big, national companies because they seem to know our markets better, and they’re more favorable with appraisals. The problem is it’s hard to find local banks that can loan the amount of money that we’re looking for.
Bigelow: At the beginning of the market crash our lenders really came after us. They wanted more personal guarantees, they wanted assets and cash, and they were pretty nasty about it. We consulted with professionals who dealt with banks during former downturns, and we knew that banks will always ask for more money and personal guarantees — and that’s the kiss of death. They will suck you dry of your money and then shut down the operation.
We were very proactive and strategic about dealing with our banks. We told them that we needed all of our cash for working capital. We also told them that, ‘Yes, we could pay you off, but if we did we wouldn’t be able to pay off our other banks, and we’re not going to do that to the other banks, just like we wouldn’t do that to you. They eventually went along with that plan. Our stance is that we’re current on all of our payments. If they want to come get our land, they’ll collapse the whole thing and they’ll get 20 cents on their dollar. We have a good strategy that gets them paid in full, albeit slowly.
Deitch: We have not changed our strategy other than to be realistic about who our consumer is. There is no free money out there. Hopefully, we will not see again the days where anyone can get a mortgage regardless of their credit or employment status. There was a lot of fraud committed and it hurt our industry greatly. But the banks aren’t doing anyone any favors with their lending practices. A lot of people are upset that they took so much government assistance and aren’t letting that money trickle down into the economy. There needs to be balance. But overall, I think the tightening of the lending rules is a positive thing.