On-Your-Lot Gets Hot

Today, many production builders are jumping into on-your-lot building as a sideline operation, lured by stories of extravagant returns. After all, what is there to fear when building their own house plans on the customer's lot while the customer covers the financing cost? No land, no risk and another way to get a little more bang out of marketing money that's already spent.

As long as builders don't venture too far into the countryside, it seems logical that subdivision supers and trades ought to be able to handle a few of these houses. It's like stealing!

Before committing to this strategy, there are a few things to think about besides the price of gasoline. Leaders in this highly specialized niche market have advice, including Houston-based Giant David Weekley, a production builder who made the jump into on-your-lot eight years ago; Ed Martin, a specialist in scattered-lot operations with Tilson Home Corp., a company outside Houston that closed 485 on-your-lot houses all over the eastern half of Texas in 2005 for more than $72.7 million in revenue; Ohioan Dave Showers, who built Wayne Homes into a scattered lot juggernaut with 22 percent net profit before selling his company to Centex in 1998.

Critical Leadership

"There's no denying the attraction on-your-lot has for production builders," says Showers. "The cash investment is much less because you don't have to buy land or take down lots from a developer. At Wayne, we didn't have any financing expense because we worked off draws from the bank on the customer's construction loan. We paid most of the trades on a 30-day cycle, so we were always ahead of the bills with our draws. Because they owned the job site and got the construction loan, the customer was also responsible for the insurance. But this is a different business, and you'd better understand the nuances of it."

Showers is critical of the idea of trying to have subdivision supers manage scattered-lot houses on the side. "That's dangerous," he says. "That's how we started, but we quickly learned how inefficient we were. As we separated from subdivision building, we learned that a good subdivision super isn't necessarily a good scattered-site super.

Because the buyer owns the land, "Customer relations is much more important in on-your-lot," Showers says. "You can't 'fire' him. If you don't make him happy; you don't get paid."

Leadership at the site is particularly critical: "A typical subdivision super is a hands-on guy," Showers says. "He understands construction but is not likely to be well-enough organized to run a job site remotely. He probably doesn't have the skill to anticipate challenges before they happen. The trade crews have to be self-starters in on-your-lot. In most cases, the super won't get to the job site every day. That requires a different management approach. It's about coaching and mentoring as much as supervising."

Showers also notes on-your-lot production building requires greater skill and attention to detail from the entire company. "Blueprint mistakes can be catastrophic," he says. "In a subdivision, the super can catch such a mistake and improvise a solution. But on a remote job, if you send bad information to the field, it will come back to haunt you. For all of these reasons, it's very hard for people who are used to working for a subdivision builder to be efficient in a scattered-site operation."

Different Strokes

Martin says Tilson finances construction out of retained earnings rather than on the customer's dime, and Martin pays his supers (Tilson calls them 'builders') on commission rather than salary and a bonus, although both sales and supers have full benefits.

"When the customer owns the lot," Martin says, "you have to please him. You have no choice. Our financing construction just emphasizes the point. If they don't close, we not only don't get their money, we lose ours."

What Martin leaves unsaid is that financing construction out of Tilson's retained earnings creates a sales advantage for the firm, which specializes in entry-level and first move-up houses. Buyers don't need interim financing, so they never have to juggle two house payments at the same time; they can make a down payment of a few hundred dollars and not have to worry about another payment until they close on the house. By that time, they're through paying on their current accommodations.

Tilson's builders drive an average of 300 miles a day, visiting every job at least every other day. But they spend six hours or more in the car in work days that may stretch to 12 hours. Paying commission makes the builders that much more entrepreneurial.

"Our builder has to develop in the trade crews the desire to work for him," Martin says. "We have to develop their talent, skills and confidence to where we can leave them alone for most of the time they're on the job."

The trades also learn to communicate with each other instead of the builder to manage the hand-offs from one trade to the next.

"That's another reason it's hard to for us to bring on new trade crews, especially those used to working in subdivisions. They don't know the people there before them and after them. They don't call and then the others get mad. ...That's why we place so much emphasis on training and quality processes," Martin says.

Tilson's sales grew 27 percent in 2005, and the firm is up another 40 percent in the first third of 2006.

"Unlike our builders, who commute long distances to reach their job sites, our buyers usually work in the area," Martin says. "Many already live on the site, sometimes in a mobile home. While we build on some scattered lots in existing subdivisions, most of our homes — 70 percent — are in unincorporated rural areas as opposed to cities."

Customizing Is Key

If you are a production builder and think you can build the same houses on scattered sites, Martin and Showers say you'd better get that idea out of your head. Unlimited customization is the norm, not the exception.

"That was our secret," says Showers. "We did virtually everything the buyer wanted. There were times I'd drive up to a site and not recognize the house as being one of ours. This is the hardest part of the business in my estimation because every house is different, and if you don't have good blueprints and good materials lists, it wreaks havoc in the field. And yet, you have to give the customers what they want."

Tilson has 105 employees, and seven of them are draftsmen working constantly on custom changes. "About five years ago, we were so busy we decided to stop letting people move so many walls," Martin says. "We stopped making structural changes and our business almost died. These people want what they want. They're independent, and remember, it's their house — not ours."

Tilson adopted new processes to find a happy medium. "We have a system with virtually all the changes anyone could make to our plans, pre-priced and constantly updated — so when people ask for a change, we can quote them a price before they leave," Martin says.

Land Mines on the Site

Both Showers and Martin say another on-your-lot building aspect that most subdivision builders don't understand is the necessity to deal with a variety of site conditions. "A lot of times, people will tell us in the sales office that their site is flat. It looks flat to them," says Martin.

Showers taught his supers to do site assessments. Martin has specialists who inspect the sites and estimate the cost to make the site buildable.

Both of these two specialists in on-your-lot stay away from doing wells, septic systems and most other site improvements. "That's the responsibility of the buyer," says Showers.

"We're experimenting now with selling turn-key, full-site services," Martin says. "We want to see if it brings us more business."

Weekley's Tough Nut

David Weekley Homes created a profit center to do on-your-lot eight years ago, and the principal says he isn't certain he'd do it again if he had it to do over: "We went into it at about the same time we started building big new-home centers on Texas freeways," Weekley says today. "We were already committed to centralizing our options, upgrades and selections processes. So we decided to put an on-your-lot business into those design centers to capitalize on another profit opportunity. We put model homes behind the design centers. We had prospects asking us to build our houses on their lots for years. When we looked into it, we found developers were selling scattered lots all over the Houston area.

But "if you don't have that lot supply, it's a waste of time," Weekley says. "Specialists in on-your-lot always put their models on a well-traveled road. We had the opportunity to do it on a major freeway. It looked like a good idea."

Now he's not so sure. "The challenge is that every house is a one-of-a-kind because every lot is different. Each is in a different community with different restrictions and regulations," Weekley says. "And by their nature, on-your-lot buyers are customer-oriented. They want it their way. But they often can't make their dreams fit the reality of what it costs. We had to dedicate a special designer to adjust our plans to their needs."

Weekley also acknowledges that having subdivision builders and trades do this work is a challenge and estimates he increased his hard costs by $5 to $10 a square foot.

"You need to have your regular production operations really fine-tuned before you try to get into this," Weekley cautions. "Then you have to find people who are very entrepreneurial and willing to spend the driving time required to get this work done. It's very management intensive and not a way to add a lot of volume. We do about 100 houses a year in Houston compared to 1,700 to 1,800 in subdivisions."

Weekley says on-your-lot is working well enough now in Texas that his firm is starting operations north of Atlanta and in Ft. Myers, Fla. "I'm glad we're in it now, but it took a long time make it profitable."

Ratios That Prove It Can Work

Although a host of factors make it difficult for subdivision builders to cross into on-your-lot, the financial ratios of specialists in this segment still make it attractive to builders. “You don’t have land as a cost, but it’s also not reflected in the sales price,” Shinn cautions, “so your direct cost percentage is higher. It’s a heck of a lot more complicated to build these houses with supers spending so much time driving.

“Lee Evans (management guru) used to describe Dave Showers’ company as a bumble bee. Aerodynamically, he’d say, there’s no way this should fly — but it does. Dave had a 22 percent bottom line. That proves it can be done.”

Here’s how Shinn says Wayne Homes’ cost ratios ran in Showers’ heyday in the mid-90s.