IN THE AUTUMN OF 2000, DOUG TRIPP traded in his desk as a Pulte division president for his own 26-foot-by-8-foot construction trailer. “The company was me,” he says, recalling the start of Tripp Trademark Homes. “I built it, I sold it, I sat in the trailer on weekends waiting for customers.”
Tripp left the trailer office behind not long after closing 14 homes in 2001, and in 2002, he used his positions in a subdivision to jump to 101 closings and $13.4 million in revenue. All told, Tripp's company has posted a 224 percent revenue growth rate since starting.
The trend line looks strong moving forward: The company is already booked through the end of the year and into the second quarter of 2005. “I pinch myself every day,” Tripp says.
Tripp isn't a stranger to the highs and lows of building, but he was still surprised by how fast his company picked up. “Sometimes it feels like we're drinking water out of a fire hydrant,” he says. “Making sure we manage our growth in a responsible way has been the challenge.”
Now, Tripp says, his goal is to grow by about 50 closings a year—this year will be slightly less because his developers were behind, and next year will be slightly more—and a core group of company employees keeps growth in check. One key: Tripp, his wife, or his brother is committed to attending every closing.
Tripp isn't the only builder who feels as if the start of his business has been a dream. The late 1990s and the first part of this decade have been generous to the many builders who decided the time was right to jump into business for themselves. On this year's Fast Track list alone, 49 of the 100 builders started since 1994 and 13 since 2000.
That's not to say the road has been without bumps. Many of the builders have benefited from their locations in high-growth markets, but that's also meant competition from big builders for land and employees. They needed to develop strategies to keep them competitive, profitable, and growing at sustainable speeds—and up and running, in the event of a downturn that could wipe out unprepared companies.
A number of bumps simply came from some builders never planning to grow so quickly. Gary Stover Jr. left his family's development company in 2001 to start “a small building company that wasn't going to build many houses.” Fast forward: Last year, Stover Homes booked $18 million in revenue, and Stover anticipates closing about 145 units this year. “The opportunities are there, so we can't sit on the sidelines,” he says.
But Stover plans to slow the Dover, Del., company's growth rate down in a year or so, plateauing at about 200 homes a year. “I'm still a hands-on management person,” he says. “Above that level, something will suffer, and I'm not willing to do that.”
Regardless of their initial goals, nearly each builder can point to missed opportunities that would have helped them onto the fast track even earlier. Town and Country Home Builders, founded in 1998, nearly tripled its goal to build 24 houses a year by 2003. Looking back, co-owner Larry Brians says he would have pushed to grow faster, perhaps setting a goal of 50 homes a year. “I don't regret that we built slow and steady,” he says. “But if we had been willing to stick it out there on the line, we would be that much further along.”
Getting Up To Speed Builders cite hiring the right employees as a key to facilitating growth. Yet, after starting their businesses on their own or with a few close relatives and friends, they were reluctant to add personnel. For some, that concern stemmed from a desire to keep overhead costs low; others were hesitant to delegate decision-making authority to outsiders.
Ken Howell, president of Stones River Homes, based in Murfreesboro, Tenn., hired a purchasing manager this year when he realized he was devoting more energy to growing the top line than to controlling costs. “I knew I wasn't getting the best pricing I could,” he recalls. Though Howell worried about adding an additional $50,000 in expenses for the position, he says it will save the company $600,000 this year. “Now, I wonder how I did it without him,” he adds.
Adding directors of construction and operations enabled Palm Coast, Fla.–based SeaGate Homes to shuffle some responsibilities and whittle down its 450-order backlog. Not having to make every operations decision has freed president Robert Gazzoli up to concentrate on land development, and the company has realized other efficiencies through combining additional construction managers and on-site technology. “We weren't set up as efficiently as we needed to be,” Gazzoli admits. “We didn't have the proper structure or the right people. Now, we do.”
There's more to getting the best employees than just realizing you need them, though. Small builders increasingly find themselves competing with big builders who can pay top dollar to land the top people in the market. That means the small builders must find cash to compete or offer extra perks to recruit and retain good performers.
One popular perk is offering discount home buying programs through which employees are able to buy company homes at a cut rate. Deerfield Beach, Fla.–based Homes by Kennedy allows its employees to earn 2 percent off the sales price for each year they're employed by the company; managers can purchase a Kennedy home at cost. Close to one-third of the company's 53 employees have jumped on the offer, says Robert Trautman, Kennedy's president.
Older And Wiser These builders have gotten off to a quick start in the industry—helped by some earlier experience and the housing boom—and now they must set the pace for continued growth.
Most agree that errors they made along the way taught them valuable lessons. “I definitely got in at the right time,” muses Howell, who honed his management skills through 17 years in the computer industry. He says he was “able to make plenty of mistakes.” They didn't hold the Tennessee builder back too much: He expects to close more than 50 homes this year, for at least $12 million in revenue, a jump from 36 closings and $8.3 million booked in 2003.
Among the lessons he'd pass on to future builders, Howell says, is that it pays to say no. “At one point, we would build anything, anywhere, but it does not make sense to grow your top line if your bottom line isn't growing at the same pace.” Now, Howell contains Stones River Homes to specific neighborhoods.
Maturity, for many builders, means following Howell's advice. They're passing on jobs that they jumped at in their early days and holding orders steady for a year or two to prepare the companies for significant jumps in revenue and closings.
When Charles Gahan started GBW Homes in 2001, the Caledonia, Mich.–based company built wherever it could obtain lots. “We had three or four houses going that weren't within 20 miles of each other,” he recalls. “It was nuts.” Now, his projects are within several subdivisions.
Gahan also made the decision to hold closings to about 40 this year; GBW closed 43 homes in 2003. The move will better prepare the company for 2005, when Gahan expects to finish between 100 and 150 homes. “It's intentional,” he says. “It's a chance to catch our breath. I wanted to make sure the systems are in place for the next step.”
Dodging Obstacles Despite the advantages many have enjoyed by starting during a boom, it's been nearly impossible for builders to avoid taking hits on the costs of land and materials. Some small builders have gone into land development to keep those savings for themselves, while others are buying as much as they can now, anticipating even higher prices in the future (see “Getting Dirty,” page 128).
Controlling the effect of escalating materials prices on the bottom line has been tougher. The costs of framing lumber and steel have skyrocketed, and builders in the Southeast have been plagued by cement shortages.
Though it's difficult to turn down orders, some builders are doing just that because they cannot accurately forecast their costs six months or a year into the future. Stover Homes has raised the prices of its houses at least twice due to increases in cement and lumber prices, and company president Gary Stover says his profits have diminished in kind.
The costs of materials aside, these builders are largely optimistic. Few cite concerns about rising interest rates, and some even say the entry of big builders into their markets has helped, bringing additional attention to all new-home builders.
But the possibility of a downturn always looms, especially for those who've been through one before. “I think the market could be very different in five years,” says Scott Henry, president and CEO of Albuquerque, N.M.–based Stillbrooke Homes. “I was in Amarillo [Texas] in the mid-'80s, and it was like somebody turned off a faucet. We had to look up to see bottom.”
Howell and many of his counterparts frequently cite what they foresee as the best strategy for the future: diversification. Builders are mixing up where they build, the types of products they offer, and their target customers.
“This is a cyclical business,” says Ron Smith, president of Smith Family Homes, which he started in 1998 after spending 30 years with national builders. Part of his business plan includes new townhomes, which will start around $140,000, compared with his single-family detached homes that average about $260,000. “If there is a slowdown, that might give us a little buffer,” says the Tampa, Fla., builder.
Young California Homes realized the benefits of diversification early. Based in the San Francisco Bay area, the company expanded into Southern California during the height of the dot-com frenzy. “We could find more available properties there,” says Michael Howl, vice president of sales, marketing, and land acquisition. “It worked out well because 2001 and 2002 in Northern California were not profitable years, but Southern California stayed strong.”
While working to brand its image as a “single-story specialist” in the San Diego area, Michael Crews Development has branched out, expanding to the Phoenix residential market in 2003, developing lots in California and Washington, and growing a commercial construction division. Making profits in a variety of areas should help through a downturn, says company president Michael Crews, but, he adds, “you have to have an exit strategy in place at all times.”
Henry agrees. He says builders should be ready to make changes such as offering more comprehensive warranties and better financing if they see signs of a slowdown. “Be willing to do things you haven't [done before],” he warns. “Be prepared to do things differently.”BACK IN BLACK
Oakley Custom Homes, Lewisville, Texas In 2002, Clay Lockley saw a pathway to becoming a winning builder. But, he had to lose—big—to get there. Another nearby builder's business was floundering and had several dozen lots in subdivisions that Lockley coveted. He took over the builder's company to get control of the lots and its floor plans, but he also took on a handful of problem-plagued, in-construction houses, piles of warranty claims from former customers, and messy financial records. “Every one of those houses was a mess. We felt the pain of that growth for a year and a half,” says Lock-Oakley Custom Homes ley, who is a partner in Oakley Custom Homes with his father-in-law, Perry Oakley. “But when we analyzed it over a two-to-four year period, we knew it would work.”
At times, it's been back-breaking work. Oakley honored those warranties for the sake of good will with customers and posted operating losses in both 2002 and 2003. Then Lockley went on to plan projects on the inherited lots. Now, the company is in six subdivisions, with a projected 93 closings this year.
What's more, the numbers have turned in Lock-ley's favor: He expects the company to make about $30 million in revenue this year, turning a $3 million profit. He and his father-in-law aim to close 150 homes annually within the next few years. After that, Lockley says, they'll re-evaluate the company's goals. He doesn't rule out taking more risks that will benefit the company in the long-term. “I would do it again,” he says. “Now that we've gone through it once, I know what to look for.”
Garland Griffin Homes, Westlake, Ohio It took a measured approach to building to put Matt Garland and Chris Griffin on the fast track. The duo first ventured away from remodeling into custom home building in 1997, when they built a friend's home at cost as a learning project.
Slowly, Garland Griffin Homes began buying lots and building on them. The company closed seven homes one year and about 10 the next while working out of Garland's own house. It wasn't until 2002, when Garland Griffin entered a subdivision, that it made the leap to 46 closings. Since then, growth has continued along the same steady path: It's poised to close about 60 homes this year, and revenue growth has been about 131 percent over the last three years.
The volatility of the cost of materials and difficulty securing land sit on the periphery. The company raised prices last year to compensate for some of the increased building costs, and Garland anticipates it will begin developing its own lots soon. “We have to stay ahead of the game,” he says.
Infinity General Contractors, Colorado Springs, Colo. Having served in the Air Force for 21 years, Scott Hente knew that side of American ernment well. Then he got into construction, becoming vice president of Infinity General Contractors (then known as Robert-Scott Enterprises). “I wish I'd known the amount of bureaucratic red tape I would have to encounter,” he says. “I didn't think it would be as difficult to get through city agencies as it's been.”
The length and complexity of the local development review process spurred him in 2003 to jump back into a different government role: Colorado Springs city councilor. Hente acknowledges that it's been a challenge to convince some constituents he's there to do more than line developers' and builders' pockets and insists that he's careful to recuse himself from city business that involves his day job. “I'm trying to improve the process,” he says. “If we can reduce red tape and time lines, we can increase affordability across the board.”
Change hasn't come as quickly as Hente would like—he's yet to bust through much tape—but Infinity continues to grow, posting over a 41 percent revenue growth rate since 2001 despite a recently lagging local economy, and the company is expanding into condo construction with a 120-unit development.
Polo Homes, Dallas When changes in the tech sector weakened Bill McCleskey's business of buying selling IBM computer mainframes in the late 1990s, he turned to home building He researched the Dallas market for two years before deciding in 2000 to concentrate affordable housing. “It's giving back to the community,” McCleskey says. “I've rejected portunities to build much larger homes.”
McCleskey hit the right target. He has concentrated on infill lots and is working with city to buy lots it forecloses. Use of technology—which you'd expect from an IBM alum—enabled the company to stay small and keep overhead low, and Polo Homes' revenue has grown more than 40 percent since 2001. McCleskey aims to close 50 homes a year by this a goal he'll meet—and surpass.
Success has not diverted McCleskey's attention from his primary purpose: helping advantaged people own homes. His homes sell from $82,000 to $165,000. About 90 cent of customers are first-time buyers, many of them minorities and single mothers he's taking it a step further: He's started a mortgage company to better serve his cus tomers, who sometimes find it difficult to secure financing. “I get a lot of gratification helping them get into their first homes,” McCleskey says.
Colonial Homes, Fort Myers, Fla. Fort Myers has been a hotbed for home building activity for the last few years as retirees and families have flocked to Florida only to find traditional areas such as West Palm Beach and Dade County crowded. The big builders haven't been far behind; in the late 1980s, only one built in Fort Myers, but last year, they comprised eight of the top 10 builders in the market.
Five-year-old Colonial Homes has found a winning formula to compete. The main ingredient: Tony Persichilli, whom the company hired as its president. He'd been working in the area since 1987 for a national builder. He leveraged his market knowledge and contacts to get Colonial off to a strong start: It turned a profit in its first year, when it closed eight homes.
The key to Colonial's growth since—almost 41 percent revenue growth since 2001 and as many as 400 closings expected in 2004—has been keeping the company's product narrowly tailored, according to Persichilli. The company targets move-up and empty-nester customers with homes priced from $250,000 to $500,000. Sticking to that product type helps Colonial keeps its edge, says Persichilli, noting, “We don't need to be the biggest.” Looking ahead, the strategy is to continue adding to the bottom line—and not to get caught up in building for the sake of boosting unit counts. Part of that strategy includes planning for the day the market cools.
“People are speculating that it's not a cyclical business any-more. We don't take that approach,” Persichilli says, adding that the company prepares a “downside analysis” for each project and has stayed away from “crazy finance structures” designed to add more units to the total.
Three years ago, Larry Brians could buy developed lots in Port St. Lucie, Fla., for as little as $2,500, and 90 percent of the lots cost $8,000 or less. Today, those same lots start at $45,000 and average around $60,000, says Brians, co-owner of Town and Country Home Builders.
In every region, builders tell the same story. As big builders have entered their markets with cash to spend on land, lot prices have doubled, even tripled—or more—and every year it gets tougher to secure finished land. Builders who once relied on developed lots are becoming developers themselves, trying to save on the middleman costs.
Young California Homes, which builds in Northern and Southern California, started a subsidiary to entitle and develop its own lots. Other builders are developing more than what they need and selling the extra lots. San Diego builder Michael Crews of Michael Crews Development reports that lot development generates one-third of his bottom line.
Dover, Del.–based Stover Homes has stockpiled enough lots to carry it through the next seven years. But that hasn't eased company president Gary Stover's concerns. “We're getting to the point where a company our size won't be able to compete for land with the nationals,” he says. While Stover acknowledges that he may be sitting on too much land in the event of a downturn, he says right now it's worth it for the cost savings. “I'm sitting on ground that I paid $15,000 to $20,000 per acre for that's now going for $35,000 to $65,000 an acre.”