Jay C. Lewis officially became a home builder on Monday, April 27, hoisting a shovel full of Florida sand to break ground on the first model home for his new Orlando, Fla.-based company Surrey Homes.
It was an anachronistic and hopeful action in a market where groundbreaking shovels are rusting and home building companies are dying daily. Some might even say it goes beyond hopeful and moves into less-than-sane territory to begin a building business now, when there is so little business and not likely to be more until the market ends its free-fall at rock bottom.
Yet, across the country, perhaps as testimony to the optimism it takes to become a home builder in the first place, new home building companies are springing up here and there. To these entrepreneurs, nimble because they have no debt, little or no owned land, few employees, and slight overhead, the timing seems right.
“We feel like the timing is pretty darned good,” said Lewis, who is building the business with the backing of investors. “I believe that existing-home prices aren’t going to get any lower.”
Lewis expects to build 10 to 12 homes this year in four communities in the greater Orlando area, four of the homes will be models. And longer-term ambitions are much bigger than that.
“We want to be one of the top five builders by market share,” he said.
Lewis left M/I Homes, where he was the Orlando division president, in December 2008, starting up Surrey Homes on Jan. 1. “I think I can be more successful being a private builder.”
In this market, being private, as long as your debt level and other costs are low, is a distinct advantage. He can have the nimbleness and depth of market knowledge of a small, private company yet still capitalize on big-builder buying power because trades and other suppliers, desperate for business, are willing to sell him goods and services at the same rates they charge production builders in return for fair margins. Lot developers, too, are offering options on softer, more reasonable terms.
Surrey, like Lewis’ alma mater NVR, where he worked for many years, won’t own lots long-time, only buy them on a just-in-time basis.
For the last four months Lewis, who is the company’s sole employee now, has been pouring over large aerial maps, where available lots are outlined in yellow, negotiating to buy lot options in spots near job centers. “Homes are where jobs go to spend the night,” he said.
Lewis has been negotiating to buy lots low enough to allow him to sell starter and first-time move-up homes ranging from $170,000 to $250,000, a price he says the local market can now bear.
He said his company’s hurdle rate is low enough for him to sell homes at those prices with some upgrades standard, such as solid-surface countertops, tile, and Energy Star appliances.
He plans to also differentiate his homes by including a longer-term warranty and maintenance plan. Under the maintenance plan the company will schedule routine visits to the houses for warranty plus three more years to caulk cracks in stucco and perform other preventative maintenance.
Lewis admits it’s a risk to start a new building business now, but it’s mitigated by strong partners and no debt, he said. Homes will be built with cash on hand, rather than by borrowing.
“We are well-capitalized, no debt, and a business model is premised on not ever having debt,” he said.
Another former public company division president has turned home building company entrepreneur in the Minneapolis area. Wayne Soojian, former division president for Ryland Homes for 12 years and with K. Hovnanian for 11 before that, started Colfax Cos. last October.
Like Lewis, Soojian thinks a nimble, small builder with low overhead will be able to make a living in the market even at its current low levels and be positioned to profit as it starts to rise. Soojian thinks that will happen in Minneapolis sooner rather than later.
“I don’t have any baggage from the last five or seven or 10 years to carry along with me like specs and lots and model homes” like existing public builders do, he said. “I think there is plenty of opportunity out there.”
Soojian’s model is different from Lewis’. He operates more like a merchant builder, constructing houses for a $5,000 a month management fee plus 10% of the hard costs in the house. He’ll build on customers' lots if they have them. If they don’t, he can help them obtain lots, even in subdivisions since developers are happy to sell these days.
“In today’s environment our purchasing power is as good as anybody’s because there are plenty of contractors looking for work,” said Soojian.
For house plans, he sends customers to various Internet sites where they can pick out the styles and configurations that appeal to them. Then he helps them work from their budget to choose a plan with features that meet their needs. He has several “packages” of finishes that start with the simplest and cheapest and go on up, depending on what customers want and can afford.
In Soojian’s business model, the buyers take out construction loans and pay him in drafts as the house is built. Soojian has yet to break ground on any homes, but he said he has several buyers in the process.
The ability to develop what is almost a custom home, where they want to live on whatever budget they have, gives Colfax an advantage, he said.
“What I’m trying to do is address the market,” he said. “It’s a buyers’ market, probably the most significant buyers’ market in my lifetime, so you should be giving the buyer what the buyer wants, houses they are choosing in the location they want as well.”
The custom home market, as well as home additions, is also what Homes by Bruns, a Dayton, Ohio-area start-up is focusing on.
“Really in a down time, this is the time to expand if you can expand, if you can swing it,” said Randy Bruns, who recently started the company in Tipp City, Ohio, and has one contract signed and two others close. The price point so far is averaging about $750,000.
The Bruns family started building homes in the Dayton area in 1951, and then got out of the residential business and into commercial construction and other related businesses for a while. In the meantime, all eight children of the original home building Bruns, seven boys and one girl and their spouses, went into the business.
“We have got it in our blood,” said Randy Bruns, one of the seven sons. “We had to diversify to give everybody room.”
Randy Bruns has another home building company called RCF Construction in Celina, Ohio, that built 350 homes in 10 years and managed to turn a profit last year despite the downturn. He recently decided to start the new company in Tipps City after another family company, a real estate agency called Bruns Realty opened up six months ago in the same town.
“We thought, ‘Well, if we are going to have a real estate company out here we might as well have a home building company in this area,’ ” he said.
Offering new homes as well as existing ones gives the real estate company more to market and the family connections assure they have aligned motives.
Homes by Bruns is offering scattered-lot development and also has a few communities of its own where buyers can purchase lots. There’s little new overhead, since Homes by Bruns shares offices with the realty.
“We do have subdivisions out there, so we do have some land costs and spec homes sitting around,” said Bruns. “So there’s a little bit of pressure in these times, but it’s not overly bad. I really truthfully feel like we are starting to come out of it, off the bottom.”
Teresa Burney is a senior editor with Builder magazine.