Big Builder Killers

A lot of small builders continue to thrive in their regions, in spite of the advantages of the Giant firms. Small companies have rebelled, defending their turf from Giants by staying flexible, taking risks and understanding the high stakes they face.
By Matthew Power, Senior Contributing Editor | April 30, 2006

Rebel Tactics

Reality Checklist

Land Buyer Blues

Lean and Mean

Panels from Scratch

Web site Tell-Alls

IT Budget and Staffing

Recommended Budget as A Percentage of Sales

The Right Gear

"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."

"When the market changes," he continues, "you have to dare to differentiate. Differentiate or die. And right now, the markets are changing dramatically. In Washington, D.C., for example, I know builders who did 50 homes last year, and this year they're doing eight. It's that bad."

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.

A lot of small builders continue to thrive in their regions, in spite of the advantages of the Giant firms. Small companies have rebelled, defending their turf from Giants by staying flexible, taking risks and understanding the high stakes they face.

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.

More information online
Group Two Advertising Grant Homes Bigelow Homes
Steve Maltzman and Associates Jagoe Homes  


Rebel Tactics

Working with a client in Vero Beach, Fla., Group Two Advertising faced an uneven fight. A large, national builder, G.L. Homes, was coming to town, opening a 600-home community. Lexington Homes also had a community underway, but the parcel did not front on a main highway. Local ordinances restricted signs to one 4- × 8-foot sign, with no flags.

To get around those rules, Lexington piled a huge mound of dirt near the community entrance, then put a trailer on top of that mound. They then tethered a large, colorful balloon to the trailer, advertising their community. After a few days, the city insisted on the balloon coming down, but not before everybody in town knew about the new development. Next, the builder took some guerrilla marketing on the road.

"We rented a bunch of trucks," company president Richard Elkman says, "and put big canvas signs in the back of those trucks. The signs said, 'You can own a home for $50,000 less in our community.' We moved them up and down the street on the day of G.L.'s grand opening. It was very effective."

Reality Checklist

What is the position you own?

What is the position you want to own?

Who is your primary competitor?

What is your strategy?

Do you have the money for that strategy?

Do you really match the position you perceive?

Land Buyer Blues

In a recent profile titled "Chasing Ground" in the New York Times Magazine, Toll Brothers CEO Robert Toll noted that he spends all day, almost every day, looking for land deals. Most of the big builders now guard their land inventories the way the Pentagon guards its military assets: they're amassing a treasure chest of land for the future, when an acre of dirt becomes even more precious.

In New Jersey, which is increasingly embroiled in development conflict, builder Jay Grant of Grant Homes has had to retool his business due to land inflation.

"Absorption has slowed," Grant notes. "At the same time, the cost of individual lots has escalated phenomenally. The approval process is one of the most difficult in the country."

Big builders, he says, have made the situation even worse for the little guy, by paying exorbitant prices for lots.

"A developer in my home town spent 12 years getting a 17-lot parcel approved," Grant continues. "Myself and several other builders had approached him. We formed a coalition and did all the right things. At first he wanted $400,000 a lot; then he raised that to more than $500,000. The next thing we knew, K. Hovnanian (a New Jersey-based national builder) had come in and bought all of the lots. Rumor is that they paid more than $500,000 apiece — in cash, with no roads and no septic."

Grant says what surprised him most is that the builder is now marketing finished homes on those lots for $1.5 million. He would have had to ask even more.

"I couldn't even make the pro forma work for that price," he says. "They can do that because of their volume discounts and because they beat the crap out of their subs — and avoiding customization.

"At first, the public guys weren't interested in any parcel with less than 50 lots," he continues. "Then it was 30; then 25, then 17. Nobody expected them to get down to this level."

Instead of rolling lots, Grant is now rolling with the punches. He has gone back to his strengths as a custom builder, abandoned spec homes altogether, and refocused on personal contact with clients.

"We're completely on open-book management now," he says. "What closes our clients is when we show them exactly what they're getting for their money. We also charge for estimates. We sell them on our quality and experience. They have to respect what we do."

Lean and Mean

Bill Jagoe of Jagoe Homes says that most builders, big and small, leave themselves vulnerable to national builders in the market only because they refuse to change.

But small-volume builders, he says, have a huge advantage. If they decide to make changes, they can make them almost immediately. Reducing the workload of paperwork at his firm has greatly improved turnaround times. Back in the bad old days, getting out plans and purchase orders and starting jobs took about a month. Now, the average is closer to four days.

"The big firms aren't able to change the same way," Jagoe says. "Once you adjust your processes you can adjust anything you want — including your margins. You just pick up the slack somewhere else."

Panels from Scratch

Instead of buying from an existing modular plant, the builder partnered with a local manufacturer.

As it sought to transfer suburban home plans to a compact, urban design, Bigelow Homes in Aurora, Ill., approached a local truss manufacturer. The two firms based-in partnered to create panelized wall components with just the right technology to speed assembly.

"We brought in our carpenters and design team and they sat together to create a workable system," Vice President Tony Spano recalls. "We actually built the first three models on-site as if we were building them in the factory. During that time, somebody from the plant was standing looking over the carpenter's shoulder all the time. They took that process back to the factory and made it work remotely."

The company's trial-and-error efforts have taught it several lessons about working with panelized structures.

"The connection between installer and manufacturer was extremely critical," Spano notes. "For example, we initially planned to have plumbing in the walls. But we found that our guy could do the job just as effectively in the field as the factory.

"The same was true of electric," he adds. "We ran the conduit but didn't pull wires. We also found that we could add the siding in one day, so there was no point installing it at the factory. And we added the drywall after installation of the panels. We're a green builder, and it was important that insulation not settle during transportation."

Web site Tell-Alls

Builders need to stop trying to use their Web sites as a way to tease customers into visiting a model home, Joe Stoddard of Steve Maltzman and Associates says. Those days are over. Builder Web sites for today's generation must give people real information immediately, including pricing.

"The age of hiding stuff is over," Stoddard says. "If they don't find exactly what they're looking for in three seconds, they're going to another site."

He adds that people want to know details about the local community — things big builders are unlikely to offer online.

"Put some stuff about the community. Interview the principal of the local high school. Make it real. Too many builders are being counseled by sales and marketing gurus who came into celebrity 10 years ago, and now they don't get it.

"The fact is that if you're a mid-size builder in Dallas, there are 500 other builders in the region just like you," Stoddard continues, "and no one's going to hang around your Web site if you don't deliver."

IT Budget and Staffing

How much should small volume builders be spending on digital technology?

"The smaller your company, the larger a percentage of your sales you need to spend on IT, including the Web," Stoddard asserts. "But you don't need a full-time person on staff if you apply best practices and do your cabling right. We find that if you have more than 20 employees, you can get by with one quarter-time person. Below that level, you can use remotely managed services. Those are becoming very accessible and affordable."

Recommended Budget as A Percentage of Aales

Small Remodeler 1.5%
Custom Builder 1%
Production Builder (100-plus homes) .5%

The Right Gear

Not every small builder has an IT department — or should have one, according to Joe Stoddard, a manager with Steve Maltzman and Associates. Instead, small firms can use software packages such as Microsoft Sharepoint to provide key services, particularly documentation for clients.

"Bottom line is that for about $20 a month, you can service 50 customers with password-protected collaboration on the site. You can post all kinds of levels of detail about each project, from before cradle to after grave. That's important."

He adds that the Web site provides a place to store a paper trail of communications, documents and requests from clients. You can also post in-progress photos and control which version of a document is accessed.

"Sharepoint sites are also very portable," Stoddard notes. "As you grow, you just save the site as a template. All the key data is stored in a database."

The ability to reference all of that data, Stoddard explains, has "intrinsic value" to small builders.

"They live and die by references," he says. "Everything is geared toward keeping that reference index high. With a system like this, you can see if your reference index drops and do some marketing."


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