Typically, Ivy Zelman, former managing director at Credit Suisse and now CEO of Cleveland-based Zelman and Associates, spends her time studying the housing and home building markets and advising her home building clients on strategy. Zelman tends to deal in big-picture issues, such as research and analysis surrounding the building and building products industries.
Yet even Zelman, who started a consulting company in 2007, has had to think about her own business, and how to pay for its operations during a housing recession that has caused several builders to file for bankruptcy and likely will cause many more to follow a similar path in the next 12 months. Zelman’s thinking about how to keep her company afloat led her to consider what builders could do to get their own financial houses in order.
“I want to retain people, so I am only going to pay them two-thirds of their cash bonus, and pay them one-third over three years so that they are not going to leave me,” Zelman says. “There are creative ways of keeping good people without ticking them off too much.”
Tying people’s wages to the success of the company is another good idea, though Zelman concedes that “working on re-evaluating compensation is tough.”
If recalibrating pay for one’s own employees isn’t palatable, builders should at least be re-evaluating their relationships with contractors and vendors, Zelman says.
“Bring in 10 guys that have copy machines. Or call your insurance providers, and re-evaluate all of your relationships,” she says. “You don’t want to throw out the guy with the best performance, but test him a little bit. ‘Times are tough right now, I really need your help. You really need to work with me if you want me to survive. Can I extend my payment terms? Instead of paying you in 30 days, can I pay you in 60? I need the flexibility to help me pay my bank debt. I don’t want to scare you, but if you can help us it’s going to generate this much savings.’ ”
If a builder has the available staff, dedicating an employee or two to the task of going through every expense and looking for ways to cut costs is another sure-fire way to find savings.
“I call it the fine-tuning of all aspects of your business,” Zelman says.
One way to modify the business plan to cut costs while not impacting sales would be to cut back on advertising, Zelman says. Many consultants are advising builders to pull back on newspaper advertising and funnel remaining advertising dollars to the Internet, where a builder has the potential to reach a wider audience. But with slumping sales and masses of inventory creating a buyer’s market, Zelman says that greatly reducing spending on all advertising might not hurt sales that much.
“It doesn’t really pay to advertise right now, because the publics are going to bring in traffic and if you are neighboring them, I’d piggy-back off them,” Zelman says. “It doesn’t seem to be driving higher conversion rates anyway.”
A final piece of advice Zelman offers echoes sentiments from other experts on how to deal with land and house inventory: Sell now and take what you can get on price.
Many builders right now are thinking something like this, Zelman says: “Oh man, I can’t sell that thing. I bought that in 2004, and it’s worth so much more than that.”
Take emotion out of the equation, Zelman says.
“Think about adding back the tax benefit to the loss and how much are you really down?” Zelman says. “Think about the carry costs. Even though it’s a great parcel, and you feel like you bought it at a good price and selling it here feels like the most painful thing you’ll ever do, think about all the money it is going to cost you over the next few years to carry it.”
Zelman also advocates seeking out land developers to try and renegotiate take-down schedules, and bring about more favorable terms.—E.B.
Learn more about markets featured in this article: Cleveland, OH.