1-30 units; Stephen K. Hann Custom Builders; Stafford, Texas
Careful diversification--a combo of design/build customs, spec homes, remodeling, and light commercial--keeps this builder on course through uncertain times.

In November, Houston-based Continental Airlines announced 12,000 layoffs nationwide; Compaq cut 2,000 local jobs with a potential for more to come; oil prices fell to a two-year low. Stephen K. Hann remained cautiously optimistic but had already launched a series of business-boosting strategies--just in case.

"We are not waiting to see what happens," says Hann, "We are marketing more aggressively--right now." Hann also instigated a "more proactive stance than ever before" marketing his Houston-area spec homes: He's held open houses, added extra landscaping, took out special advertising in the Houston Chronicle's weekly insert, and obtained special financing packages from a local lender.

Hann knows specs leave him vulnerable to market downturns but feels he needs them to serve an impatient transferee market and to take advantage "of marketplace momentum." An unsold spec can easily cost $40,000 a month. So he limits them to four--and staggers geographic locations, price points, and construction schedules to moderate the risk. With these cautious strategies--and a written goal to sell specs with a minimum 15 percent gross profit--the homes continue to sell as strongly as ever.

Balance's reward
Carefully balancing risk and reward has grown Hann from a lone wolf custom builder partially funded by an angel investor to Stephen K. Hann Custom Builders with a robust staff of 11. He transitioned from the company's old name, Trinity Homes, on the advice of a business associate who told Hann there was more value in building under his own name than under a faceless entity. Indeed, each custom home is so exquisitely detailed, no matter the style, the Hann touch has become an unmistakable trademark.

Hann's company relies on diversification, systems, and people to keep it on a steady course to weather economic uncertainty. Hann does remodeling as well as new construction. "The cycle hits hardest on those who focus on only one segment in the business. At the same time, companies that diversify too broadly tend to dilute their expertise; they may weather downturns but are unable to take advantage of strong markets," he says.

The company typically builds four, million-plus custom homes annually; though one currently under construction will go for more than $3 million. The firm has established relationships with four leading residential architects who often refer work directly to Hann. Most work is done via negotiated contracts rather than bids. In 2000, luxury specs ranging from the mid-six figures to the million-dollar-plus range accounted for 40 percent of total revenue. Roughly 20 percent of the company's sales comes from its remodeling division.

"Remodeling offers several benefits," Hann says. "It moves on a slightly different cycle than home building. Because we do three remodels for every one new-home project, it keeps our name in the market. In a tight labor market, it keeps our trades busy. We don't want to let our trades go because we might not be able to get them back." Diversification as a strategy works: In five years, Hann's annual revenues have grown from just less than $2 million to more than $10 million. Even given Houston's economic downturn, Hann's revenue for the year will still be $9.8 million.

Focused systems
To maintain focus, systems rule at Hann. Its "sales to production" (STP) system tracks all the tasks and schedules that must take place in the planning and construction of a home--484 of them by Hann's count. For each step, the STP lists the person responsible for completing the task as well as start and completion dates. A field version contains 22 steps.

The company has spent the last two years perfecting its estimating system. The system prompts users with step-by-step information. Once the raw data has been input, Hann can finish the estimate of an $800,000 house in about two hours within 2 percent accuracy. Hann claims the purchasing system has added at least two points to the company's operating margin. Every task and material must have a purchase order, which doubles in the system as a checklist for scope of work.

The company's increase in volume has allowed it to negotiate bulk purchases at better prices with various trades. The builder leveraged more competitive prices with its granite vendor. And it asked for and received a six-month lock on lumber prices.

To analyze the company's performance, Hann developed what it calls the "production overview," a spreadsheet that "at a glance shows if we are on target for sales and production for the year, as well as how much of our total sales are due to remodels, new homes, or specs."

People are another key to success. Carter Noonan operated his own firm before becoming vice president of operations for Hann. Other key players are Paul Newell, vice president of sales; Cheri Boehmer, marketing director; and Dawn Bradley, comptroller.

Every three weeks, Hann hosts a company-wide meeting with a catered lunch. The agenda includes the usual progress reports and reminders of standards. It ends with an Open Forum, during which staff can discuss issues or problems. Staff has incentive to participate: Two percent of net profits feed the company's bonus plan.

Cue the client
Communication is key within the company and with customers. As with other custom builders, Hann and the customer size each other up during the early going. Hann will turn away business if he feels the fit is inappropriate. Good referrals are the lifeblood of the custom home building business, so choosing the client is as important for the builder as it is for the client.

If the potential client complains about the bad deals and poor service he had with other contractors, take that as a clue, Hann says. "We want to work with people who value what we bring to the table," he continues. There are responsibilities on both sides, he remarks, recounting the aphorism of one custom builder who said, "If he'd only taken 5 percent of the jobs, he would have made more money and had fewer headaches."

Clients are typically industry leaders who want Hann "to be their quarterback or team leader in the home building process," he says. Part of the self-selection process is his required professional service agreement. This gives Hann a nonrefundable up-front retainer. Tire kickers simply don't sign on. The retainer is typically 1 percent of the anticipated construction budget for custom homes and 2 percent on remodels.

Customer service is critical to this builder's success. Clients have regularly scheduled weekly meetings with their key contacts on Hann's staff to discuss the project. The meetings bring a personal touch to the building process and streamline communication. Clients don't feel as compelled to telephone when they know that, say, every Tuesday at 2:30 they will meet with their building team.

Change orders are under control, too. The company collects money for the change as soon as it's issued. This procedure and others are spelled out at contract signing, when home buyers receive a loose-leaf guide that takes them through the home buying process. It explains what to expect and when and what they need to do.

Design central
The company categorizes the custom home selection process into three phases facilitated by a 2,000-square-foot design center. The showroom features kitchens with both handcrafted and manufacturers' cabinets. There are molding configurations demonstrated and six types of doors on display. Popular specialty rooms, such as a library and media room, are also showcased. "We did a lot of partnering," Hann says, explaining how a company that builds 12 or fewer homes a year could create such a well-detailed demonstration space.

Like many winners, Hann and his team constantly study. "I don't necessarily look just at our industry, but also outside of it for ideas," Hann says. A sidebar in Forbes Small Business magazine gave him the idea for calling a quarterly brainstorming session that resulted in several goals, which include to sell speculative inventory with a minimum gross of 15 percent profit, to maximize profitability and employee quality of life, including having fun, and to develop the 2002 business plan by the end of October with a final completed by Nov. 15. No kidding, all five goals were completed on time.

Winning Vanguard Practices

Stephen Hann targets multiple areas to ensure its focus on diversification will keep the company healthy. The company:

  • Spells out scope of work and non-refundable fees payable by the potential custom home or remodeling customer in a professional services agreement.
  • Provides better customer service while streamlining customer demands through weekly client meetings.
  • Puts change orders firmly on the balance sheet and asks for payment up front.
  • Requires standard visits 30 days and 11 months after move-in to remain proactive with warranty schedules.
  • Tracks all 484 elements in the planning and construction of a home with its "sales to production" system.
  • Provides a homeowners' manual as a lasting resource that details every construction step and home maintenance process.
  • Introduces the company to the client's neighbors through letters. Should neighbors have questions (or perhaps need a new custom home or remodeling), the letter includes the project manager's name and cell phone number as well as complete company information.


Stephen K. Hann Custom Builders


Stephen K. Hann, president

Children: Morgan and Madison

Hobbies: scuba diving and sporting clays (a form of skeet shooting)

Management team: Carter Noonan, vice president of operations; Paul Newell, vice president of sales; Cheri Boehmer, marketing director; Dawn Bradley, comptroller

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