Big Builder Killers

"This is not a game," says Richard Elkman, president of Group Two Advertising in Philadelphia. He's referring to the growing threat small builders face from Giant firms. "Its a war to protect your business and your family. That's something a lot of builders don't understand. The national builders could come thundering into your neighborhood any day. Maybe one already has. With cleverness and courage, you just might beat these big builders at their own game."

Elkman says small home builders need to shout louder if they want to get heard above the megaphone of a national firm. He calls his unorthodox techniques "guerrilla" marketing. He says that sometimes breaking the rules is the only way to get noticed at all. The noose is tightening for the little guy, he says, because big builders will let nothing stand in the way of their growth imperative. Even now, as the economy softens, national builders expect to keep growing — but that requires exploiting ever smaller markets.

"The engine of the big companies is just too big," says Jay Grant of Grant Homes, a builder in Mendham, N.J. "They've got to feed it."

By "feeding" it, of course, Grant means they need to scoop up land on which to build a lot of homes and ensure a regular cascade of closings. In most cases, big builders can outbid any small builder for land. On top of that, their clout with distributors and subs allows them to slam together product faster and cheaper than local competition. Some national firms now have custom divisions that compete directly with local firms. No niche is completely safe any more.

In this article you'll learn about some of those techniques and tips, from rolling lots to self-made modular plants. There's no magic bullet out there to protect your market position when the Giants come to town, but it's not time to throw in the towel, either.

Break the rules.

"I think the first thing you have to recognize is that Toll Brothers may build 10,000 homes a year," says Richard Elkman, "but not 10,000 in your market. They have the cash and systems, but who are they are in your local market? When you look at them that way, they're not as giant, not as scary."

That "carpetbagger" perception, Elkman notes, can be exploited in many ways.

"They're likely to bring product from another area," he says. "That means you have a design opportunity. Also, you're small enough to change product and advertising strategies instantly. The big firms can't do that. And you can get down into the marketplace. The big builder is not looking at niche opportunities like tying in with a local church or leaving fliers at the dry cleaners or a well-known restaurant."

Elkman offers many examples of maverick marketing efforts that have given small firms a boost. For example, one of his clients, Conaway Homes, a mid-size (100 homes a year) builder with homes in Tyler, Texas, was facing a major blow. Choice Homes, a national builder of nearly 5,000 homes a year, was coming to its neighborhood.

"Conaway had to do something to build the size of its company perception-wise," Elkman explains. "So we designed a counter card for all of the local Lowes and Home Depots in the area. What it said was that anybody building a home with Conaway would get a $2,000 to $3,000 discount.

The builder paid for the cards, of course, but the money ultimately came from the home's construction budget.

"This technique linked Conaway up with two of the biggest employers in town," Elkman adds. "And we did it before Choice Homes got settled in the area. That's important. They also came in and paid more for local land than they should have. It's a case where the good old boys [got] together and were proactive. They weren't directing efforts at Choice, but they made it too hard for them to compete."

As a result, he says, Choice Homes left the Tyler market within 18 months, looking for easier pickings.

Grab it, but don't own it.

The strategy of retaining control over land parcel by "rolling" lots is not new. In fact, Professional Builder talked about the concept back in 2003. But it merits revisiting, because it's one of the few low-risk tools left to small builders looking for land security. With the sky-high cost of land, head-to-head land bidding wars with bigger firms can get small volume companies into financial trouble in no time.

"Rolling lots works like this," says, Grant. "You need a developer/seller who is patient and has deep pockets. Preferably, these lots have been sitting on the market for a year or two. For example, I did a project in Florham Park, N.J. a few years ago with 10 lots worth $250,000, fully improved.

"I said, 'I'll pay your asking price, but instead of buying the whole parcel, I'll pay you for one lot, and you title me for two.'" Grant continues. "I'll build two spec houses on those lots: that's a prerequisite — spec homes. I agreed to buy the remaining lots within 18 months. In addition, he got 35 percent of my builder profit. We signed the deal, and I made about $9 million in sales with a $250,000 initial investment."

Grant says he used this method for many years, until the big-builder hunger for land simply overwhelmed his market (see sidebar: Land Buyer Blues). He says rolling lot deals have become a quaint relic of the past for him in his "superheated" market, but his Builder 20 chums in other regions still use them frequently, with tremendous success.

Some risks are worth taking.

Bill Jagoe of Jagoe Homes has co-opted one of the major strengths of national builders: streamlining processes to reduce operating costs. It's not by accident that his firm often controls a 30 percent market share of new construction in the Louisville, Ky., area.

"I'm able to change things quickly now," Jagoe notes. "I can look at what the big guys are doing and have new product to compete with them out in the market within 30 days. We're just leaner.

"I used to build 100 houses with five supers," he continues. "Now I can build 500 with the same number. Those supers used to spend an hour to three hours in preconstruction meetings on every job. Now we don't even hold those meetings."

But Jagoe notes that those changes didn't come by accident. He brought in a consultant who helped him look at his company with a fresh eye. The biggest discovery: his processes were rife with unnecessary paperwork based on overblown risks. In other words, a lot of his policies and procedures had been put in place because of a single incident. Somebody created a new document or procedure to prevent that incident happening again. But the real risk was negligible — reams of profit-killing bureaucracy.

"We found reports that we'd been running on every job for two or three years that I had never even looked at once," Jagoe says. "It came down to a lot of mistrust in the system. Our staff was managing nine different status boards for example. That was just unnecessary."

Deleting distractions

Next, Jagoe analyzed the number of non-construction activities — such as change orders, warranty issues and other general paperwork. He identified 273 non-construction activities affiliated with every customer. By adding trust back into the system, he was able to immediately remove 137 of those, which "were adding no value whatsoever" to the business.

The firm looked at design and product options.

"We focused on what our clients actually needed," the builder says. "We were maintaining a lot of options that were not selling. We brought it down to about 4,000 options, but they were much better organized. On a quarterly basis, we go through new option suggestions and decide which ones to adopt."

Panelize for speed and price.

Many of the national builders have now begun using modular systems to make their work flow even faster. For small-volume builders, panelization is not just a handy tool — it may be a key to survival in certain markets.

Tony Spano, vice president of Bigelow Homes in Aurora, Ill., began looking at panelization strictly as a cost saver. Now he's a believer. His firm took the dive when it took on a project to build 100 single-family homes on 25- foot-wide lots in a blighted neighborhood of Chicago.

"One of the things that drove us to prebuilt systems initially was that the city was very concerned about vandalism during construction," Spano recalls.

By using pre-built wall and roof components the homes could be dried in and thus protected against theft in three days.

"Also, thanks to panelization," Spano says, "we were able to take some of our single-family product from the suburbs and adjust the plan to fit on a 19-foot lot. We had to work in some tight places in the city, and this made it possible.

"We set it up so everything brought to the site could be installed that same day," he adds. "In three days, we found we could complete the exterior with windows, roofing and doors in place."

Bigelow first used the panels after it took over as general contractor for the 100-unit Ezra Homes development in Chicago. Another builder had begun building homes on the site five years ago building 12 homes in that period failing to hit the affordable $120,000 price the city sought. Instead, the builder ended up with $180,000 homes.

By using panelized construction, shallow frost foundations and even-flow production, Bigelow has been able to knock that record out of the park.

"We built 88 homes in one year," Spano notes. "I don't think anybody's ever done that in the city — and we came in at the price they wanted."

Bigelow Homes continues to develop, including multifamily homes in the suburbs and city. They specialize in new urbanism and green building.

"We're a small fish in a rather large pond," Spano adds. "But frankly, while the [big builders] fight over their market share, I'm happy that we can provide 200 homes a year. We consider ourselves innovators."

Untangle your digital presence.

For small volume builders, the aim of computer technology — both in- house and on the Internet — is not to outdo your national competitors, or "futureproof" your firm. Instead, you're setting the bar low — just a little bit better than your closest competitors. Keep it simple.

That's the advice of Joe Stoddard, a manager with Steve Maltzman and Associates, a consulting firm based in Orlando, Fla.

"A 50-home-a-year builder comes to me and says 'We want a system we can grow into.' I tell them 'No you don't.'" Stoddard says. "What they do by doing that is add a year to deployment time. They'd be better off going with a smaller, easy-to-use solution and for a year or two.

"Look," he continues, "You can't go from nothing to automated purchase order system overnight. That's not how it works."

Small builders, he adds, have great advantages over large firms when it comes to integrating IT and Web-based software. The smaller the company, the faster and easier the transition.

"A 10-person company might take a year to get up to speed," he notes. "But a 20-person firm might never make it at all. There's that much of a difference depending on how big you are."

One of the problems often overlooked when you plan a major upgrade in your company's IT capacity, he explains, is employee retention.

"Even companies with a very stable staff will have a 50 percent turnover where the (IT) project is going on," Stoddard says. "It's almost like a second job for them. And if you try to do it a couple times and fail, you end up with disgruntled employees — and a damaged company."

Instead of biting off a huge IT transition, he says, small firms can optimize their workflow with relatively inexpensive, easy-to-use applications. They may even be able to get by with Web-based applications (see sidebar).

"You're far better off using 90 percent of the power of a small application than 10 percent of a big one," he notes.