Up Against The Heavy-Weights

REMEMBER THE STORY of David and Goliath? Based on all the standard external measurements—size, track record, market position, etc.—Goliath should have cleaned David's clock. But David played to his strengths—speed, mobility, confidence, and the element of surprise—and took home a pretty big payday. All in all, it's not a bad operating strategy for single-market builders who face off daily against industry giants with seemingly superior resources and buying power—with one important difference: Single-market builders who compete successfully in markets swarming with national builders aren't looking to take out the big guys. Instead, they use strategies like these to help them coexist with national builders—and occasionally knock them down to size.

In virtually every sport, the home team has an automatic and undisputed advantage. It's also true in home building, says Home Builders Network's Trellis. “The [national builders'] weakness is lack of hometown expertise,” he says. “This is your turf. You have to defend it. You know the market, the land, the buyers.”

Local boys such as Mike Nino know that and play it for all it's worth. President of Nino Homes in Hollister, Calif., he competes with Standard Pacific Homes in Greenfield, Calif., near Salinas. He relates to farmers selling acreage, he shows them the projects he's done locally, and he points out that at his company, he makes the decisions. “When I go to talk to these farmers, I've got the agricultural background, and I'm the guy making the deal instead of this 30-year-old suit hired out of college,” Nino says. “[The farmers are] sitting across the porch from the guy who's going to be putting his name on it.”

He also does some digging into what's important to the sellers, such as naming a street after a family patriarch, preserving the homestead, or, in one case, building a park named after the seller's favorite charity, the Rotary Club.

Product design is another area where home-field advantage looms large, says Nick Lehnert, vice president of sales and marketing at Distinguished Homes in Anaheim, Calif. Having come to the company after eight years of heading up architecture and product design development at Centex, he knows that big builders like to reuse product to control costs. “But is it the right product for the market?” Lehnert asks.

Rob Lee, a partner at infill builder Chesapeake Development in Chamblee, Ga., agrees. His company buys scattered lots in neighborhoods the big builders pass over because they can't get whole blocks. Lee draws on his background as an architect to achieve ultimate flexibility in making plans fit unique sites. “We design our own product,” he says. “We can change it on every plan and build a house that is very responsive to the market.”

The big guys may have more bucks at their disposal, but small builders can still snag some great land deals. Most notably, land acquisitions have to make their way up the approval chain at a national builder, and deals can be tabled once they get to headquarters.

Roger Pollock, president of Buena Vista Custom Homes in Lake Oswego, Ore., is an acquisitions team of one. Everyone in town knows that if they bring him a deal, he has the authority to make it happen quickly. Plus, real estate agents in town bring Pollock deals on finished lots because they know they'll get the listing on the house he builds on it. As a result, agents are “out looking for land for us all the time,” Pollock says. “There are deals we never would have gotten if we weren't listing back ... . To find a really top-quality piece of land in the Portland market is very difficult. To turn it over to a builder and never profit from that isn't in the agent's best interest, so they call me first.”

Jim Manning, owner of Manning Homes in Newport Beach, Calif., has avoided going head to head with a slew of national builders in Orange County by targeting remnant lots in developments. “Our chances of getting a project are greater if there are a fewer number of lots,” Manning says. “If there are 50, the publics will want to go at it. If it's 20, they say, ‘Nah, that's too small. Let Jim go at it.' ”

Manning also has a reputation as a go-to person for family trusts. When they decide to sell property, they want to move in a hurry, he says. That's something the publics often can't do because their deals require multiple layers of approval. “I try to do as much due diligence as possible so I can give the best bid and the shortest time frame possible,” he explains.

Small builders also are forging alliances with competitors to purchase tracts of land or groups of lots in master planned communities. The key to a successful venture is to complement instead of compete, whether it's on product type or price point, says Don Evans, president of Forrest Homes in Atlanta. The end result is a better product range for the market. “Invariably, in a single community, I won't have everything a buyer would want,” and neither will another builder, he says. “The synergy in the community is absolutely correct.”

How to decide who gets the prime lots and who gets the leftovers? Have one person divvy up the lots into sections and give another first pick. “That way,” Evans says, “the guy who is dividing it up won't put all the best ones in the same pile.”

You may not be able to match the marketing budget of a national builder, but you also aren't locked into a national mind-set. Guerrilla marketing is fast, nimble, low-cost, and effective.

“You can't compete with the dollars they have,” says Richard Elkman, president of Delray Beach, Fla.–based Group Two Advertising, which works extensively with small builders. “But you can reach out to prospects in ways [they] can't do easily.”

GOOD FIT: Manning Homes has a reputation for building on the odd lots in planned developments that don't appeal to the big builders. Shown here is Seacliff, in Huntington Beach, Calif.

Take Lehnert's use of “human bootlegs,” energetic college students or young adults placed on well-traveled street corners with an arrow sign. “They have their iPods or Walkmans, and they're going to be very active, moving that arrow,” he says. “You could have four or five of those on a weekend, directing traffic to your community.”

One simple marketing strategy is a cross-promotion with local businesses that target your buyer demographic, says Elkman. Make up coupon books for discounts at the businesses and give them out to sales center visitors. Also, create numbered coupons as a buyer incentive, such as offering a free washer and dryer with the purchase of a home, to place in counter displays at the businesses. The businesses would receive $25 for every coupon that's redeemed at your sales center. And numbering the coupons allows you to track them.

“Now you're getting qualified traffic,” Elkman says. “If you ... pay $500 to get 20 prospects in, that's a heck of a lot less than advertising. There are lots of those kinds of things that can be done, [getting] other companies [to create] traffic for you.”

Builders also can get a lot of marketing mileage from partnering with local charities or hosting community events, says Liz Jackson, president and principal of Jackson Pendo Development Co. in La Mesa, Calif. Her company competes against nearly all of the top 10 builders in the San Diego market.

Recent events at Jackson Pendo communities have included a golf tournament to support a local youth program and a classical music concert. “Those types of local events are where you get exposure and become part of the community,” Jackson says. “That's important.”

Involvement in the community may seem like a touchy-feely activity with questionable impact. Don't try to convince Pam Sessions of that. The president of Hedgewood Homes in the Atlanta market, Sessions says her company's commitment to the community has helped it achieve a reputation as a mixed-use developer. It is so well known that the firm has cities calling to invite it to do projects. “The visibility helps a lot,” Sessions notes. “People think it's important to have developers who care. Anyone can cut a check, and it's quickly forgotten. People tell us, ‘We're so fortunate to have you in our community.' We see it as money well spent.”

Hedgewood takes a creative approach to serving the community. The company provides business cards to teachers at schools serving its developments, and for every home that sells, the company donates a book to the neighborhood school in the buyer's name. “It's a small amount per house for us,” says Sessions, “but it makes a big difference in the long run.”

The company also does “a lot of sponsorships,” Sessions adds, including a handicapped-accessible tree house and a local middle and high school robotics team that wore Hedgewood Homes T-shirts when it competed (and took second place) in Singapore. “Over time, people start associating that you're in places that matter,” she continues, “and that you sincerely care about the community and not just your neighborhood.”

Through a program called Profit Partners, Buena Vista Custom Homes supports a host of local charities year-round. “It wasn't started as a way to get more exposure, but it's worked out that way,” Pollock says. As a result of the consistent support, Buena Vista has been named sponsor of the year by several charities, honors that Pollock neither requested nor anticipated. “If you do it long enough and consistently enough, all those rewards will come,” he notes. “That's what I believe. ... I think it has a little bit to do with why we're successful.”

MAKE NICE: Community involvement can play a huge role in getting a project approved. Nino Homes built this park in Greenfield, Calif., as part of its ongoing commitment to the city. As a result, local officials call owner Mike Nino when they hear about prospective land deals.

Nino is savvy enough to know that his willingness to build city parks that are better than what anyone asked for, or to help build a historical society museum, gives him a leg up on the competition. “I do feel I have a certain responsibility to give back to the city,” he explains, “but part of it is because it's good for me. It's harder for the big guys to do that without looking shallow. I harbor no ill will, but doggone it, where I can beat 'em, I'm gonna.”

It's easy to slack off on training when the market is hot. In a soft market, though, skill sets need to be as sharp as possible. Hedgewood Homes puts an emphasis on sales training because much of what adds value to the company's product, such as its commitment to energy efficiency, green building, and neighborhood design, is subtle. “We do a lot of training on how to demonstrate and sell the differences,” Sessions says. “There is a lot to the story that you can't see ... so our agents need to be able to demonstrate that difference, even down to the very narrow streets to make them pedestrian-friendly. If we weren't prepared to explain the difference, [customers] could leave thinking that was a detriment.”

The team at Chesapeake Development takes advantage of every training opportunity available, Lee says. The partners participate in monthly HBA roundtables and in a buying group to learn about new products, and Lee's wife is taking courses through the NAHB's Institute of Residential Marketing. Plus, they load up on educational sessions at the International Builders' Show and attend continuing education programs to maintain their designation as a Certified Professional Home Builder.

Hiring an outside inspector to check quality at the drywall stage and again before closing has helped Gary & Olsson Properties of Houschton, Ga., train its builders on construction best practices, which has greatly reduced defects and helped cut expenses. “We thought it would cost us money, but our warranty costs went way down,” partner Ken Gary says. “We promoted it to the builders as a training program. We started with 30 to 40 defects per house, and now we're under 10.”

Builders in some markets have been stung by national builders who offer huge discounts, usually just before the end of a quarter to move excess inventory. Small builders shouldn't follow suit, according to industry experts. “I'm not a big believer in discounting,” Elkman says. “I think it destroys the value of the product.”

There is a place for incentives, though, especially in a soft market where customers are on the fence about whether now is a good time to buy a house.

Rockford Homes has been building in the same four, contiguous counties in the Columbus, Ohio, market since 1980. The builder stays away from big discounts because those buyers tend to cancel more often, says vice president of sales and marketing Donald Wick.

In the current market, they are going with incentives the buyers can see and touch, such as a free fireplace, he says, and promote a basic design without a lot of bells and whistles. “In softer markets, people buy more conservative things, so they buy our houses more,” Wick notes. “We've got a conservative design and product. [Buyers] don't want more in times like this, they want safer. They want less, but less that's adequate.”

Ideally, says Lehnert, incentives should add value without adding an equal amount of cost. “If you give someone $5,000 in closing costs, they'll use it all. If you give them $5,000 in design center options, they'll use it, but it costs you 30 percent less,” he notes.

Savvy small builders learn from the competition and adopt what's worthy of emulation. For instance, national builders leverage their size for pricing discounts from suppliers. Now, small builders are forming buying groups to gain the same kind of discounts. Chesapeake Development is part of an Atlanta affiliate of Custom Builders USA. “We brought builders together to negotiate pricing, like a big builder,” Lee explains. “Last year, we would have been the 24th largest builder in the country in terms of revenue. That gives us the ear of local and national vendors.”

Of course, then there are the contrarians who say the notion that local builders can't match the efficiency of national builders is a myth. “That couldn't be further from the truth,” Pollock says. “I've tried to sell property to nationals, and the bureaucratic process isn't worth it. It's very, very frustrating. There are no local decision-makers. There are more layers of business to go through. They're like a big, slow, moving ship. When they get pointed in a direction, they're hard to stop. If they need to change course, that doesn't happen quickly. ... We have a lot more flexibility in any kind of market.”