Leaders Of The Pack

ROGER POLLOCK IS MORE CONFIDENT today than he was in 1998.

Given his success then, years ago, he was running Portland's top home building company, RMP Properties, closing almost 500 homes and grossing about $30 million annually. Then D.R. Horton came calling with the money Pollock thought he needed to grow the company into the regional powerhouse he'd dreamed of.

But soon after D.R. Horton took over, Pollock left the company, with financial security and plans to start another building company as soon as the four years of his noncompete clause ended.

In 2002, he did just that, closing two homes for $303,000 in revenue. Fast forward two years: In 2004, his new company, Buena Vista Custom Homes, closed 148 units for $42 million, a 1,083 percent three-year compounded annual growth rate, enough to shoot the company to the top of this year's Fast Track list.

What's more, Pollock's on track to grow the company this year to 300 closings and $175 million in revenue, and the Portland Business Journal recently named Buena Vista the fastest-growing company—not just home builder—in Oregon. “We had more ability in our old company than we had the confidence to realize we didn't need a big brother to reach our goals,” recalls Pollock.

BUENA VISTA CUSTOM HOMES

It turns out that Pollock and his team already had what they needed to succeed: extensive knowledge of the complicated Portland market (new development is constrained within an urban growth boundary that surrounds the city), business plans and systems, and a strong reputation to help secure additional financing.

In fact, many of Pollock's colleagues new to the Fast Track also credit their knowledge of their markets as a key to beating the competition. Those smarts, combined with old-fashioned good luck and timing and aggressive business strategies, have produced the formula for this group to outpace the rest of the already fast-moving home building industry.

As a child, Todd Tatum vowed never to become a home builder. But watching his grandfather, and then his parents, operate some of the first production building companies in Southern California's High Desert, the lure seeped in enough that he joined the family business, then called Tatum Development, in 1990. “That was right when the market here was tanking. I learned the inside of the business during the bad times,” says Tatum, now vice president and CFO of the family's newest venture, American Housing Group, based in Victorville, Calif.

Times got so rough that the family shelved the building business in 1994. Tatum and his father spent the next eight years as private water brokers, moving water throughout California. But a rebounding housing market called them back in 2002, when they closed 35 homes.

The Tatums were willing to take another chance on the industry, Tatum says, because they saw fundamental changes in the market, which had been a bedroom community to Los Angeles during the 1980s. “We're creating jobs up here for the first time. People are working and living here. That's making a big difference,” he says. That shift helped the company hit 121 closings last year. Tatum says he's aiming for 320 this year.

The Tatums weren't the only builders keen to the changing employment dynamic, though. Tatum Development had built on scattered lots, and American Housing Group began that way, too. But increased competition has driven those prices up—lots that in early 2004 cost about $15,000 now ring up at as much as $100,000—and Tatum has turned to buying tracts of land that are too small for the national builders. That approach saves some money, but it's not cheap: One plot Tatum was considering in June came with a price tag of $2.5 million for 34 lots.

Inc. magazine recently crowned Reno, Nev., as the top place to do business. But the owners of Altmann Ott Homes, the market's No. 8 builder in 2004, didn't need anyone to tell them that. As they've watched such prominent companies as Barnes & Noble and Amazon.com set up major distribution plants just off the I-80 interstate, they've seen the company double in revenue, from 97 closings and $20 million in revenue in 2002 to 171 closings and $42 million last year. “In the last three years, our prices have increased an average of 60 percent,” says Daniel Ott, the company's president and COO.

AMERICAN HOUSING GROUP

As in many of the country's other hot markets, much of that price appreciation stems from the higher costs of land. Fortunately, Ott and his partner, company CEO Fred Altmann, teamed up with one of the area's largest land owners six years ago. That alliance has helped the company stockpile seven years worth of land inventory.

Well before the Reno market caught fire, Ott designed a business plan that would limit the company to building 300 homes per year. He'd been a builder in Sacramento, Calif., before moving to Reno in the mid-1990s, and while in California, Ott built 650 homes in a single year. “When that was done, I felt our quality and controls had suffered,” he says, adding that 300 is a more manageable level. “Once we reach the 300 mark, we will put it on cruise control.”

In such a hot market and with an abundant supply of land, that may be easier said than done. Ott acknowledges that with the company quickly approaching its target—he says it will close about 250 homes this year and reach 300 in 2006—the real challenge will be slowing the pace of growth. “Our projections show we could go to 450 or 500, but we're not going to let that happen.”

Las Vegas–based Pageantry Cos. controls its growth, too—by sending it elsewhere. “We have a philosophy,” says Bill Hoover, the company's Nevada division president. “We get to 500 units and leave it. If we want to expand to 1,000, we find another location and build 500.”

ALTMANN OTT HOMES

The company has put that philosophy into action in some of the West's most booming markets. It expanded in 2000 into Seattle, where it will close about 500 units this year, and last year to Phoenix, where it already controls nearly 800 lots and will begin closing homes in 2006.

While Hoover says Pageantry has developed a formula for running efficient 500-unit divisions, they aren't identical triplets. Division staff must respond to their markets' unique features, such as a need to look toward raw land and attached projects in Phoenix and possible entry into the second move-up market in Seattle (the company prefers to buy finished, single-family detached lots and to build entry-level and first-time move-up homes).

Not every builder on this year's list is enjoying the housing boom. “It's driving us crazy as we're looking at the market around the country, where subdivisions open and are sold out in a day,” says Mark Winter, president of Appleton, Wis.–based Mark Winter Homes. New-home sales in the market are off 30 percent compared with 2004, and many smaller builders are cutting their businesses back, largely due to faltering employment growth, he says.

Originally, Winter projected growth in line with last year, when the company grew from 88 to 96 closings and grossed $19 million. But he's pared back the goal of 110 homes to holding steady with 2004. “We don't think we're going to grow in 2005. We just don't want to go backward,” he says. He's determined that short-term growth will likely come from a more diverse geographic area or product line, so he's looking into condo development to complement his entry-level and move-up homes that range from $185,000 to $260,000.

Bo Knez, president of Perry Township, Ohio–based B.R. Knez Construction, is fighting a stalled market in Northeast Ohio by diversifying as well. After operating as a custom home builder for more than 10 years, Knez joined a Builder 20 group and ramped up production, hitting 44 closings and $13 million in revenue last year. He considers himself a semi-custom builder now, with products ranging from $150,000 to more than $500,000.

The goal for this year is to increase closings slightly, to about 50, and to reach further into what he calls “the neglected market,” buyers looking for homes priced less than $200,000. For the time being, geographic expansion isn't in his plans. “It's tempting to leave, but we don't experience booms and busts here. We're content with where we're at. We don't have aspirations of doing 3,000 homes a year,” Knez says.

Many of Knez's colleagues on the Fast Track in boom markets can remember tough times, too. That's why Buena Vista Custom Homes' Pollock says he options finished lots rather than developing them himself, and he keeps as much cash as possible. “It gives me the flexibility to change with the market,” he says. “In Oregon, there has never been a market like this. It's a little too easy for us to think it's always going to be this way, that there's some sort of genius angle we've discovered that previous builders had not. We're just tremendously lucky.”

For the first time, we separate and compare the Fast Track members by size.

Mid-sized and large builders solidly increased their rate of revenue growth in 2004, but across all three groups of builders, closings growth was more volatile.

The smallest builders on our Fast Track fell off the pace a bit in 2004, as their rates of growth for both revenue and closings dropped. The 26 builders who closed fewer than 100 homes last year still managed to more than double their production between 2002 and 2004, though.

Improved financing has been key to growth for some. Boca Raton, Fla.–based Sterling Communities has bankrolled six projects with the help of Hearthstone, a national institutional investment firm that provides capital to home builders. One such project allowed Sterling to buy an estate on the Intercoastal Waterway in West Palm Beach, Fla., which it carved into 19 high-end homes, strengthening the company's position as a luxury builder. The company closed 88 homes last year for $44 million in revenue, but president and owner Paul Asfahl says the concentration on the upper end of the market will increase his average price this year from $498,000 to $768,000.

B.R. KNEZ CONSTRUCTION

Jeffrey Homes' group of private investors has grown along with the company, which increased its closings in Southern California from 33 in 2002 to 126 last year. About 50 investors—up from an original group of six a decade ago—provide the capital for big land buys, says Doyle Barker, the company's president.

Paul Hyde Homes, the smallest builder to jump onto the Fast Track this year, with just five closings in 2004, has designs on growing larger through a method usually reserved for much larger companies. “I'm trying to buy another local small builder in the area, which would triple the size of my operation,” says owner Paul Hyde, who's based in Kenner, La., just outside New Orleans.

The Fast Track's largest builders continued their industry dominance in 2004, increasing both their rate of revenue and closings growth. And though local builders often decry national builders' entry into their markets as one of the reasons land has become so expensive and scarce, some readily acknowledge that the big builders help their business.

Lexington, S.C.–based Essex Homes SE shares its market with several national builders, including KB Home, Centex Corp., Beazer Homes USA, and D.R. Horton, but president and owner Karl Haslinger isn't complaining. He's adopted some of the big builders' operating practices. “I made it my business to study their business. I got the information on how they operated any way I could. I hired their people as superintendents and incorporated their subcontractors,” he says. The homework seems to be paying off: Essex Homes SE ranked fifth in the market last year with 200 closings, and in April, Haslinger hired his sales manager from D.R. Horton, who's helping the company grow toward 300 closings this year.

Victorville, Calif.–based American Housing Group takes studying the nationals to a new level. Vice president and CFO Todd Tatum says the company makes a conscious effort to locate its model-home complexes near KB Home, with the knowledge that many buyers will look at KB and likely check out his homes, too. “We haven't had a problem getting them in the door. Then we have to sell ourselves, our company, and our history,” Tatum says. “We think nationals in the market are great for us.”