LGI Homes, the upstart start-up builder in Texas that has climbed quickly to No. 58 on the BUILDER 100 list, is expanding its unique business model to Phoenix, Ariz.
Chris Kelly, a Pulte division president of operations in Phoenix, started working for LGI in January as its new Phoenix division president. But Kelly spent the first few months of his new job in Texas, learning the LGI “process and culture,” he said.
It was a big change in focus for the 11-year Pulte veteran. Rather than focusing on creating and selling products for every category of buyer, as Pulte does, LGI targets one niche of buyers—apartment renters—with the intensity and pin-point accuracy of a laser beam. The company’s main form of marketing is a direct mail campaign targeting 20,000 apartment dwellers every month, telling renters they can buy for the same price they pay to rent.
LGI, which closed 439 homes in 2010.
LGI approached Kelly with the proposal that he pilot their new Phoenix initiative. Kelly, who was not unhappy with his job with Pulte, was attracted to the opportunity to build homes for first-time home buyers.
“Everything I heard, I liked,” Kelly said. “It was an easy decision because it reminded me of some of the things I wanted to do when I got into home building, to make money but really target that first time home buyer, people who are afraid to buy a home.”
Kelly remembered how scary the purchase process was when he bought his first home, and he was working for Pulte at the time.
“I really couldn’t turn [the offer] down,” he said. “A lot of builders are positioning themselves for this great recovery, but our model is working today.” And he foresees it working in the future as the market improves as well.
While LGI’s model has been a success in Texas, where the housing downturn has been more modest, it remains to be seen how it will fare in Phoenix, one of the hardest hit markets in the downturn. Hanley Wood Market Intelligence says foreclosures and population decreases have lead to more than 100,000 vacant homes in the Phoenix metro area.
Kelly isn’t worried. “We don’t see our customers as being interested in foreclosures,” he said. That’s primarily because most of the potential buyers LGI markets to are living in apartments and aren’t really thinking they can own a home until LGI’s marketing materials start showing up in the mailbox.
Where LGI might run into more trouble is with appraisals of the new homes coming in low due to sales of distressed ones.
But “appraisers certainly are seeing added value for a new home versus a resale home and, indeed, versus a foreclosure or short sale,” he said.
After orientation in the LGI way, Kelly went back to Phoenix a few months ago to start scouting out land parcels with finished lots for the new operations. He said he is close to closing on the first land deal, which would allow the company to have buyers in new homes by the end of the year.
While most builders, including the large, publicly funded ones, are seeking out finished lots in A locations closer to town, LGI’s criteria are different. LGI wants B and C locations, usually on the outskirts of town, that it can buy cheaply enough to sell with a mortgage rate equivalent to rents. And it’s looking for a minimum of 100 lots in one place, while other builders are looking to buy maybe 30 lots at a time.
The lots also need to be near the large apartment areas that LGI focuses its marketing efforts on, and they need to be spread out far enough so that the company isn’t competing with itself. In Phoenix, the company is looking for lots southeast, south, and west of town.
Kelly is looking forward to getting the first project out of the ground with spec homes ready to sell by Halloween, a trigger time for the company because people are starting to think about the holidays.
“There are people in apartments who don’t want to do Thanksgiving in an apartment.” Since LGI only sells homes that have already been built, a buyer who signs a contract around Halloween could be eating the Thanksgiving turkey in his new home.
Kelly sees other portending holidays and life events as triggers for apartment dwellers to decide to buy as well. People don’t’ envision themselves opening Christmas presents, hunting Easter eggs, or bringing a new baby home to apartments either, he said.
“They envision a Hallmark card kind of holiday,” he said.
Teresa Burney is a senior editor for Builder magazine.