Creating the ideal home building company takes work. You need great product, perfect pricing, solid operations, and strong financial management. But it can be done.
In this year's version of BUILDER's annual Trade Secrets story, we've assembled a collection of some of the ways to build that ideal company. You'll hear from visionary builders--large and small--who have implemented far-reaching strategies to transform their companies.
Some found success right away. One builder saw immediate payoffs from turning the company intranet into a business platform that allows managers in the office and the field to assess how they're doing against their colleagues and company goals.
But achieving these ideals is neither easy nor guaranteed. As some of these improvement-oriented builders found, not every initiative worked as expected. One builder, for example, designed stunning homes ... only to find they wouldn't sell. The company learned from its mistakes, turning to market research on which to base its revised designs, and soon became one of the fastest-growing builders in the country.
That story illustrates both the challenges and chances for builders seeking to improve their companies. Successfully executing just one of these strategies is reason for pride, but the true opportunity to excel comes from pulling them all together to craft the ideal company.
|Trade Secrets: Paths to Perfection|
Develop an automated bill pay system.
Is it really possible to run a home building company without paper purchase orders and invoices?
The short answer is yes. Crosswinds Communities seized the opportunity about 18 months ago, when the Michigan-based builder started a new division in Florida. Crosswinds builds 1,200 homes a year in Michigan, Florida, Arizona, and California. The company's average single-family home costs around $230,000.
Keith Kallen, vice president of finance for the company's national division, says the builder's expansion into Florida gave Crosswinds a chance to build an infrastructure from scratch, so the company could develop its automated bill paying system free from the burden of an entrenched paper culture. In such a system, Kallen says, too often invoices would come back that didn't match the purchase order. The solution was to run both electronically.
Here's how Crosswinds executes automated bill pay: First, subs are asked to send over prices for any job they might participate in; the information is entered into the Timberline accounting system. Second, salespeople start selling the new homes, and when customers buy a house, they select options and Timberline configures the house. A master list that Crosswinds calls its "configuration sheet" is then posted in the trailer at the jobsite; subs are responsible for following the schedule set in that document. Timberline then sets up a schedule of phased payments. Subs get paid after the super signs off on the computer system that the work is complete.
With the new system in Florida, Kallen says Crosswinds will close 450 homes this year in the state without increasing its administrative overhead. The company also estimates that the new system could cut cycle time on a six-month project by 30 days.
A couple of caveats: First, Kallen says companies looking to set up automated bill pay have to establish trust with the subcontractors, most of whom are used to submitting paper invoices. He says Crosswinds created that trust by paying its subs on time every two weeks. Second, you have to have people in the construction group who understand technology and support the project.
"If you don't have the construction group on board, you'll never do it," says Kallen. "The guys out in the field have to have a relationship with the subcontractors where the subs don't feel like they need to send in invoices."
Moving forward, Crosswinds is rolling this system out to its Michigan operations one project at a time.
2) Zero-Defect Closings
Reduce service costs and identify product problems at the same time.
At Classic Homes, in Colorado Springs, Colo., setting a goal of zero defects at closing has had far-reaching positive effects. Not only have after-sale service costs been reduced by 20 percent, but the company's customer ratings have soared to 97 percent at closing and--perhaps more significantly--99 percent at six months after closing.
"This year, Classic Homes will close about 600 homes," notes Jerry Richardson, the company's director of customer service. "We own about 18 percent of the market share in this region, building houses from the affordable $150,000 range all the way up to million-dollar custom homes and attached townhouses. But with every product, our policy (on defect reduction) is the same."
That policy includes a multi-level inspection process. About a week prior to final finish and homeowner orientation, one of the company's three area construction managers walks each new home and rates it on roughly 20 major categories. Each category gets a grade, based on the quality level. Any apparent flaws or unfinished work gets docked. In order for the closing to get a green light, the home has to achieve at least an 85 percent rating.
"You may have interior trim rated at a four, paint rated at five, and interior lighting rated at a three. Along with that rating will be a note saying that one of the lights is cracked and needs to be replaced. So you're essentially preparing a punch list at the same time. Usually, by the time the house closes, it's at 100 percent," explains Richardson.
Such diligence on the part of subs isn't purely philanthropy, however. Classic Homes offers a cash bonus to superintendents who can get all punch-list items completed prior to closing.
"They get a flat bonus per house," Richardson notes, "and that bonus is divided up among the other staff. We've seen a much cleaner product since we made this part of our program. The subs all know how it works, and the supers are fully vested in it--to the point where now it's almost automatic."
Thanks in part to confidence in their zero-defect policy, Classic has been able to offer and service a full eight-year warranty on its new homes.
"We view warranties differently," Richardson says. "We offer a customer care program, and we deliver a quality product. That's a philosophy that is ingrained throughout the company."
3) Market Research
Find underserved market niches and save yourself from costly mistakes.
Founded in 1995, the award-winning, Las Vegas-based Astoria Homes got off to what can only be described as a rocky start.
With the best of intentions, company president and founder Tom McCormick traveled to Italy and returned home to build Italian-styled architecture with European merchandising in Las Vegas. Unfortunately, no one would buy the homes.
"The company was really just ahead of its time," says vice president of marketing Sia Howe. "If we built those homes today, they would probably sell like hot cakes."
But they didn't back then, and Astoria was on the verge of shutting its doors. It went back to the drawing board to find out what Las Vegas buyers really wanted. The company hired Concord Group of Newport Beach, Calif., to do its market research. "Doing research," Howe says, "helps us give the customers what they really want, not just what we think they want."
The research paid off. Getting in touch with the real Las Vegas market helped Astoria become the area's sixth largest home builder, with 800 or more closings expected in 2003.
Bolstered with demographics, research, and a successful sales track record, the company took a calculated risk. McCormick realized that the homes Astoria built served only about 25 percent of the market. Another 45 percent of the Las Vegas market could not afford them. Enter Astoria's Triumph label homes.
With Triumph, Astoria decided to build 1,100- to 1,400-square-foot, two-story houses on postage stamp-sized lots. There are no backyards and density is roughly 14 units per acre. "It's much more of an urban concept in which the houses have courtyards that face onto the street," McCormick says. "We put them on land that was previously going to be apartments, so neighbors look at this as better than apartments."
"We were most worried about having only a one-car garage," Howe notes. But the Triumph concept has caught on with its targeted Gen-X market. Buyers are young professionals, 25 to 35 years old, and about half have young children.
The first Triumph neighborhood was the 428-home Silverado Place (prices range from $128,950 to $135,950 for two- and three-bedroom, two-and-one-half-bathroom homes). The next was the 394-home Independence (where the largest home now sells for $148,950). Models for their newest community, the 533-home Peaks, will open in August.
Sales are brisk as Astoria completes 25 homes a month per subdivision. And Gen-Xers aren't the only ones interested in buying. The builder even gets calls from active adults asking when affordable single-story Triumph homes will be built.
4) Product Diversity
Broaden your market reach and withstand slumps with a mix of housing types and prices.
For some builders, the prospect of putting attached row house condos priced in the $300s next to single-family detached homes in the $700s, with a section of detached townhomes priced in between, might be a bit uncomfortable ... and risky.
"It's hard to mix price points and sell any of them successfully," says John Wilcox, executive vice president of the NAHB's business management department. "You need a developer who is marketing the whole community and has a clear vision of who is buying at what price point."
At Liberty Station, a 361-acre, mixed-use waterfront redevelopment of San Diego's Naval Training Center, where that scenario of three diverse projects is currently under way, the builder has such a developer: itself. The Corky McMillin Cos., which encompasses land and commercial development, home building (McMillin Homes), real estate sales, and mortgage services, determined that such a mix of product and prices would sell within Liberty Station's 37-acre residential sector.
Never mind that the company had to design each of the three residential types from scratch instead of simply translating plans from up to a dozen active projects in San Diego and other nearby markets. "Liberty Station had very different goals than any other community we've ever developed," says Sandy Perlatti, senior vice president of marketing.
In addition, narrow lots for all three products required floor plans that were also out of McMillin's comfort zone, including optional third-story study/lofts on the 129 Beacon Point detached townhomes that actually extend square footages past those of the 80 single-family homes at Admiralty Row.
Known as a move-up home builder in San Diego (with more affordable product in satellite markets), McMillin Homes sought to provide Liberty Station buyers with a less expensive option; hence, the 140 attached townhome condos at Anchor Cove. "It's always been our desire to provide homes for young families," says Perlatti. "We also want to have as broad a reach as possible in a market, both to meet demand and achieve our desired volume." The company closed more than 1,000 homes in 2002.
Since Beacon Point and Admiralty Row both opened in December 2002, followed by Anchor Cove in February of this year, sales have been brisk. Nearly a third of 349 total units planned for Liberty Station were under construction by mid-May, and all three projects were selling into their third phases in less than six months.
As planned, the waterfront location and mixed-use master plan has attracted young professional couples, with the mix of housing product and prices appealing to a broader range of economic ability than a one-price-fits-all approach. Sales pace at Anchor Cove, the most affordable of the three products, averaged 16 units per month before construction started this past spring.
5) Consolidate Vendors
Lower your costs and boost your perks by relying on just a few vendors.
National purchasing is all the rage among public builders, who have used the strategy to dramatically reduce their hard costs. Last year KB Home, for example, saved an estimated $30 million through national purchasing; D.R. Horton saved $55 million, according to investor presentations it gave last spring.
But you don't have to build 20,000 homes a year to take advantage of the savings and perks provided by streamlining the number of vendors you use. Morrison Homes, an Atlanta-based builder that closed just under 3,200 homes last year, expects it will save $500,000 this year by consolidating purchasing in just five areas: HVAC, plumbing, exterior doors, lighting, and fireplaces.
"We'd been involved in regional opportunities, but we felt the advantages involved in national relationships made sense," says Stewart Cline, Morrison's president and CEO. "We think there's value in reducing the number of manufacturer relationships we had."
If your volume is more in the hundreds, don't fret--there are opportunities available for you, too. "You just have to take the time to pursue them aggressively with manufacturers," says David Patton, vice president of estimating and purchasing at Morrison's Houston division, which closes roughly 300 homes annually. "It's not the [closing volume] that matters. It's just that the value of the program goes up" if you're closing more homes.
That value comes in many forms. Hard costs are often reduced. At Morrison, installing an HVAC system (including materials, labor, and the product itself) runs about $3,500. Purchasing them for the Houston division alone resulted in a $100-per-system rebate from the manufacturer. Buying the same product for Morrison's three Texas markets upped that rebate to $125 per system. Finally, a national contract brought that rebate up to $140.
But that's not all. "We also get all of our [systems for our model homes] free, the systems in our existing models changed over at no cost, and a longer warranty" of five years versus the standard two, according to Patton.
Morrison received similar value-added benefits in lighting. Thanks to a national contract it signed with an Atlanta lighting company, Morrison's Houston division has an exclusive on certain lighting fixture lines in its market. The contract also allowed the builder to upgrade its lighting company-wide at no cost to buyers.
In addition, Morrison went from eight HVAC manufacturers to just two. It reduced its fireplace vendors from a half-dozen to one. It chose one national door system over a patchwork of local vendors. And it expects to slice its 12-strong list in the area of plumbing to two or three key suppliers. "We won't get down to one," Cline says. "We're looking at consolidating toilets, pedestal sinks, and drop-in sinks, but bathtubs and showers are more complicated because of design issues."
As for the vendor consolidation process itself, it can be fairly straightforward. At Morrison taking a national approach took less than a year. "I don't think it's that hard," says Cline. "It just has to be a priority." And the company made it one. Morrison's regional vice presidents of purchasing met as a group last fall and again at the International Builders' Show in Las Vegas, where they heard presentations from manufacturers and made decisions on what to select, remembering service and other considerations. "People like myself in the divisions are in the loop from the start," Patton says. "We know what we're looking for."
Learn more about markets featured in this article: Las Vegas, NV.