Private builders are here to stay.
Michael J. Ryan
To those who predict that the large public builders will continue to gain in market share and eventually own 75 percent of the market by 2011, I ask this: ?Did someone forget to tell you that 70 percent of the market is owned by companies that produce fewer than 100 units each year??
In order to garner three-quarters of the market, public builders would have to push out all of those smaller builders in less than 10 years, and I think that?s unrealistic. I?m not suggesting that the public builders don?t operate well-run companies, but the industry is far from reaching the point where private builders have to worry about being priced out of a market.
Today, it?s a tougher, more capital-intensive game to play, but private builders are still players. From a global standpoint, the public builders have more capital and are more volume driven. However, this doesn?t mean they have the ultimate advantage. The lowest prices and the highest velocities don?t always make a direct correlation. In our Chicago market right now, four of the top six builders are privately owned.
The public builders augment the national competitive landscape, but home building is, and has always been, about local markets. From a micro standpoint, it doesn?t matter whether the competition is a well-financed company or if it?s a mom-and-pop operator: Success is measured by how well you know the market.
Because of Town & Country?s local connections in Chicago, for example, we get first, second, and third opportunities at land. Our superior relationships with trades keep our costs down, and knowing how to deal with the local municipalities and planning commissions gives us an edge on the competition.
People ask me why I choose to remain private, as if the IPO route is the only way to go and as if there?s never been an unsuccessful attempt at going public. I like to counter by asking, ?Why would a builder ever decide to go public?? Unless management really wants to grow the company exponentially, the so-called advantages in size fail to outweigh all the expensive accounting hassles and the tremendous pressure to perform.
Private builders aren?t going away. Because they?re not focused on growth at any cost, they can do what they want, when they want to do it, without the second-guessing by analysts or the excessive scrutiny from investors.
What?s more, if you?re a private builder accustomed to making a certain amount of profit, that amount reduces considerably after selling a piece of the company to shareholders. If you sell 40 percent, you?re left making 60 cents on the dollar because the public owns the rest. Volume would have to nearly double in order to recoup. Why would you do that to yourself?
?Michael J. Ryan is CEO of Town & Country Homes in Lombard, Ill. A family-owned business since 1958, the company has divisions in Chicago, Minneapolis, and Southeast Florida.
Published in BIG BUILDER Magazine, June 2002