Building middle ground

In looking ahead to 2013, we asked builders who placed in the middle of the pack in our survey about the lessons they learned from the downturn, and how they are applying that information to future opportunities.

By Kyle Clapham, Managing Editor | May 24, 2013

Whenever industry ranks are published, an inordinate amount of time is spent focusing on the top of the list. Granted, the builders at the front of Professional Builder’s Housing Giants survey enjoy a disproportionate share of influence in the industry because of their size. But the sheer volume of their transactions can obscure finer business points as the housing market emerges from a downturn rife with important takeaways.

Enter the mid-level guys. These builders must account for what they lack in size with astute observations, calculated foresight, and shrewd reactions. These companies had to batten down the hatches and weather the crash with resources that paled in comparison with the largest U.S. builders. 
In looking ahead to 2013, we asked builders who placed in the middle of the pack in our survey about the lessons they learned from the downturn, and how they are applying that information to future opportunities. Here’s a recap of some of the responses we received:

The Corky McMillin Companies
San Diego, Calif.
Housing Giants rank: 103

The Corky McMillin Companies continues to move ahead with Millenia, a new mixed-use urban center in Chula Vista, Calif., that offers a unique hybrid alternative to traditional suburban developments and transitional urban neighborhoods.
The 210-acre development will include two-and three-story townhomes targeted to move-down buyers and couples with no kids, which is a departure from the company’s usual client base—families and first-time buyers, says Mark McMillin, president and CEO.
Corky McMillin recently filed for LEED certification for the entire Millenia neighborhood. “It’s more than a marketing tool—it’s recognition of the sustainable design of the project,” McMillin says.
The firm, which builds primarily in California, has been buying land in San Antonio because sellers will generally option it there. The area is buoyed by a strong military presence and private job market, McMillin says.
Corky McMillin has been constructing specs at a rate close to just 10 percent, a common theme among builders as housing inventory languishes at historic lows. Having too many unsold specs can impede the start of new homes, but specs keep the sales rate moving, which should be three or four houses per month, McMillin says.
“Working with the banks and starting specs has been tougher than it used to be, but it is slowly getting better,” he adds.

Goodall Homes
Gallatin, Tenn.
Housing Giants rank: 132

Goodall Homes has offered three basic products for the last three years: single family (small and large), one-level condominiums, and two-story townhomes. The one-level condominiums continue to be a strong seller as more people opt for simplified, open floor plans, and the two-story townhouses perform amply when located in or near an urban area, says COO Keith Porterfield.
The builder expects to close about 300 homes this year in four counties around Nashville, Tenn. Goodall plans to open three communities in Franklin, Williamson County, which Porterfield describes as “one of the hottest markets in the Southeast,” with another development on the way in the future.
The company implemented an operational change in November 2012 to improve relationships with subcontractors and trades and provide a better buyer experience. Goodall had been turning around homes in 80 to 85 calendar days on average but wanted more certainty in its processes.
The firm decided to limit starts to eight per week so the customer could know the exact date the home would close. Doing so also enabled Goodall to tell trades the exact day they would have to be on the jobsite.
“Once those homes start, the schedule is uploaded to the trade portal,” Porterfield says. “We know the exact day the lumber will drop, and we know the exact day the plumber will rush into the house.”
Instead of 80 to 85 calendar days, Goodall’s homes now average about 68 work days. Though the cycle is slower, the change has helped overcome labor shortages, Porterfield says.

Centerline Homes
Coral Springs, Fla.
Housing Giants rank: 94

Centerline Homes saw the housing crash coming and started positioning itself in mid-2006 to be “able to weather the storm with low leverage and a better balance sheet,” says CEO Craig Perry.
The company shuttered its commercial, mortgage, and custom home divisions and concentrated on areas of reliable past success. “We tried to focus in on really working the production side of the business, which is where we always made most of our money,” Perry says.
Perry and his team implemented as many changes as possible during the downturn to put themselves in position to take advantage of the resulting market. The firm spent the last year and a half working on an internal systems revamp that Perry says is the last component of the shift.
Centerline, which builds in south and central Florida, sought to enter the Charlotte, N.C., market beginning in 2007 but didn’t find the right fit, he adds. In 2011, the company made its first acquisition of distressed buys in the area. Later that year, Centerline bought a group of assets that jump-started activity for the firm.
The company’s willingness to identify multiple assets that were not central to its core business and sell them quickly before the crash enabled  Centerline to make more strategic decisions and better manage risk after the downturn.

Wathen Castanos Hybrid Homes
Fresno, Calif.
Housing Giants rank: 154

While many builders slashed their prices to stay competitive during the downturn, Wathen Castanos Hybrid Homes went back and reassessed value. As a result, the company instituted a new product series targeted toward the re-sale market, says President Mike Nimon.
That move followed the decision in 2007 to head toward an energy platform after embracing building science and value engineering. Wathen Castanos began building all of its homes, which are green-point rated by California, at 30 percent above state code five years ago.
The monthly energy savings were more attractive during soft times, but the shift in attitude now sets the tone for the company and its sales base, Nimon says.
These days, Wathen Castanos is in the midst of another “remodel up.” The firm opened four different cities with four series and models in 2012 and will open models in four locations in 2013, introducing new model complexes with larger square footages, different elevation styles, and more amenities to attract current buyers.
The company’s typical customers used to be first-time buyers in about 90 percent of instances, but that figure dropped to 30 to 35 percent as more move-up buyers took interest in Wathen Castanos.
“The amount of purchasing power at lower interest rates allows a buyer to reach for larger homes, increased design features, and more amenities,” says Nimon, whose purchase of finished lots at a good value during the downturn set the stage for 2013 and 2014.

Betenbough Homes
Lubbock, Texas
Housing Giants rank: 104

Betenbough Homes, described by President Rick Betenbough as a “value builder” serving three markets in West Texas, found competing with resales increasingly difficult. 
“We have re-engineered our lower-end plans so we can lower our price and lower our cost and just be more competitive on the extreme low end to compete with used housing,” he says.
The company’s low-end product starts at about $112,000 for 1,400 to 1,600 square feet. After selling more than 300 homes a year before the bust, Betenbough Homes fell to a low of about 150 houses last year. The firm’s decision five years ago to expand from Lubbock to Midland and Odessa helped diversify risk and minimize the damage.
“We gained enough sales in those other two markets that we never had a year that was [a loss],” Betenbough says.
NAHB certified each Betenbough house as green through the end of 2012, but Betenbough found the program didn’t directly contribute to sales and decided to withdraw.
“We can’t find the evidence that green sells homes,” he says. Rather, energy-efficient features support sales by reinforcing a quality product, he adds.

SummerHill Homes
San Ramon, Calif.
Housing Giants rank: 86

SummerHill Homes, a builder of higher-end houses in the San Francisco area, currently sells in four communities and plans to open a new community this year in Sunnyvale. The front two acres of the Las Palmas infill site on El Camino will be sold off for a hotel, and SummerHill will construct 103 townhomes in the back part, says CEO and president Robert Freed, who calls it a classic Silicon Valley higher-density infill site.
The company maintained all of its construction superintendents and subcontractor relationships after the crash, which positioned SummerHill to emerge from the downturn with plenty of talent and resources.
“Our efficiency has come as a result of having top quality people and subcontractors versus any new startling production methods,” Freed says.
Freed and his team try to keep SummerHill’s house plans as flexible as possible to give potential buyers numerous design options. In addition to the popularity of a great room, Freed has noticed more people are looking for four bedrooms, which compelled SummerHill to begin offering a downstairs bedroom in its two-story homes.
SummerHill also is weighing the value of including certain smart home technologies in its production housing, Freed adds. In the end, the company has learned many valuable lessons during the past few years.
“At the moment all of our IQs are higher than they were about three years ago,” Freed says, quoting a friend.

DSLD Homes
Denham Springs, La.
Housing Giants rank: 46

DSLD Homes, which builds in Louisiana and Mississippi, doesn’t plan on doing anything differently in 2013 as the national housing outlook improves, says managing partner Saun Sullivan. 
The company’s market proved relatively stable during the downturn and, as a result, DSLD has not been subject to the volatility experienced in other areas of the country. “We didn’t have the fall down, so we probably won’t see the run up either,” Sullivan says.
The firm will continue to reassess its footprint and fill in gaps where they currently don’t have product. “Most of our volume will come out of getting some incremental sales from the subdivisions we already have in place,” Sullivan says. 
DSLD has 70 subdivisions averaging two sales per month, and Sullivan would like to see that rate jump to at least 2.3 a month. But he acknowledges impending labor and materials shortages could abate progress and even threaten the company’s hallmark 42-day frame-to-finish schedule.
The same pride DSLD takes in the quick turnaround of its houses can be found in its approach to sustainability. The firm doesn’t participate in any energy-efficiency or green certification programs, and doesn’t feel the need to publicize that it builds everything 30-percent better than code, Sullivan says.
“To us, energy efficiency goes back to good construction,” he adds.

TRI Pointe Homes
Irvine, Calif.
Housing Giants rank: 108

TRI Pointe Homes, another California builder, typically starts a project with eight to 12 specs, says CEO Doug Bauer. After some of those homes have sold, the company then embarks on another eight- to 12-unit phase.
With specs selling quickly and land prices rising, TRI Pointe relies on disciplined growth and underwriting. The firm, which closed on more than 300 lots during the first quarter of this year, incorporates an 18- to 22-percent gross margin on each project, Bauer says.
As the housing market gained traction, subcontractors have been slower to increase their labor base than in previous cycles; this scenario hasn’t affected TRI Pointe, though, because the company has strong existing trade relationships that enable it to continue to build homes on time.
“We’ve gone to an automated, paperless payment system, which has definitely improved the relationships and speed with which we can pay our vendors and, in turn, enhances the speed at which we can build homes,” Bauer says.
TRI Pointe offers a broad range of products, which gives the company an advantage in buying land because of its versatility. “You’ve really got to be adept at analyzing a piece of ground and maximizing the type of product,” Bauer says.
From walking sites with clients, Bauer learned about the growing popularity of great rooms and indoor-outdoor living. “Forget the formalities of a living room and dining room,” he says.


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