The young couple can't decide whether they want the house. He's leaning toward "yes." She's not so sure. With so much riding on this moment, they hate being rushed and not being able to step out for a minute to talk with just each other. Time and privacy, however, are not in the cards. This is no sales center, nor a date with a realtor. Above them, like a roving evangelist, is an auctioneer, bellowing out enticements to try to up the bid. Beside, in front of, and behind them are more than 200 fellow supplicants. What's that in the back of the hotel ballroom? It's a band, ready on cue to strike up the music whenever a triumphant bid carries the day.
Why the Troy, Mich., Marriott? Why today? Ken Neumann, CEO of Chicago-based Neumann Homes, is closing the chapter on his 2005 purchase of Tadian Homes and bowing out of the battered Detroit market by auctioning off the remainder of the homes and the bulk of the lots left from that ill-fated deal. Neumann is by no means the first builder to go the auction route. Nor will the company be the last. Neumann's story, though, serves as a classic cautionary tale of how yesterday's top-of-the market deals for capacity growth could and did become some of today's lethal dead weight.
Neumann and Gary Tadian, CEO of Tadian Homes, grew to be friends and learned the inner workings of each other's businesses through their respective tasks on NAHB committees and builder club activities.
When Neumann found out that Tadian might sell, he came to the table. After about six months of negotiations, the old friends announced a deal in January 2005.
The deal for Tadian wasn't merely a marriage of convenience. Neumann also values familiarity. When he decided to move beyond his home base of Chicago, he chose Denver and Detroit. He went to school in Colorado and loved the outdoor activities the state had to offer.
"He was very selective," says B.J. Hinson, current region vice president of finance for the Southern California Coastal Region for Hovnanian Enterprises and Neumann's former CFO. "We looked at several deals when I was there."
Tadian's Detroit operation was close to Chicago, giving Neumann the ability to easily scale up and access the market. He also had a deep-seated faith in what drove that market.
"The food I ate when I was a little kid was paid for by General Motors," Neumann says. "My parents were employees of General Motors. I've been very optimistic about our great American companies."
But Neumann didn't buy just on emotion. Although familiarity with Detroit, Tadian, and the city's employers may have made him comfortable with the market, they didn't dictate his final decision. The numbers did. At the time Neumann bought Tadian, the market was producing about 24,000 units a year. He thought those numbers were a bit inflated by the residential boom, but, with his faith in the American automakers, he still projected 18,000.
"Eighteen thousand units a year is a good, solid market," Neumann says. "There's not an enormous amount of competition in terms of the big publics. Being that we were just across the lake with similar product, similar communities, and similar demographics of people, we thought we'd do real well here."
Motown Mowed Down
Since that time, it seems the fate of the home building and auto industries have been tied together in Detroit. "Home building is down across the country," says Howard Fingeroot, managing partner in Pinnacle Homes, a developer and builder in Farmington Hills, Mich. "But there's a double effect in Michigan. One, you have the slump in home building. Two, you have the layoffs with the big three automakers."
The market fell well below Neumann's projection of 18,000. In 2007, the builder projects just 5,000 starts in the market.
"You have people leaving the state so you've got a resale market that is competing with new homes," says Bill Anderson, vice president of land development services with Atwell-Hicks, a private, land-development consulting firm in Ann Arbor, Mich. "Ford and the pharmaceuticals and those guys are transferring their people, and they're undercutting the home builders."
What does this all mean? Quite simply, new homes aren't moving. "This market is pretty rough," says Bernie Glieberman, president of Crosswinds Communities, a residential building and development company in Novi, Mich. "There are builders who aren't selling anything. There are sites that haven't sold a house in six months."
Although critics contend Neumann was overly aggressive to jump into the Detroit market, others defend him. "No one saw this housing downturn come with the severity it has," says Lance Ramella, senior managing director for Hanley Wood Market Intelligence (HWMI).
By last fall, one of Neumann's lenders cut off debt for new construction. "That sent us into a tailspin and cost us tens of millions in the last quarter [of 2006]," Neumann says. "We had to walk away from options. By the middle of December, I knew we were going to be out of covenant with every lender by January 1."
To gain some liquidity, Neumann held his first auction in Detroit last November. He sold 23 single-family homes, 24 condos, and 40 home sites at about 80 percent of list price. He decided to start working more closely with his lenders and set up conference calls to provide them with quarterly results, updated forecasts, his strategies, and market summaries.
"We showed where we were, and we laid out a plan," Neumann says. "We showed how we would do recapitalization, work with lenders, and move things around. Times are tough."
Specifically, Neumann needed his lenders to untangle his revolving lines of credit and construction loans in his markets. "They were cross collateralized and cross defaulted inside the borrowing base," he says. "Some of the lenders are cross defaulted into anything at Neumann Homes."
So, as Detroit tanked, Neumann convinced his lenders that Motor City was different from the rest of his markets. "With all lenders, in the cross default provisions, anything that happens in Detroit is not considered part of the default," Neumann says. "If we have a default in this marketplace, it wouldn't trigger defaults in the other loans."
Bird Anderson, senior vice president and head of the home building group at Wachovia, thinks this approach helped Neumann successfully renegotiate his loans. "A protocol to sit and present ideas for dealing with problems absolutely is the best way, as opposed to last-minute surprises," he says. "Banks will go a few rounds of negotiations amendments if they believe it's in their best long-term interest."
Learn more about markets featured in this article: Chicago, IL.