Market Timing

On a recent monday morning, Jeff Caruso's desk was almost clear. That's the way most weeks start—except that for Caruso, the owner and CEO of Caruso Homes, the week starts long before he gets to the office on Monday mornings.

Caruso is rarely off the clock, whether he's using the digital camera he carries everywhere to snap pictures of interesting homes or driving to the growing number of his company's communities. Most of Caruso's mornings start at about 5 a.m., when he wakes and reaches for his BlackBerry. He dashes off a handful of e-mails, shuttles his daughters to school, and often squeezes in a workout before heading to his company's headquarters in Crofton, Md., 25 miles northeast of Washington.

It's all done with an eye toward continuing to grow and improve Caruso Homes, the company Caruso founded in 1986. He's been through the ups and downs of the Washington housing market since, weathering the bust of the early 1990s and riding the current boom that's helped the company set new records in 2004 and 2005.

FAST TRACK: After weathering bumps in the Washington-area home building market and growing slowly for several years, Caruso Homes has set itself up for rapid growth. Owner and CEO Jeffrey Caruso and president and COO David Herzog pack much into their days to facilitate that growth, meeting with staff members to choose everything from what new products to use in their homes to which new parcels of land to buy. One of the biggest choices lies ahead: A satellite office in Virginia has spurred the company's growth farther south, and it's considering expanding to additional states.

In his first 20 minutes in the office, Caruso glances through the short stack of paper on his desk, reads a few e-mails sent in response to those he sent off at 4:57 that morning, says hello to employees, and heads down the hall to the management meeting that kicks off each week. In addition to Caruso, the dozen people seated around the table include president David Herzog and the department heads of land acquisition, land development, finance, sales and marketing, production, and purchasing.

Karen Samoy, vice president of sales and marketing, begins by telling the group that the company set a number of records in the previous week: 19 sales, 13 closings, and Randy Clark, director of Maryland sales, sold $4.4 million worth of homes himself. Applause fills the room when she pauses, and again when she brings in three employees who helped process the closings.

Samoy continues with an update on the company's second House for Hope project. The home built in Maryland in 2004 resulted in about $100,000 of donations to Hope International, a nonprofit organization that makes small business loans to entrepreneurs in such countries as Afghanistan and Ukraine. Samoy says the 2005 project in Virginia will double that amount. In addition to Hope International, this project's beneficiaries include local domestic violence and health-care centers.

The success Caruso Homes has enjoyed in the past few years helps enable such giving. In 2003, closings fell from 192 to 138 and revenue dropped by $12 million, due largely to communities finishing before new developments could begin.

The company's fortunes bounced back in 2004, with 221 closings for $96 million in revenue. The numbers only look more promising from there. Caruso predicts it will close 308 homes in 2005 for $155 million in revenue and expects to grow those numbers to 482 homes and $275 million in 2006. But the company's top managers have their eyes on a rounder number. “I want to be building 1,000 units before I'm 40,” says 36-year-old Herzog.

Next up: Harold Horner, director of purchasing. He's having trouble finding plumbers and electricians. “I made 213 calls to get three plumbers,” he says.

Those conditions make Caruso's longstanding relationships with many of its subcontractors invaluable. The company also operates a trade council, through which subcontractor managers meet every other month with Caruso management. The council helps find proactive solutions to disagreements and fosters loyalty between the builder and the trades, Caruso says.

The competition for labor reverberates through the market—and through Caruso. “The biggest issue over the last couple of weeks has been staffing,” says Rob Bishop, the company's vice president of production.

Nevertheless, the warranty department is surpassing its goals, Bishop reports. Caruso developed its customer service and warranty program with the help of its Builder 20 club. “It's the single most productive thing we've done,” Caruso says of his participation in the club. When he and Herzog presented the customer service program they were planning to the other Builder 20 members, they found none had used it successfully. In the end, Caruso Homes adopted another member's warranty program. “That taught me to use the club,” Caruso says.

Customer service at Caruso starts with the company's “Answer Book,” a 100-page, step-by-step explanation of the home building process and the warranty. Caruso requires buyers to bring the book to each meeting they attend. Managers say teaching customers to rely on the book has significantly reduced disagreements and misunderstandings.

The company also has a “100 percent complete” program, with the warranty department signing off on more than 390 details on each home before the buyer's final walk-through. “The warranty department has no reason to accept a house that isn't 100 percent,” Caruso says. “The superintendents recognize the value of a tough warranty department when they walk through with the buyer.”

Roger Staiger, Caruso's CFO, updates the group on recent investment deals he's secured, including a competitive rate on mezzanine debt that generates a round of applause. Caruso follows with news of a new equity fund that will invest in projects stretching over five or more years, an approach he hasn't found elsewhere.

The equity and mezzanine debt markets are new to Caruso Homes. The company has long relied upon Caruso's continued reinvestment and bank lines of credit to finance its projects, but that process has matured in recent years.

In 2003, it began having its books independently audited, an exercise that has proven both demanding and rewarding. The audits have translated into success in securing deals, as investors feel more comfortable with the company, Caruso says.

After a brief update from the land acquisition and development staff, Caruso heads back to his office, where consultant Bob Karen waits, examining blueprints of Symphony Village at Centreville, Caruso Homes' first active adult development on Maryland's eastern shore.

When Caruso wanted to pursue active adult home building, he sought out Karen, who launched K. Hovnanian's Four Seasons active adult communities. It's a pattern seen many times over at Caruso Homes. Caruso wants to learn from others' expertise and minimize his own company's mistakes. “We're team builders,” he says. “We bring in specialists.”

Karen's current specialty: helping Caruso brand the Symphony Village concept. Active adult communities feature prominently in Caruso's expansion plans. Caruso thinks it's an underserved niche in the Mid-Atlantic region.