Standing Firm

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.

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.

Ed Hatcher Owner Hatcher Homes

2005 revenue: $9.2 million

2005 closings: 16

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But a builder's success usually rides on the product it delivers on the land it controls. That's probably truer for smaller builders, and some are taking a closer look at what types of homes can carry them into a profitable future.

Whitehall, for one, has expanded its portfolio to include single-family, patio, villa, semi-custom, townhouse, and multi-story condo options and has bought and developed land throughout southwest Florida, where Whitehall is building whatever type of home “doesn't put us in competition with the nationals,” says Andrews. (Whitehall won't build in any community where national builders are active.)

Ott, for another, predicts that Altmann-Ott—which is active in seven subdivisions with from 60 to 308 lots, and which expects to increase its revenue by 20 percent this year, to $90 million—must eventually get into entirely new product niches, such as condos or high-rises.

McNair Custom Homes, with operations in San Antonio and Austin, Texas, “stays out of the way of the big guys,” says owner John McNair, by narrowing its field to higher-end prospects that make up about 8 percent of that market. Hatcher Homes, which closed 16 houses that produced $9.2 million in revenue in 2005, is shifting some of its construction to larger (3,000- to 3,200-square-feet) and higher-priced ($530,000 to $660,000) homes to separate itself from large builders.

Because smaller builders typically are willing to purchase parcels that yield fewer lots, they say that they are better positioned than larger competitors to explore infill opportunities. “The advantage of being small is that you can scoop up five or 10 lots at a time,” says Mike Dishberger, Sandcastle Homes' owner, whose company builds within Houston's inner loop. The only large builder Sandcastle encounters in the inner city is Perry Homes, and Dishberger says, “We try not to buy property where Perry is.” His company's infill product is typically two-story, and Perry's is three-story, although both sell for around the same price: $250,000 on average.

Mayfield Homes, which generated $25 million from 140 closings last year, is building in a community called Brookhaven that's 15 minutes from downtown and two minutes from its Buckhead suburb, where Doughtie has been buying 30 to 50 lots annually and plans to close 15 homes in 2006, up from 10 last year. Hatcher Homes is working with commercial partner Myrick Development on a redevelopment site in Marietta, Ga., that Hatcher says had been a crime-riddled housing project that's been razed. It is being renewed with 50,000 square feet of retail space and 45 condos (which Myrick is putting in) as well as 54 townhouses and 18 to 22 single-family homes (which Hatcher Homes is building).

Hatcher's infill homes target first-time and move-up buyers, a segment other small and midsize builders are beginning to view as a competitive sweet spot. Vintage Homes, which concentrates on the high end of the Jacksonville market, is extending its construction on 120 lots to include semi-custom homes that will cost $300,000 to $500,000, says Linder. David Anderson Homes in San Antonio—where total permits are projected to rise to 18,000 this year, from between 7,500 and 12,000 in the 1990s—expects to double its revenue, to $18 million, in 2006. Owner David Anderson thinks that much of that growth will come from a new type of home it started building this year that, at 1,500 square feet and $150,000, is 20 percent smaller and less expensive than its current inventory. Anderson's company will build 120 of these houses in 2006.

Last November, Hollaway Custom Homes, an $18 million builder in San Antonio whose inventory includes houses selling for $2.2 million, launched a company called Rio Homes to accommodate this less-affluent buyer segment, which accounts for roughly two-fifths of the market's prospects. “We've been getting a lot of traffic for our $350,000 to $550,000 homes that we believe we'd convert with a less-expensive product,” explains owner Mike Hollaway. Rio has two neighborhoods in the works: one with 84 lots whose homes will range from $120,000 to $150,000, and another, which Hollaway will start later this year, with 140 lots whose homes will range from $200,000 to $250,000.

As they acclimate to more-intensely competitive surroundings, smaller builders, for the most part, don't sound anxious. None are seriously contemplating selling their businesses to larger builders, although they've all been approached. They're not rushing to expand beyond their base camps, either. Ott says that Altmann-Ott has investigated markets such as Boise, Idaho. “But that would require a separate division and would mean a lot of travel.” Whitehall has eyed the Carolinas, albeit only “moderately,” says Andrews.

Dan Ott Co-owner Altmann-Ott Homes

2005 revenue: $75 million

2005 closings: 200

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Maybe it's false bravado, but these builders are convinced that they can at least hold at bay any big-builder onslaught. Many have served their markets for decades and equate longevity with customer satisfaction when competing against national builders that “usually have one point of contact for buyers,” says Bobby Lunceford of Lunceford Properties, who's built in Atlanta for 34 years. Delaurentis calls Lifestyle Homes “Reno's best-kept secret” because it delivers that market's lowest-priced homes that include top-grade construction features such as 5/8-inch drywall and 4-foot-by-6-foot wood fence posts with RV access.

Dishberger says that Sandcastle's strength lies in its low overhead. “We have only eight employees, and we don't use model homes because they're expensive to maintain.” To underscore his point, Dishberger notes that Sandcastle recently took over an 82-lot infill neighborhood in Houston that D.R. Horton “gave up on,” half-completed. “We're selling homes that are the same size, with more features, for less money, and our gross margins are close to 30 percent,” says Dishberger with obvious satisfaction.

Mark Downing Owner Cornerstone Homes

2005 revenue: $27.7 million

2005 closings: 91

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An Atlanta consultant advises local builders to join forces on land purchases and get creative on house design.

When Sean Doughtie needs help deciding how best to promote the homes his company, Mayfield Homes, is building in the Atlanta market, he turns to Lisa Brutman, a consultant who owns the marketing firm Focus Market Solutions.

Brutman, who once worked for D.R. Horton's Tory Homes division, says that most local small builders she works with have established niches and land positions, two things she believes are imperative to stay competitive. She adds that smaller builders must be vigilant in their search for land development opportunities that larger builders often avoid, such as those with fewer lots or without existing infrastructure.

Georgia can be a tough market for any builder to make money in, with its plethora of builders, too few large-land tracts, and more counties than any state in the Union, each with its own zoning regulations.

Brutman's advice in this competitive environment? She advocates developing partnerships with developers “who will take care of you. [Builders] need to be that developer's building arm.” Brutman also recommends that smaller builders form land-purchasing coalitions so that they can bid competitively against better-financed large builders. Smaller companies might also consider tying into large builders' communities with a product—such as active adult or homes with alley-fed garages—that the large company isn't offering.

Smaller builders, she says, must fine-tune their mix “to the point where you understand your cost structure and have product superiority.” That might mean hiring an architect and other experts to “know what a good product strategy is. Too many small guys build right out of the plan book.”

Mike Hollaway Owner Hollaway Custom Homes

2005 revenue: $18 million

2005 closings: 18

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