11) Customer Expectations
Leave no doubt about what, where, how, and when your home buyers can expect results and answers.
Who says production builders can't learn from their custom counterparts? As the upper end of the housing market continues to tighten, luxury spec builders looking to meet the heightened expectations of potential buyers might want to take a page from some of their peers in the custom realm.
Brad Ausmus, founder/president of Symphony Homes, a custom and semi-custom builder in Colorado Springs, Colo., has spent 25 years honing his client handholding techniques. He relies on a combination of gut instinct and a dedicated process for making sure buyers are comfortable and fully informed through the design/build process. "We have problems when we have surprises," Ausmus says. "Our sales system is designed to eliminate surprises."
Ausmus' approach starts with a multi-page, ultra-detailed list of specifications that eschew open-ended allowances for certain finishes and features. "We'll call out an actual spec for every allowance so the buyer knows what that amount will buy," he says, compared to others who leave allowances to the buyer's imagination. "We want clients to have an exact handle on what they're getting."
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Ausmus is careful to list generic specifications for structural lumber and other commodity items, enabling him to get the best deal among comparable suppliers and brands. He also hedges his risk when listing specific brand and model for products such as appliances or fixtures, adding a disclaimer to find an equal or better spec in case the preferred spec is unavailable. Again, no surprises.
At contract, Ausmus presents the client with a customized version of Carol Smith's renowned Homeowner Manual (available at Builderbooks.com for $44.95 to NAHB members, including companion software); clients can expect regular communication and walkthrough inspections of their home from groundbreaking through warranty service. Buyers even have two days to review the manual and back out of the contract if they want.
During construction, Ausmus follows a schedule of on-site inspections with the client, beginning with when the lot is staked prior to excavation. At rough framing, Ausmus conducts another walkthrough to confirm (and perhaps alter) plumbing, electrical, and mechanical locations, then again after the rough-in of those systems to verify them again. In addition to a final orientation at completion, Ausmus will accommodate ad hoc requests for walkthroughs with a client.
In addition to building about 20 custom homes a year, Ausmus maintains a small inventory of luxury spec homes and a single model home that also help him meet buyers' expectations. "For all the paperwork you give buyers, it's hard to get them to read and understand it all," he says. "I tell them they can expect the same workmanship that's in our model home. If a question comes up, I can refer them there. If there's a similar detail that's less or different in their home, I'm obligated to bring it up to the same standard."
For all his planning and formalities, Ausmus still relies on his gut and experience to gauge a client's needs. "I tell them we're entering a long-term relationship," he says, using an initial sales conversation to solicit signs of whether the relationship will work out. "Sometimes I just know we won't be able to meet their expectations, and I wish them luck finding a builder who can."
12) Joint Ventures
The Brehm Cos. brings building expertise to the table. Hearthstone, the investment management firm headquartered in San Francisco, brings money and research capability. "That combination allowed us to expand," says Horace Hogan II, president and COO of the Carlsbad, Calif.-based Brehm Cos.
Brehm, with more than 35 years of experience in home building in San Diego County, was interested in expanding its operations while remaining privately owned. Hearthstone, formed in 1992 in response to federal banking law changes that restricted banks' real estate investments, manages funds and invests exclusively in residential development throughout the United States for public and private pension plans, university endowments, Fortune 100 companies, and large private trusts. Brehm and Hearthstone have worked together as joint venture partners for nearly 10 years.
Brehm saw opportunity in the Inland Empire, an area east of Los Angeles and Orange County, Calif., and north of San Diego County. An up-and-coming area, it takes only six to nine months to get a project approved in the Inland Empire's Riverside County, as opposed to the three to five years it takes in more heavily developed San Diego County. Riverside, where land prices are lower than in the counties on the coast, is the fastest-growing county in California with some 32,000 starts annually, Hogan says.
Partnering with Hearthstone allowed Brehm to start acquiring the land it needed to be successful in Riverside. Hogan's comfort threshold for Brehm is 1,500 lots in the pipeline, a 30- to 36-month supply. Presently it owns or options a very comfortable 2,600 lots. For a share of the profits, Hearthstone offers reliable and flexible financing (often 100 percent) so the builder can leverage its know-how with little or no cash.
Hogan really likes a number of aspects about partnering with Hearthstone. First, Hearthstone brings insurance to the deal--"really strong policies with reasonable rates," Hogan says. With insurance expensive and tough to obtain, that solves two problems. Second, Hogan values Hearthstone's access to technical expertise--its officers develop pro formas and undertake investment analyses of the project. Third, Hearthstone has a program that allows Brehm to pay subcontractors weekly; regular and reliable payment means Hogan gets the subs he wants--and they stay loyal.
Legally, each project is typically set up as its own limited liability corporation, a structure that makes every deal a stand-alone and limits liability for both companies. And Hearthstone's in-house legal department takes care of moving the projects through to acquisition.
Brehm's projects are a hit in Riverside. Its new communities there offer homes as large as 4,400 square feet with as many as eight bedrooms and sell in the high $300,000 range, a bargain by California standards. With four new communities about to open, the company expects to close on 300 homes in 2003; it projects closing 500 units in 2004 .
13) Internet Applications
Build a strategic intranet.
corporate intranet is now the lifeblood of Royce Builders, a claim few companies--let alone home builders--can make.
All the company's legacy data that was once cumbersome to retrieve, display, and analyze is finally accessible through its new intranet, and Jeremy Liardon, information technology (IT) manager at Houston-based Royce, says the payoff to the business has been substantial.
Now, Royce can slice and dice its data in any way it sees fit. Some examples: The intranet ranks the company's construction managers based on production speed and volume. Supers can benchmark their progress and calculate what it will take for them to receive bonus money.
The system also runs a detailed sales analysis based on gross sales, "bust outs," which are customers who withdraw from a contract, as well as closings, transfers, and net sales. Managers can sort the data by subdivision and overall market.
"Most intranets are for employee relations," says Liardon. "Ours is a business application platform. I can't think of a person in our company who won't be using the intranet."
Liardon is especially proud that all the applications development work at Royce is done in-house by his nine-person staff, three of whom are programmers. The staff recently rolled out Sales Link, an automated sales system, and development started last month on Construction Link, the company's construction management system for scheduling, cost management, and automated payments. Both applications will run over the intranet.
Liardon says this approach benefits the company in at least four ways:
* Reduced administrative costs. The company now maintains each piece of information in one place instead of having data scattered across people's hard drives in a series of Excel spreadsheets.
* Better decision-making. Supers, salespeople, and administrative people have more confidence in the data because it's real-time and presented in a format that can be customized to suit the company's needs.
* Improved efficiencies. Easy access to data reduces the need to issue as many reports. Now, the data gets updated daily, and people can print out reports as needed.
* Flexibility. Developing information technology systems in-house lets Royce adjust to management directives much faster than if development work required teams of consultants and an outsourced staff.
Liardon set out to move Royce to the Web from the time he came on board as IT manager in 1999. One of the first things he noticed was that the company was using an antiquated mainframe application on an IBM AS/400 machine. Using Data-Mirror's Transformation Server, Royce converted and sent the mainframe data to servers based on a Microsoft SQL server database that can more easily handle running traffic over the Web. Liardon says that Royce will finally be off the AS/400 system in about three years.
"I don't want to interrupt our daily activities," says Liardon. "Our long-term goal is to remove ourselves from the AS/400 ... but meanwhile, our programmers can work on the SQL server and not have to know the old green-screen application. The system just pulls the data out of AS/400 and into the SQL server and feeds it to the intranet."
Although most builders won't go out and recruit a nine-person IT staff, the idea of building an intranet that goes beyond internal jobs postings and benefits information and runs strategic business applications makes sense for growing builders to consider.
14) Cost Management
Know your true costs by using precise pricing.
For many builders, running variances is a bad habit to break. Not for the Snyder Cos. in Essex Junction, Vt., which has found a way to manage costs far more effectively through per-unit pricing on all components of its homes. The result is quick, precise estimates with little variability, says Mark Lords, owner and principal of the Snyder Cos. "If we have a 1 percent variance, something is really wrong."
The company, which had 60 closings and $18 million in revenue last year, has been using the approach "forever," Lords says. It works like this: Instead of asking subcontractors for a general bid for a job, the Snyder Cos. requests a per-square-foot price (or other measure, where appropriate) for the job. Material costs are estimated separately from labor costs, which are calculated on a per-unit basis (square foot, cubic foot, etc.). Framing, for example, breaks down into a lumber takeoff and then a per-square-foot price on the framing process itself as opposed to a turn-key price for the whole job. Where homes vary, costs for features such as painting a vaulted ceiling are treated as an "add-on" to the negotiated per-square-foot price. "That way, we can meet in the middle," says Lords. "It brings flexibility to the process."
It also brings transparency. "Everybody knows what they're dealing with," says Leo Dusharm Jr. of Leo's Carpentry, a Burlington, Vt., company that does trim carpentry for the Snyder Cos. "It's just common knowledge that this is what [the price] is."
Still, it's a different way of bidding a job for many subs, who are often wary at first. "It's a little harder to get the subcontractors to go along with it," admits Lords, who wins them over with a trial period. "I say, 'Let's do a couple of houses.' Then they become believers ... . If they trust you, they don't have to estimate every house they do. They get the job, and they know what they're going to be paid." If subs' costs change because of insurance or other issues, they can ask for adjustments from the builder's purchasing committee.
Such streamlined estimating and purchasing doesn't happen in an instant. "There's no question about it," says Lords. "It takes time to get there." Snyder Cos. maintains detailed specs for its base home, so it knows exactly what materials are needed. Using software the company created itself, it modifies the specs as needed with "packages" that account for changes to the base house plan. Adding a window to the plan, for example, requires less siding, paint, drywall, and framing lumber, but involves an additional window--calculations the builder can do quickly, thanks to its per-square-foot philosophy.
Lords wouldn't estimate costs any other way. "There's less room for error, it's easier to figure, and it's faster," he says.
Leave your options open to optimize sales opportunities within multiple phases of a community.
Albuquerque, N.M., builder Michael Sivage has a simple philosophy when developing and selling a new community. "You never want to miss a sale because the phasing is too restrictive," says the CEO of Sivage-Thomas Homes. "The key is to leave yourself plenty of options to make adjustments."
Sivage will oversee the company's production of about 1,500 new homes in Albuquerque, Phoenix, and Tucson, Ariz., this year, including a careful manipulation of how and when to develop raw land into lots and lots into homes. For a 1,000-lot parcel, Sivage may turn 200 lots at a time, giving him a 12- to 18-month supply from which he'll release perhaps 50 per phase.
Ideally, Sivage and his development team work to eliminate "dog" lots from the master plan before turning any dirt. Instead, they identify premium parcels that will be held out or priced higher per phase to avoid cherry-picking by home buyers. "If worst comes to worst, we can reduce the premium [for those lots]," he says, while still profiting against their development costs--a more lucrative alternative to discounting dog lots below cost. In its move-up communities, the company has been known to reap an extra $100,000 or more for a premium parcel.
Though the absorption rate of a given phase primarily determines when to release the next set of lots, Sivage will open the next parcel to accommodate a popular model that's sold out in the previous phase. He'll also allow buyers to reserve or contract for lots in unreleased sections--with the understanding that the price of their homes will be higher and the wait much longer.
As a trade-off, such buyers benefit from homes that have been refined and improved based on warranty calls and buyer feedback in earlier phases. "We're in a state of continuous improvement," says Sivage.
That approach also helps Sivage properly price lots and homes, as well as adjust to unforeseen changes in hard costs during construction. The company often underprices homes at a project's grand opening, then slowly escalates prices as demand (and improvements and/or hard cost increases) warrants. "It creates a sense of urgency that motivates buyers to purchase early in a phase," Sivage says, and mitigates having to lower prices to stimulate traffic and sales.
Once in production, Sivage-Thomas Homes works to maintain an even flow of starts and completions, regardless of sales. "We try to build out a phase before going to the next one," says Sivage. Buyers appreciate a finished neighborhood (even if some homes remain unsold), he says, while subs like the steady work. "We may not sell the same number of homes per month, but we want to start the same number of homes." Ideally, the company maintains no more than 15 percent standing inventory.
For all his contingencies and flexibility in phasing, Sivage knows most of his planning will never become reality. "Our approach is to maintain as many backup plans as we can," he says.
Learn more about markets featured in this article: Los Angeles, CA.