Indianapolis-based Davis Homes on Wednesday, July 24 officially ceased operations, marking the end of a family home building business that has collectively produced more than 25,000 homes over 50 years--primarily in the state of Indiana.

"As hard as I and our devoted management team and all employees have worked, Davis Homes could not survive a housing market that has devastated many other builders and homeowners, both in Indianapolis and throughout the nation," said CEO Brad Davis.

The company pointed to the severe downturn in the housing industry and the resulting pressure put on private builders by publics that have become increasingly active in the market as contributing factors.

Davis coaxed his home builder father out of retirement in 1985 to launch the company. In 2007, Davis Homes was Indy's fifth largest builder, closing 491 homes. The company had 5.9% market share.

Indianapolis is the country's 26th largest housing market by number of permits. In 2007, there were 7,200 permits issued, and it is estimated that approximately 4,800 will be issued by the end of 2008. Locally-based C.P. Morgan dominated with more than 1,000 closings and 13% market share. In all, the metro's top-10 builders account for 66% share, and five of those 10 builders are publics.

Though the local permitting began to decline in 2006, trouble began in earnest for the company in mid-2007 when pricing fell drastically--10% to 15% overnight. "None of us could believe it because Indianapolis was still the most affordable large-market city in the United States, so we never saw the big upticks," Davis told Big Builder.

Centex Corp., Beazer Homes USA, Pulte Homes, and KB Home were all active in the market at that time. Emerging from first-quarter, 2007 reporting, they charged into the spring selling season by dropping prices in April. It took a little while for buyers to realize the prices that were available, but within weeks, the effect was very clear.

In May of that year, Davis recorded 40 sales. In contrast, once buyers found the bargains, sales plummeted; during the first half of June, Davis' numbers fell to negative seven sales. "People were canceling with us to go buy the cut-rate homes," said Davis.

The company responded by meeting the price point, and the remaining two weeks of June netted 40 sales. "It just showed that if you do lower your prices, you are going to move units," Davis said. "But you just can't make any money."

Davis carried on with this tactic through July and netted another 35 sales. But the dark side was that gross margins were only between 5% and 8%. Knowing the model wasn't sustainable, Davis raised prices back up and implored financers to get lower lot release prices.

"Until the storm clouds go, can you take that $40,000 lot and allow us to buy it for $20,000?" Davis recalled asking. "The general response was to say they would lower [the price], but only to about $32,000. It helped for a while, but it didn't help enough. We knew what we had to pay for a lot [in order] to continue to make money and have absorption. It was really about 50% of the prior year's appraised value. In that scenario, I think the model would have worked. But they wouldn't go about 75%."

At the same time that Davis was struggling to keep the company going, he was negotiating with construction banks to continue funding the 300 homes under construction.

There was an exploration of bankruptcy, but after analyzing it, Davis didn't think the company could emerge profitably. "We were uncertain as to whether we could raise DIP [debtor-in-possession] financing in any meaningful way. Plus, there needed to be an agreement from banks and external developers in order to be able to emerge profitably. We couldn't see getting anyone to go as low as we needed to be."

Regarding the company's existing 10 major landsites, Davis says the company has worked with banks to do deeds in lieu of foreclosure--though six were pre-sold. Westport Homes has taken over the two of them: Oriel Point in Avon, Ind., and Brighton Knoll in Noblesville, Ind.

Davis is not yet at liberty to name the others, but he did say that none are public builders active in the market. "We have gotten no calls from publics regarding our land sites," he said.

Today, there are less than a dozen spec homes left to sell, but every other home has been closed. Trade payables are virtually paid off, and Davis is trying to focus on having the best recovery possible for everyone.

For a company that has been building in the market for so long, treating vendors fairly and maintaining a good reputation was critical.

"Doing the right thing is the motivator," said Davis, while acknowledging that the payables have been very difficult. "We knew there would be losses, no matter what--even if we had figured out a way to go forward. In bankruptcy, for example, there are losses, but the company does go forward. So, we knew losses were immanent, including our own equity--but, we really tried to look at a lot of solutions to determine a go-forward plan."

Finding a successful go-forward plan is the real challenge in Davis' mind, because the only business model that works today is one where you can get the land at next to nothing, factor that into lot price, then enable a builder to sell three homes a month at a 25% gross margin. The caveat? "You have to get the offering down to where you can do that."

In spite of the need to wind down current operations, don't count Davis out for good. He's anxious to get back in when land reaches a cost basis that makes sense again. "I love this business, and I truly plan to stay involved."

Learn more about markets featured in this article: Indianapolis, IN.