When it closed 250 homes two years ago, Altmann-Ott Homes ranked as Reno, Nev.'s fifth-largest builder. But this western market of 200,000 people, which issues around 5,000 permits per year, has since become a magnet attracting national builders, several of which “are finding ways to get 500 homes on the ground,” says Dan Ott, co-owner of Altmann-Ott, which closed 200 units and generated $75 million in revenue last year. “They're willing to put 50, 60 spec homes out there and offer all kinds of incentives to get buyers to sign by a certain date. I don't want to be in that dogfight.”
Such brawls are becoming unavoidable in what once were considered secondary markets such as Reno, San Antonio, and Jacksonville, Fla. To gain footholds in markets with mushrooming populations, big builders are buying land and constructing homes at levels that fall outside the financial reach of many smaller companies. The competitive maelstrom that nationals can stir up is reshaping these cities' housing markets to the point that “entry level” in Reno equals $240,000, versus $150,000 only a few years ago, says Jon Delaurentis, president of Reno-based Lifestyle Homes.
This latest wave of competition has forced local builders to reassess everything, from their land acquisition strategies to what kinds of homes they can build and still make money. That analysis is leading some builders to turn themselves inside out, although most say that they continue to grow by staying close to developers and tweaking their product mixes. And while these builders espouse the virtues of smallness and local market savvy, “it's all relative now,” quips Ed Hatcher, who owns Hatcher Homes in Atlanta.HUG YOUR DEVELOPER
No one is actually under siege yet, as strong demand provides plenty of business all around. “We all can say grace over what we have right now,” says Jerry Linder, who owns Vintage Homes in Jacksonville, Fla., and is president of that market's HBA. Florida is nirvana for builders looking to elevate to a higher tier. Every day, 1,100 people move into the Sunshine State, and the four counties in the Jacksonville metro market increased their permits to 17,753 in 2005 from around 9,000 in 2001. Linder says that in St. John's County, close to 50,000 lots should come online over the next few years.
Sarasota, Fla.–based Whitehall Quality Homes hopes to at least double last year's revenue, to between $150 million and $200 million, within five years, says executive vice president Jerry Andrews. Another Jacksonville-area builder, Cornerstone Homes, would achieve its goal of closing between 220 and 250 homes annually by 2007 if, as owner Mark Downing projects, it closes 210 units this year, more than double its 91 closings in 2005.
But as markets open up and big builders flood in, land prices escalate, nudging smaller builders out of their comfort zones. “The publics are coming here and paying $10,000 [per acre] above what the rest of us will pay and will write a check that afternoon,” says Ott. “We won't do that because it would blow us up.”
Downing says the good old days—when he could make a down payment to option a parcel and then purchase lots within that parcel outright when he was ready to build on them—are rapidly becoming a thing of the past. Now, landowners and developers are demanding that buyers pay for and take ownership of entire parcels at once, which places extra burdens on builders' cash flow because of land-price appreciation.
The smallest “takedown” that Cornerstone has done recently, says Downing, was for $12 million, or between $50,000 and $100,000 per lot (considerably higher than what the builder was paying five years ago). Downing recently did an $18 million deal that averaged $91,000 per lot. Consequently, he has had to work harder to keep his investors' confidence from wavering. Another Jacksonville-area builder, Brylen Homes, also leans heavily on an investment group it assembled two years ago, which now has 10 sources. “I know what each of their appetites is and can go to one for $400,000 and another when I need $16, $18 million,” says owner Bryan Lendry, whose company closed 80 homes last year.
For these and other single-market builders, relationships with local developers have become increasingly important. Sean Doughtie co-owns Mayfield Homes, which builds all-brick houses on a minimum of one acre each in two Atlanta-area counties. He's fortunate that his father, Chris, has been a local developer for 35 years. That connection has helped Mayfield spot good land deals several years before a market gets hot. In fact, Mayfield's policy has been to buy three times the land it immediately plans to develop. Lendry says that he has three reliable land sources he considers friends, whom he's enlisted occasionally as joint-venture partners. “My job,” asserts Downing, “is to make sure that I'm at the top of their lists. If I'm the 10th builder a developer calls, I'm in trouble.”
Most developers, though, aren't family or friends, and their loyalties are fleeting, which explains why some builders—such as Sandcastle Homes in Houston and Acworth, Ga.–based Bob Lunceford Properties—formed development companies last year.HATCHER HOMES, ATLANTA
2005 revenue: $9.2 million
2005 closings: 16
HOME SIZE (AVERAGE):single-family: 3,000 square feetmultifamily: 2,900 square feet
PRICE (AVERAGE):single-family: low $400,000smultifamily: $425,000
LAND POSITION:70 to 80 lots (15 to 20 acres)