More than two years into the downturn, home builders face an accelerating liquidity crisis. Cash reserves are being depleted, backlogs are minimal to nonexistent, and margins are poor or negative. Builders have responded by slashing overheads, selling excess assets, and plowing personal cash back into the business–all part of a strategy to survive until market conditions improve. Public builders have written down or impaired assets to adjust to current land and home values, actions private builders can't easily take. What tools do private builders need to be effective and survive this crisis as their cash is depleted and lenders tighten the credit to finance their businesses?
Builders simply won't be able to compete if they don't reprice their land and house inventory, which means renegotiating bank loans to reflect current market values. In order to approach the banks, you need to develop a plan–critical components of which include data to support the adjusted values you propose and a realistic assessment of the value of your own and similar assets in the market. The plan, which must be professionally "packaged," also includes realistic projections of your sales, cash flow, and capital needs. All of these are moving targets, but if you don't know where you are and will be based on the best information you have today, you will not be successful. You must be realistic, because if your assets aren't repriced to the market they need to be given back to the bank.
You should have legal counsel and financial advisors help you determine what you can and need to do to protect your business and personal assets. You can't afford to forgo professional help–too much is at risk.Don't put more capital into your business until you have a long-term plan; you will lose it if you are forced into bankruptcy.
Don't sugarcoat your problems with your banks; be realistic and honest with yourself. If you undervalue or overvalue assets, you lose credibility in the negotiation. Although options will vary, if you have limited or no personal guarantees or minimal personal net worth accessible by creditors, you have an even stronger negotiating position. Remember, the rules with the banks have changed. Your lending officer is no longer the decision maker, and every step you take in discussions with your bank must be carefully thought out and choreographed. You probably have a stronger hand than you realize. And also remember, you won't be able to rely on bank credit in the future; it simply won't be available in the same way you've been used to.
The final goal is to use the restructuring process to survive and then take advantage of the growing opportunities in the downturn. Successful survival needs assets that are repriced to be competitive; without that, you can't compete with the publics and start-ups who will have a lower basis than you. With a competitive asset basis combined with keeping your core and experienced business intact, the next step is to then tap the new sources of debt and equity capital that are available for proven operators. The private home builder with access to capital will be in an enviable position in the housing recovery. The steps to be ready to take advantage of it must be taken now.
–Larry Comegys is managing director of Algon Group. For more information, visit www.algongroup.com or send an e-mail to firstname.lastname@example.org.
What are the new tactics required to conduct business effectively through the downturn?
Accept market reality.
There will be no quick recovery. It'll be two years before there's profitability.
Reprice land and home inventory.
Follow the public home builders' lead and mark assets to market.
Renegotiate bank loans.
Approach banks with a professionally packaged plan, including asset comps and financial projections, to support adjusted values.
Invest in personal planning.
Hold off on throwing more money at the problem until hiring legal counsel and financial advisors to help protect business and personal assets.