Business gurus urge builders to exploit uncertain economic times with niche targeting and service diversification. By Matthew Power

John Schleimer, an industry consultant with Market Perspectives in Roseville, Calif., and former president of the NAHB's Institute of Residential Marketing, has seen a lot of builders come and go. When the economy dips, he says, the ones who come out stronger have used their downtime wisely.

"Often, builders get very complacent about their product and their product design," he says. "They tend to lump all clients into one big group. Most builders use outdated plans that work for a married couple with kids, but in reality, about 75 percent of new-home buyers are not a married couple with kids. This is a good time to add diversity in product and floor plan mix.

"A cooling economy offers a great time to study and carry out design changes," Schleimer insists. "It can be as simple as getting into the truck, turning the key to the on position, and visiting projects that are not like what you're building."

Indeed, says Tom Weston, president of The Weston Group, a Los Angeles-based consulting firm, "builders can learn globally, but they need to strategize locally.

"It's easy to get put off by unemployment numbers and other statistics," Weston says, "but you can overanalyze what's happening in the big picture," he explains. "This is the time to re-examine your business plan. If you don't have one, it's critical to adopt one so you can measure and see for yourself what your results have been."

Weston notes that builders often tend to react to slowdowns by ditching their promotions and advertising. Instead, he says, "they should think about re-innovating their product lines."

Reconsider remodeling

Weston also strongly encourages small builders to diversify into remodeling. "New-home builders have an inherent leg up over a straight remodeling company. Often, they already have a model home that can serve as a remodeling showroom."

Weston notes that many home builders shy away from remodeling because it doesn't fit the production model. "It's a different business," he says, "but if the builder sees himself as the general contractor, it can do very well. And in five or six years the people buying new homes will be ready for remodeling, so it builds affinity with buyers.

"Builders have a lot of fear that if they offer remodeling as an option, their clients will stay in their homes forever," Weston continues. "The converse is often true. You may talk about a $100,000 renovation, only to convince them that instead of remodeling they should buy a brand new home. There's good integration between the two.

"The other thing to look at is providing hassle-free ownership," he adds. "Preventive maintenance agreements can be extremely lucrative, at the same time improving people's satisfaction with their living space."

The right product?

The most likely casualties of this type of economic slowdown, according to Schleimer: homes purchased with discretionary spending. "Anything out here above $300,000 has slowed down dramatically. By discretionary we're talking about stock market money--not drawn from a salary.

"Sales of homes that don't require discretionary money will remain more stable," Schleimer adds. "And on a regional basis, if job growth is stable in the area, that marketplace is holding up. That's because in a slowdown, a home is the only place you can see return on your investment."

"The point is to create a replicable line of business that stays solid year after year," notes Weston. "No offense to smaller builders, but if you're doing 25 to 50 homes a year, you're already spot building--not working with a manufacturing mentality like a big builder. It's not that difficult to rethink your product line."

[Photo: Daisuke Morita/Photodisc]

Belt-Tightening Rules

Industry consultant John Schleimer identifies three essential first steps to take to protect your assets.

  • Get rid of inventory. "Nothing can kill you faster than unsold inventory, especially at the high end of the market."
  • Go back to the drawing board. "Look for unserved or underserved markets in your region."
  • Don't overlook referral or repeat buyers. "This loyalty can result in 10 percent to 15 percent more sales in a down market."