Warming Up Spec markets are coming back for Wayne Holt. His new problem? Finding land.
Davis Turner/Sublime Management Warming Up Spec markets are coming back for Wayne Holt. His new problem? Finding land.

In December 2010, Ted Cushman talked with Wayne Holt, who runs Reward Builders, Inc., a custom and spec homebuilding company based in Cary, North Carolina (www.rewardbuilders.com). Ted first spoke with Wayne back in December of 2009, for Builder’s 2010 State of the Industry report. This winter,Ted got back in touch to see how 2010 turned out for Reward Builders, and to get Wayne’s report on building market conditions in the Raleigh-Durham-Chapel Hill area. What follows is a transcript of their December 2010 conversation.

Wayne: It’s Wayne, who’s calling?

Ted: Wayne, it’s Ted Cushman from Builder.

Wayne: Hey, how are you, sir?

Ted: I’m doing well. I’m glad to hear that you are doing well also.

Wayne: I am, yes sir. Thanks for thinking of me again.

Ted: Let’s catch up. The last time we talked, you had made a transition — you had gotten some realty skills and qualifications and had become a qualified Realtor. And you had been pretty successful — you were stuck with some spec houses and you had managed to get those sold. And you had moved into a situation where you were working with banks to complete incomplete projects that had failed for one reason or another — the builder had gone out of business, or the construction loan was foreclosed or something. And that was also working out for you; and it sounded like you were just starting to be able to get back into the business of building homes outside of that banking relationship.

Wayne: That’s correct. All of that is correct, and to bring you up to date on where each of those phases are: The real estate company is still doing quite well. We are — what we had done there was we had created a new homes division of an existing company that two other guys own, and they brought me in as a new partner to create Dream Living New Homes, specifically to market and sell new homes. And one of the reasons we created that arm was to assist the banks in selling their new properties as well as working with builders who had stray-lot homes that they could not sell. So that is still doing quite well. We are marketing one area of a large subdivision. The subdivision has five different price points, and we are marketing the higher-end price point for them, and that price point is from about $480,000 up to if somebody wants to spend about $650,000 or $700,000. And we are still doing quite a few bank-owned new homes, and a lot more bank-owned lots through that company. So, we still have quite a few listings, and we’re selling and doing quite well with the real estate thing.

Ted: So are you doing construction now?

Wayne: Well, the construction piece with the banks is pretty much over. The homes that they were taking that had not been completed, all the banks that we were working with, and most of the local banks that I’m aware of, have worked through all of the incomplete inventory. So that piece of my business ended, I guess I finished my last bank job in probably July of this year. And it’s pretty much gone. Once in a while we’ll get something where we just need to go in and get a certificate of occupancy on a house that looks to be finished, but they just never got all their final inspections. So now we’re back to building new homes again — which is what I really want to be doing. It’s what my passion is. These other things were created to help us get through this difficult time, which actually hit for us in late 2007. So we are back to building new homes. We built three this year, and closed two of them, and the third one should be closing a week from today.

During the good times we were building six to eight new homes a year. Our best year was thirteen. We are on pace next year with what we currently have under construction and planned for next year to do. We have six under construction now, so if we just sell the six that we have under construction next year we will be back to what we traditionally had done — somewhere between six and eight. But honestly, we’re hoping to get back up to maybe eight next year, and depending on how things cycle and how quickly the pieces that we have under construction sell, we maybe possibly could get up to as many as ten or so.

Ted: So it sounds like these are spec houses, not custom homes.

Wayne: I have one custom pre-sell home under construction, and the house that we are closing next week started off as a spec home, but sold during the framing stage, and turned into really a custom build, a very detailed custom build. And that house is actually going to close right at a million dollars. So another thing that we have done, is we’ve taken our price point from — we used to build, before this recession, we were in the price point up to around five, five-fifty; and now our price point starts at five and goes up to around a million. But the national players have taken over so much of the market in that 350 to 500 price point locally, that I have stepped up into a price point that has less competition. There are fewer buyers there, but there is also a lot less competition and a lot less inventory.

Ted: Yeah, less inventory, and it seems like in the upper end, the deals are different. Some people — what I see nationally is that the market in the upper end has people who are independently wealthy, cash buyers, or people with very good credit who can get good financing. And what I’m hearing is that it’s very tight once you get into regular working folks who used to be able to get credit — and even people with good credit are having a hard time borrowing money to buy a house right now.

Wayne: Absolutely. And that’s exactly why we went that direction, is we were able to get into a subdivision that I actually tried to get into back in ‘07, but the developer had pretty much all the builders he wanted at that point, but as the recession took place, several of those builders could no longer fulfill their obligation, and the developer knew that I wanted to be a part of it, and we were finally able to be a part of it. But the buyers that are buying those homes are either paying cash, or they’re bringing 50, 60 percent down payment, and they’ve got jobs making a lot of money, and do quite well.

So you’re exactly right — that’s exactly what we’re seeing here. Up into 800 to a million, those people are really independently wealthy, but even at the 500 to 600 price point, we’ve seen less credit challenges there. I did have two, actually three homes that we sold this year that were three pieces that were brought in from last year, and those three homes were in the 250 to 280 price point; and two out of the three, we had serious challenges getting those people qualified. One was a retired couple moving in from out of state, to be close to their daughter, and they paid cash. But the other two were working class, and actually both of them were military related — at least one of the spouses was in the military. So they both ended up doing VA loans, but even through the VA, we had some challenges to get everything done. So yeah — under 300 for me just proved not to be a good price point for me to be in.

Ted: So can you explain the situation with lots? You’re still working with some bank-owned land, I gather. What’s that about?

Wayne: What’s happened is we have quite a few lots that are in less desireable locations. They may be on the fringes, outside of the immediate Triangle … If you’re in Lake County, or Durham County, in the Triangle, and even Orange County, you’re still in a pretty good market. But if you get out in some of the further outlying areas, the outlying areas were the first to take the hit, because if a builder or the buyer could buy in the immediate Triangle near the work centers and near the better schools, for the same money they could traditionally buy for further out in the county or an adjoining county, they’ve now moved in.

A case in point is Cary, which is where I live and build some of my homes. Cary, North Carolina, west Cary is and has been probably one of the hottest areas for probably the last ten years. And it really heated up again about two years ago, and custom homes in west Cary are just flying. As soon as you can get them up, there’s very rarely that you have a spec home that sits any time at all, because people can now buy the homes in west Cary that they may have been buying twelve or fifteen miles further out four or five years ago. So they’re spending the money today that they may have spent twelve or fourteen miles out five years ago. Closer to the work centers; Cary schools tend to be better schools than a lot of the county schools; so that’s what we’re seeing. And as far as the lots that we have, that’s what we’re seeing: these further outlying lots that may be onesies, twosies in a subdivision — the nationals are buying up a lot of the subdivisions if there are 15 or 20 or more lots. But if there’s one or two or five lots, they are not nearly as interested in going in and putting up a position for stray lots. They want to be able to go in and build 10 or 20 homes or more.

Ted: That’s a complex picture. And it’s the kind of thing where the small local builder like yourself is on the scene and able to see that local geography.

Wayne. Yes … and what’s happening too is that lots of subdivisions in the Cary area, and Holly Springs, the areas that I have traditionally built in, and even in the North Raleigh area, the stronger areas that were traditionally pretty much bullet-proof, even through the recession they did okay — well, what’s now happening is that these nationals have been able to come in and buy up large chunks of lots, because the developers that were putting lots on the ground for custom builders such as myself got in the same situation, where their notes were not being renewed, they couldn’t sell lots to custom builders, they had to move their lot inventory. So the nationals could come in and take down 40 or 50 lots, or take the whole subdivision over, and that’s what’s happened. So — there’s one subdivision right now where I’m starting a house next week actually, and there’s about 8 or 9 custom guys building homes in there now, but there’s two large — well, one large regional and then there’s one national in there, that have come in and bought large positions. So the one thing that concerns me over the next two to three years, is: where are we going to get our lots from as small custom builders? In the good areas? Because right now, the developers that were putting lots on the ground for us, most of them don’t have the cash to continue to develop. A lot of them are out of business, cause the banks have taken them and sold off to the nationals. So who’s going to put those lots on the ground for us? There’s one developer locally I’ve spoken with, who’s a big player in this market for over 20 years; they are probably going to do something that’s going to be aimed at the custom builder. But even those guys have been selling off to the nationals. So, I don’t think anybody has been immune to needing to sell the inventory; and when the nationals have the checkbooks and are able to come in and write the check, the small guy like myself are the ones that have been hurt.

The other thing is that there are enough stray lots out there, in decent subdivisions, to probably get us through for another year or so. But if this market really recovers, the small custom guy is going to be scrambling for lots.

Ted: That’s a very interesting point. The big nationals made out with the tax law revision as part of the stimulus package, with being able to carry back losses into previous years. That put a lot of cash in their pockets.

Wayne: That’s correct. I had one of the nationals, I was sitting in a meeting with a national close to three years ago, and they said they had over a billion dollars cash that they could put into devalued lots. And they have — they’ve bought quite a bit of inventory locally. That’s what our challenge is. The two challenges I see for us right now as small custom guys is continued availability of funds — it’s very difficult for speculative homes; and then, the lot inventory over the next 12 or 24 months.

Ted: Well so, stepping back just a little bit — I’m talking to people in other parts of the country. I’ve done three interviews for this State of the Industry story, which includes a builder near Seattle, Washington, and another builder in Wisconsin. And the general conditions they face, it seems like, are different. Looking at your economy, it sounds like there’s a lot of strength, a lot of improvement, in your local building market.

Wayne: Well, I am on the board of directors for the local builders association, and I’m going to be starting as Vice President of the second largest home builders association in the country, which is the Raleigh/Wake County. So I was in the board of directors meeting this past Monday, and our executive director every month goes over permitting year to date versus last year, year to date. And if you recall in 2010 we had a federal tax credit that was still in play, which helped drive permits up. And then we had a big fall-off this year for the first several months of the year, year over year, because we didn’t have a tax credit, and people weren’t trying to build inventory. But we are expecting, if it continues to trend as it has for the last 120 days, that by the end of the year, permits in our area are only going to be down about four percent, maybe five percent, versus last year. And that’s with no tax credit. So we truly believe we’re getting a better picture now of what the new normal is going to be. And to only be down four or five percent, we feel pretty good about that, for our immediate market.

Our unemployment is still higher than the national average. We aren’t creating the jobs that we previously had created. But I think that’s a national thing. That’s nationally, the jobs aren’t being created. But we still have a lot of people moving here on the hope that they are going to have a job, which we believe is one of the reasons that our unemployment continues to be higher than national. Now the house that I’m selling, closing next Friday, when those people put the house under contract, neither one of them had a job in Cary, North Carolina. They were relocating from the Akron, Ohio, area, and neither one of them had a job. They both found jobs pretty quickly after relocating down here. They came down in early August, and one was able to find a job as a schoolteacher, and one was able to find a job in sales. So we’ve seen a lot of people moving to our area because we do have lots of universities, we’ve got great hospital systems, we’ve got the Research Triangle Park, which is the technology. So we do tend to create a lot of jobs from all of those. So we think that’s one of the reasons why our unemployment continues to stay up, is from people moving here without jobs.

In some of the metro studies down here, the metro study folks truly believe that if we get any uptick in the economy, if we get any continued growth in new homes locally, we are going to be in a real shortage. Especially in the price point over $500,000 — we are below a six-month inventory right now, and moving closer to five months. And when you look at the sub-markets — the sub-market of Cary, North Carolina, is like 3.2 months supply in the 500k to a million price point. So the buyer’s market in those price points, especially up in the higher, the $800k to a million subdivision I’m building in — they are getting very little discount on those homes. The house that I am closing on next week is closing at $995,000 and the asking price was a million and five thousand. So we discounted the house ten thousand dollars. You know, we’ve discounted houses in the under three market, the houses I was talking about earlier for under $300,000, we discounted a couple of those houses 15 or 20 thousand dollars to get rid of them. Because we just didn’t have any other offers, so we took the offer we had and made it work. But the high price point, because of the shortage of inventory and not just in Cary sub-market but across the Triangle — there’s a shortage in that price point.

It’s not a bad place to be. The big issue has been, again, being able to get funds to start spec homes, because for the most part our market has always been a spec-driven market, as opposed to a pre-sold-driven market. Because when people come in, we get so many relocations, or we get the move-up buyer who doesn’t want to take the time to build, we need to have inventory on the ground where they can walk in, see it, and make the purchase, and with the banks — prior to this recession, I had seven different lenders I could do spec homes with, and now I have two that can do anything construction-related. It makes it very difficult. And those two, neither one of them want to get in too deep with any single builder. So previously, where I could have done three or four houses with a given bank, they may want to do one or two right now. It’s just making it difficult. We’ve been fortunate that we have been able to continue to get money, where a lot of my peers can’t get any money.

But at the same rate, we still have to be able to build the homes and build desirable homes, and build them at a price that people will buy, and sell the inventory and just keep it rolling. Because again, years ago we might have eight houses under construction, now, going into the year, which would be a year’s worth of inventory, so we didn’t have to get two turns on inventory, where now we have to get one and a half to two turns on inventory to do the same number.

Ted: That’s fascinating. It’s really striking to me how different the story is that you’re telling from my other two interviews that I have done. In Wisconsin, that individual is just talking about hanging on. Where he had been building 20 houses in the strong years, he had one new house last year, and he’s doing a bunch of little remodels. And these people out in Gig Harbor, Washington, near Seattle, they have three to five houses going, and they’re a small company, and it looks good right now; but it is much tougher than it has been — price competition and pressure from the buyers to keep the costs down. And when you talk about what’s coming next, the fellow in Wisconsin is just hanging on, and the people in Seattle say, things look good, but we’re afraid that anything that goes wrong could knock the train off the tracks again. Whereas you’re looking at it, and I hear you saying, you know, anything goes right, and we’re in pretty good shape — but we’re starting to have the problems that come from the market heating up again.

Wayne: Well, we just think that because we are — and Seattle gets a lot of these same ratings, it’s the number one place in the country to live, or the top ten in the country for schools — we get so much of that, that we are on the radar of a lot of people that are considering relocating, that don’t have a reason to relocate other than to go to a better place to raise their family.

But don’t take what I’m saying as, you know, “we’re down here killing it,” because we’re not. I mean, we’re struggling just like every other area. We’re just struggling in different ways, I think. The margins aren’t as good as they were in 05, 06, 07; we’re still having to spend a lot of money for permits — the jurisdictions have not reduced those fees. As a member of the home builders association, I serve on several committees, and we have tried to meet with several of the jurisdictions that are at the higher price points, and at least get them to give credit with as far as how they accept our checks, instead of taking all of it up front, letting us pay some of it at the end, so it doesn’t kill us with cash flow, that we can pay part of it from the closing table. But the margins are not as good. We are able to sell homes, but we aren’t selling the numbers — again, this year, three, where we have traditionally sold eight. But I feel very blessed and very fortunate to have been able to build three this year, from the ground up. And I am going to sell more than three, because I brought over some inventory, but honestly, all of those were sold at a loss. So cleaning the old inventory out, and building three new ones, we’re going to have an okay year. But I do believe that we have positioned ourselves — and the custom guys that are able to get money and build at least something, and stay in the game in our market, I believe they are all positioned, if we continue to get good news — and I think this week we’ve seen two really good, positive reports — one being the national housing index for the month of October, two, today’s report on unemployment across the country. And I haven’t looked at the market today, but through the first four days of the week, the market had some good gains. I think if we can get the typical Santa Claus rally in the market, and we don’t have anything crazy happen, national disasters or natural disasters, either one — then I think our market locally next year will be good. I’ve seen some quotes from some of the regional presidents of the national builders that were interviewed by local newspapers or TV stations that said, they think it will be flat next year — but they didn’t think that was bad. You know, as long as we can stay level for another year, I truly believe that 2013 is probably going to be the year that we turn around here. But as long as we can stay flat for next year, overall throughout our market, I think we’ll consider that a success. Not to go down.

Ted: Well, this is really interesting to me. I should let you get back to making some money, but I really appreciate you taking the time. You know, I do see a lot of consistency between the survey results and the followup interviews I’ve done, and in talking to other people around the country. There’s a general sense that we might have kind of stabilized where we’re at, and people are hopeful that we can stay here and improve, but it’s going to be slow and there are a lot of challenges, and it’s much harder work than it used to be.

Wayne: Yeah, I agree. And I think there is so much going on, with Europe, and the euro, and stabilizing the markets over there, and with the Presidential election next year, there are so many wild cards that could turn this thing back to negative. And let’s all hope and pray that that doesn’t happen. But yeah, I think right now that we feel like that we are stable here in the Triangle market. We’d love to see an uptick next year, and we’d love to see some positive numbers come out of this, and I think we probably will in the spring. But by the time we get to the end of next year I think we’ll be fairly consistent with where we are this year. But hopefully with a new President, or with at least an election behind us, hopefully 2013 will be the new beginning of some rising tides.

Ted: Well thank you very much, and best of luck to you.

Learn more about markets featured in this article: Raleigh, NC.