The honeymoon ended quickly for the new COO. Days after Tim Breedlove started his job in 1999 as Renaissance Homes' COO, his financial analysis uncovered serious cracks within the West Linn, Ore., home building company he'd just joined. “This thing is not doing what [the founder] thinks it is,” Breedlove remembers realizing. Even worse, he couldn't tell his new boss, who'd just left for a much needed break. “I didn't want to ruin his vacation.”
As soon as founder and president Randy Sebastian returned, though, he got the bad news from his new hire. Renaissance, one of Portland's top luxury builders, was in trouble. Cash flow was bad. Gross profit margins were 7 percent—troublingly low for a luxury production builder like Renaissance. And the company would post a million-dollar loss for 1999.
It must qualify as one of the worst “first-days-back-at-the-office-after-vacation” ever.
Taking Stock The company turned to consultant Al Trellis of the Mt. Airy, Md.–based Home Builders Network, who assessed the situation. “They were upside down,” says Trellis, with liabilities exceeding assets.
There were many reasons for the builder's business troubles. Renaissance had built too many spec homes too fast, leaving it with lots of unsold inventory. Because those homes weren't selling, the company had poor cash flow. While Renaissance's designs were award-winning, daily home building operations weren't getting the attention they needed. (Sebastian was also involved with constructing a high-end commercial office building at the time.) And unfortunately, prior to 1999, no one could step in for Sebastian at the rapidly growing company. After the company switched from custom to production home building in the mid-1990s, closings essentially doubled, taking Renaissance from 50 deliveries annually to roughly 100.
“We were building really good homes, and we always took really good care of our clients, so we were fueled into super growth without having the systems or the people. The systems started to break down. The people started to break down. And things got out of control financially,” Sebastian explains. “People ask, ‘How can a guy with 15 years' experience go through this?' Well, it's when you change your business model and you're not who you were.”
Breedlove, who worked for Weyerhaeuser's financial services operations for more than a decade, sees another factor at play: the tight land environment in the Pacific Northwest, where dirt, once developed, appreciates rapidly. “In this market, I'm not convinced that [builders] were really making money, but they didn't need to if they were in land,” he says. “Through the development and approval process, they made so much money in land, it masked any deficiencies in the home building operations.”
Working with Trellis, the Renaissance team moved quickly to stabilize the company's finances. After resolving to never build 25 spec homes in one neighborhood again (“It was like a ghost town,” Trellis says), Renaissance priced and marketed the houses aggressively to sell them fast. It unloaded one of two upper-end subdivisions it had planned to build. And Sebastian sold his one-third interest in the office building and plowed the money back into Renaissance. “In a period of 30 days, we raised $3.5 million in cash,” Sebastian remembers.
It was enough. “You can stop the bleeding in three to six months,” Trellis says. “It usually takes a year to get traction. It depends on how big the hole is.”
Renaissance's Renewal By the fall of 2000, Renaissance had begun climbing out of that hole. Weekly meetings provided timely information on actual costs and revenues versus budget. The exercise also refocused employees on building profit margins on the most basic level. “In those days, we went house by house,” Breedlove recalls, an approach that soon proved its worth as gross margins went from 7 percent in 1999 to 15 percent today. “By paying attention to what we were doing and a religious focus on profitability, we doubled our margins,” Breedlove says.
Renaissance also began paying closer attention to its pricing as a result of those weekly meetings, bumping up sales prices in one subdivision as much as 20 percent. The decision showed how far the company had come. When the Home Builders Network first visited Renaissance, the consultants had quickly identified a pricing problem. In subdivision after subdivision, the builder just couldn't sell the last two or three lots. The diagnosis: “You sold your good ones too cheap,” Trellis told them.
But that was easily fixed as the company repriced every lot in one of Renaissance's new subdivisions to appeal to the bargain-hunter, the middle-of-the-road buyer, and the status-conscious. “When the lots are all $30,000,” Trellis says, “nobody's happy because they can't get what they are looking for.”
That includes the builder. “Managing the flow of home sales had a big impact on the business,” Breedlove says. “When you sell your good ones too cheap and you give the bad ones away, it has a big impact on profitability.”
Similarly, managing the business of Renaissance more effectively has had a tremendous impact on the company itself. Bankers who passed on Renaissance during its riskier days are back. Now they are begging for the business of the growing company, which this year expects to deliver 209 homes for $83 million in revenue. Employee morale, which sank fast during the cash-flow crunch, has rebounded; staff turnover has plummeted. Customer satisfaction, always high, has surged, with recent buyers giving top marks to sales, construction, and design center staff.
And the energetic Sebastian, who only a few years ago considered selling the company he left college to establish, can't wait to get to work at the transformed Renaissance Homes. “I love my job, I love my company, and I love my life.”