By Robert I. Toll. Customization in home building is not only here to stay, it's an inevitable and increasing precondition for doing business. Why? Americans are better off economically than ever before. For example, there really is, in my opinion, very little "affordable housing" offered today. Among the major builders, Toll's average price — $510,000 — is the highest in the industry. Most other public builders are at about $225,000. That's not a starter home.
Even in the lower price ranges, the desire for personalization is strong, and there's an unwillingness to forgo it, even in exchange for a lower price. This mind-set has evolved in our society over many years.
Once upon a time, you could get an automobile in any color as long as it was black. Eventually, as automobiles became available to a wider market, those buyers demanded more choices. The same thing happened with housing coming out of World War II. With Levittown, homeownership was no longer for just the rich and famous. As wealth grew, so did customization. Toll followed that trend, shifting our strategy in the early 1970s to offer more options and upgrades.
The Cost of Choice
Despite what some people think, options are not a profit center. It's not just the hard costs that go up, but you've increased your supervisory time, and you've slowed down the production of your home. If you delay a $500,000 home by two weeks, and if the interest is 10 percent, or $50,000 a year, then $2,000 in interest has gone up in smoke. Most builders don't recognize these costs.
Our pretax profit is 11 percent, and the average builder's is 6 or 7 percent. I wouldn't call those margins tremendous. If we could sell the home without offering the options, we would prefer to do that. Then we could eliminate the markup, the overhead of those departments that manage selections, and the pain in the behind customizing causes. But we've chosen the luxury market, and we couldn't serve this market without offering significant customization.
Offering a wide array of options isn't easy. We've taken 30 years to develop systems of prebudgeting and prepricing so we can offer thousands of combinations and permutations of options. First, it was flooring and cabinets, which are now available upgrades in even the lowest-priced homes. Then, and more difficult, came elevators, music conservatories, and indoor pool rooms (both the billiards and swimming varieties).
Fortunately, customization has become more manageable, in part because of technology, which allows us to track and monitor selections information more efficiently. It used to be that a binder holding all the necessary forms with the list of options on the back was standard issue for our field people. Now, you punch the information into your Palm Pilot. Another example: More and more towns are requiring lot-specific plans rather than the five or six plans builders used to provide. Technology has enabled us to provide completed sets of plans for each lot and do so quickly.
As wealth increases, there'll be more and more customization. Because of rising housing demand and the lack of supply because of growth restrictions, those who will be served are those with more money. Now, and even more so in the future, choice is so important that if you don't provide it, you're at a competitive disadvantage.
Robert I. Toll is chairman and CEO of Toll Brothers. The company, which is based in Huntingdon Valley, Pa., develops communities and builds luxury homes.
Published in BIG BUILDER Magazine, August 2002