In the first half of 2013, builders around the country saw buyers return to the market. But to capitalize, they needed to have some homes ready to sell.
“Because we had grown our company every year since 2008, we were well-positioned and well-capitalized to put a lot of inventory on the ground,” says Fred Delibero, CEO of Summit Custom Homes in Kansas City, Mo. “That allowed us to capture a lot of market share before the competitors came back into the market.”
Bonterra Builders in Matthews, N.C., Eagle Construction of Virginia in Glen Allen, Va., and The Olson Co. in Seal Beach, Calif., also stood out from the pack because they made lot purchases and product design decisions during the downturn that fueled massive growth in 2013. These builders marshaled the capital to compete with their larger well-heeled competitors, while staying small and nimble enough to maneuver around them in the hunt for land and labor.
The dramatic rise in closings at these four companies made them among the biggest gainers on our Builder Next 100 list (released in May), while securing top spots in their primary markets. Here’s how they did it.
Getting in at the Bottom
Bud Ohly, president of Eagle, began preparing for the recovery during the recession’s darkest hour. In 2008, he started two distressed real estate funds to scoop up troubled projects. Eagle would assist banks with distressed properties by completing construction, marketing, and even changing light bulbs and mowing yards.
“We got very familiar with a lot of banks and when they had a problem, they’d call us,” explains Ohly, whose closings jumped 74 percent in 2013, a year that saw the firm acquired by the Markel Ventures subsidiary of Glen Allen–based Markel Corp. in August. “We’d analyze the situation and turn those into opportunities to buy good properties. It was kind of a perfect storm where everything came together and really gave us the dry powder to get future projects off the ground.”
Delibero also purchased a number of bank-owned lots in 2009, which fueled his firm’s 61 percent growth in 2013. In a market without any public competition, Summit has an advantage of size that companies like Bonterra and Olson don’t—it’s the market’s biggest builder and one of only a couple that also does development. But securing land is still difficult.
“The demand for land became so incredible so quickly,” Delibero says. “There was a period of time where you were purchasing lots from banks. Then, all of the sudden, prices went up considerably in a short period of time.”
Darren Sutton, president of Bonterra Builders—whose closings jumped 99 percent in 2013—estimates he secured 15 percent to 20 percent of his lots from banks. But that pipeline has since dried up. “You can’t buy the opportunities that we search for from banks anymore,” he says.
In the Charlotte market, which has seven builders among the top 10 nationals, Sutton sought out farmers and land owners who wanted to sell. Quality was his selling point.
“A lot of land owners know the people that own the land around them and they want to make sure they find somebody who will do a good job on it,” Sutton says. “People know we’ll build a nice product on it, so it kind of makes them happy.”
With more than 100 different plans, Bonterra secures lots its bigger competitors often find too small. For instance, Sutton recently picked up a couple of small development infill sites at A-plus locations that will accommodate about 15 homes apiece.
“A lot of this stuff is not something the national guys want,” Sutton says. “They don’t have the product to go on it, and they don’t want to spend the money to develop a product for something that small. But I don’t mind doing that.”
The Olson Co., whose closings jumped 66 percent in 2013, executed a similar strategy to accumulate land. In addition to being able to move quickly, president and CEO Scott Laurie chases complex deals that may have environmental issues and need demolition and new entitlements.
“It’s a pretty good barrier to entry,” Laurie says. “It typically takes two years to get from where we start due diligence to where we’re starting vertical construction. A lot of builders won’t wait for years to get started on the vertical construction.”
The Right Mix
While the downturn gave 2013’s highest risers a chance to gather land at discount prices, it also forced these builders to rethink their product offerings. For instance, Delibero began to focus on energy-efficient products as a way to differentiate Summit from its competitors in the Kansas City market.
“In the downturn, people were starting to become concerned about cost in general, mainly what it cost to own a home,” Delibero explains. “We were able to capitalize on that in our marketing. I think it was an important differentiator.”
Noticing that many of his customers were planning families, Delibero also shifted Summit’s focus from one-and-a-half story ranch homes to two-story homes. “We redesigned our plans to be market relevant and sharpened our pencils in our purchasing and operations and customer follow-up,” he says. “We talked to our buyers and found they were focused on open floor plans. We started from scratch.”
In preparation for the recovery, Eagle constructed an 8,300-square-foot design center in early 2012, which was named the 2012 Best Design Center in North America by the NAHB. Ohly says his company does an “unusual” amount of customization for a builder of its size.
Sutton began the downturn by pulling all of the bells and whistles out of Bonterra’s homes to increase affordability. That didn’t work out very well. So, like Delibero, he went back to the drawing board and added upgrades like brick siding, hardwood, Energy Star products, granite countertops, and 9- and 10-foot ceilings. “I separated myself from the pack of national home builders,” Sutton says.
Finding Material and Labor
The fastest risers of 2013 were able to secure land and tweak their designs during the downturn, when competition was minimal. But as construction picked up, finding labor and materials became something of a wild goose chase.
“The labor pool is still not where it needs to be,” Sutton says. “We had foundations sitting waiting for framers and we were waiting for brick masons. A lot of the labor corps was depleted during the downturn.”
Sutton had to pay his subs more and turn around payments in as swiftly as a week.
“A lot of our vendors that were actually what I called labor-oriented vendors [framers, painters, and drywall hangers] were paid on a weekly basis just to keep us a preferred builder,” Sutton says. “I hate running my business like that, but you have to do what you have to do to get the job done.”
But Bonterra’s size offered Sutton more flexibility than his larger competitors had. “One thing about our organization is that I’m pretty quick to make a decision and we don’t have to run it up a ladder,” Sutton adds. “The publics may have budgets set that they can’t increase [for labor].”
Delibero, without public competition, faces different issues in the hunt for labor. He says some smaller builders might overpay for labor, which forced him to be disciplined as pricing overheated.
“That creates upward pressure in labor and materials costs,” he says. “Public builders know what things should cost and can create equilibrium in market.”
Regardless of with whom these private builders competed or how they went about securing labor and land, they ultimately ending up finding a path to success in 2013. And that was the intent all along.
“My goal was to be pristine in ’13,” Ohly says. “And, we were pretty darn close.”
Kansas City (1)
Market Share in Top Market: 7.5%
Active Selling Communities: 30
Homes Closed in 2013: 180
Projected Closings in 2014: 216
Key to Success in 2013
“In 2008, we retooled the company and shifted our focus from a story-and-a-half ranch product to a two-story product. We also became very focused on green building.”
“Down the road, would we like to be regional? Probably, yes. It would possibly be in 2015. That’s what we’re looking at right now.”
The Olson Co.
Los Angeles (8)
Market Share in Top Market: 3.1%
Active Selling Communities: 7
Homes Closed in 2013: 188
Projected Closings in 2014: 215
Key to Success in 2013
“It was the land we bought in 2010 and 2011. We really know the markets. We’re so focused in only building in LA and Orange County. We know the market down to every street and every ZIP code.”
Future Plans “The key to our success is our discipline. We are very good at saying no. One of the real keys to success is our strategy and knowing what we will and will not do. When we say let’s do something different, we’ve opened Pandora’s box.”
Eagle Construction of Virginia
Market Share in Top Market: 11.5%
Active Selling Communities: 7
Homes Closed in 2013: 304
Projected Closings in 2014: 249
Key to Success in 2013 “We were ready. We had mature communities selling out and a nice mix of new ones. We had a good combination of mixed-use, high-density, and age-targeted offerings. Many of these properties were purchased with capital raised to invest in distressed projects and land in the dark days.”
“We want to grow into three new geographic markets and become more efficient by decreasing cycle time. We have a major focus on low-maintenance and high-density [communities].”
Biggest Market/Rank: Charlotte (10)
Market Share in Top Market: 3.8%
Active Selling Communities: 25
Homes Closed in 2013: 294
Projected Closings in 2014: 375
Key to Success in 2013
“We increased our community counts and focused on getting the best locations we could. We were pretty aggressive and got some deals from the banks. So, we were able to get some good lot prices going in [on what was delivered in 2013].”
“We’re going to look into expanding into another market. Right now, we’re based out of the Charlotte MSA [metropolitan statistical area], which also encompasses the northern part of South Carolina as well. We’re looking at another market within North Carolina or South Carolina for something that’s a good fit for us.”