How Homebuilders Can Handle Their Fear

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Homebuilders who are afraid of the economy have a lot to lose. Professional Builder columnist Chuck Shinn lists questions builders should ask themselves and underscores why it’s critical to stay focused and motivated during a downturn.

November 01, 2007

As I travel the country, I see builders lost in this new economic environment with no knowledge or mental map of what to do.

Many continue to operate the same way, thinking they will get different results if they just work harder and hope the problem will go away. All have a high chance of failure during this cycle.

To be a survivor, you need to turn your fear into focus and make a new mental map of where you are and the environment you are in.

There was a critical turning point for almost all crisis survivors when they became convinced they would survive and believed anything would be possible. The faster you reach this point the better your chances of survival.

Face the Tough Questions

Do you have the right stuff to be a survivor? Two critical things for survival in this recession are cash flow and maintaining your ability to borrow funds. At this point, cash flow is more important than profit, which is a statement of heresy for "the profit doctor" to say, but survival is paramount. You need to get to a break-even cash flow as soon as possible.

Will you have to lay off staff to cut your overhead? This is one of the hardest decisions, but you need to cut deeper than you think. Will you mothball communities that are not generating sales? If a community doesn't have enough sales to cover the community cost and generate a contribution margin, it might make better sense to close it down.

Will you discount your house spec inventory at break-even or a loss? The spec homes were built under a different economic climate. They are sunk costs that are tying up your cash and bloating your debt. It is best to liquidate them as quick as possible.

Will you walk away from earnest money deposits on land? Don't throw good money after bad. You can pick the land up cheaper later on in the cycle. Will you dispose of your land inventory? This probably should have already been done. The debt service on land has taken more builders into bankruptcy than anything else. Somehow you have to get out of the land debt.

Will you change your product to become more customer-focused? Through improved customer research you can cater to a smaller target market, which can improve sales and increase revenue.

Will you reduce the standard specification in your home to lower sales prices? During the last five years we have added a lot to our houses; now it is time to take stuff out.

Will you work with your trade partners to become more efficient in your production process or will you send the trade a letter demanding price reductions? The trades know your inefficiencies and can be a great asset.

This housing recession will yield once-in-a-lifetime opportunities, but you have to be a survivor to take advantage of what lies ahead. The industry will be different once we come out of the recession. Builders who recognize the recovery early will reap the benefits.

Since 1975, Chuck Shinn Jr., a consultant and industry educator with a doctorate in business management, has improved the management skills of home builders to increase their profits, quality and customer satisfaction. He can be reached at cshinn@shinnconsulting.com.

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