Two home building startups with very different business models are attempting to pick up some of the pieces left from California’s housing implosion.
Trumark Homes and RSI Development might be targeting separate ends of the customer and price spectrum. But their principals share a common belief that future success in home building will likely follow new rules in construction and financing. They also believe that starting up now, despite a soft economy, could give their companies a competitive advantage if, as expected, more new builders jump into the fray.
Irvine, Calif.-based RSI is the more unusual of the two companies. For one thing, it’s an offshoot of RSI Home Products, a long-time manufacturer of kitchen, bath, and home organizing products, whose primary customers are the big-box retailers Home Depot and Lowe’s. RSI’s founder Ronald Simon—who last year sold half of RSI Home Products to Canada-based Onex Corp. for $318 million, and has committed $100 million to launch the home building venture—is vertically integrating manufacturing and supply-chain disciplines into new-home construction, something that other production builders have tried with spotty results.
RSI Development’s CEO, Robert Shiota, also brings 30 years of conventional home building experience, which include stints as a vice president with Standard Pacific Homes, president of Richmond American’s Southern California division, and president of Artisan Communities.
“This is a blending of two cultures,” explains Steve Cauffman, RSI Development’s vice president of sales and marketing, about the company’s “precision-built construction system.” “What RSI is bringing to the table is more pre-engineering and more pre-thought,” says Cauffman. The company has been working for a year on its prototypes at a test facility in Mira Loma, Calif. Cauffman adds that some of RSI Home Products’ plants could be converted to produce trusses and wall panels, and some of its trades could be on RSI’s payroll.
Its manufacturing pedigree will also serve RSI’s commitment to building efficiently by reducing material waste and shortening cycle times. Using its construction methods, RSI needed only 15 days to build its first two houses from their foundations. The homes—at 1,621 square feet and 1,968 square feet—were sold to the city of Santa Ana, Calif., for $85,000 and $95,000, respectively.
The city had donated the land (which Cauffman says had been unused for a decade) and waived its impact fees, according to the Orange County Register. As it moves forward, RSI is looking to cultivate other private-public partnerships with cities and government agencies through its RSI Housing Partners distribution channel. To that end, the builder recently held a reception for mayors in Orange County, Calif., according to Cauffman.
Another unique aspect of RSI’s marketing is its emphasis on promoting set construction prices for finished homes, which Cauffman says helps create “transparency,” and allows home buyers to see more clearly how much extra they would be paying for land and impact fees. RSI is catering to entry-level buyers, and that’s how it is positioning itself through another distribution channel, RSI Communities, which will secure lots from landowners and master-planned communities that are seeking affordable options for their subdivisions.
Cauffman wouldn’t comment on how many houses RSI Development might build or close in its first year, except to note that RSI will eventually be active in other western states. He concedes that RSI, which currently employs about 20 people, “will take some time” to work through its “intensive system.” But Cauffman also says that RSI has already developed “a fairly good range of products” (it’s close to finalizing a deal where it would build Spanish-style homes). “We see this as the right time to get our feet on the ground.”
Finding the Right Land is Key
Trumark Homes in Danville, Calif., a new business for the Irvine-based land developer Trumark Communities, is already hitting the ground running. In August, it will start building models at Wyeth Cove, a community on 4.38 acres in Upland, Calif., that will have 39 single-family courtyard homes, ranging from 1,717 square feet to 2,401 square feet and priced in the $700s. Trumark plans to have homes ready to sell there by January. (Trumark’s strategy is to keep its prices below its markets’ conforming loan limit for FHA mortgages.)
Initially, Trumark Homes will target only those markets in Northern and Southern California that don’t have a lot of new inventory and have older existing housing stock. In Upland, for example, 90% of the homes were built before 1989, and Wyeth Cove is the only new-home development within about 20 miles.
Michael Maples, Trumark Homes’ principal and co-founder of Trumark Communities, says that Trumark Homes actually launched in May 2008, but spent the better part of the following year looking for sites that matched these criteria, which were set by its equity partner. Maples says his company tracked more than 200 deals during this period, and Wyeth Cove “had been in an out of escrow” with two other builders before Trumark secured it.
“Buying land is always a stretch, but it’s also the most critical part of any deal,” says Maples, who nonetheless believes more land that “on the surface fits our needs” will become available as the market continues to sort itself out.
Maples and his partner, Gregg Nelson, have been thinking about starting a home building operation since the last economic downturn in the late 1980s. He says that when business conditions are fragile, startups are easier to get going because “you can get good leadership” by hiring employees who have been laid off by other builders; “you get more loyalty from subcontractors” that during better times go where they can find the best prices; and “you can buy distressed land that you can develop at higher margins.”
When he spoke with BUILDER on Wednesday, Maples said his company has five other deals in northern and southern California in escrow, which are scheduled to be rolled out over the next three years.
Maples projects that his company will close 60 homes next year, between 150 and 200 homes in 2011, and between 300 and 400 homes in 2012. While he is vague about what will differentiate Trumark Homes’ products from those of his competitors, Maples points to the company’s tagline “Creating New Traditions” as defining the kinds of communities it hopes to develop. (One of Trumark Homes’ executives is Marty McComas, previously a senior vice president of operations for Davidson Homes, and an official with John Laing Homes. Maples observes that Laing did a good job among local home builders in developing houses for different buyer groups.) Maples also sees potential synergies with Trumark Communities’ commercial division, which has expertise in building mixed-use projects.
He is aware, though, that Trumark’s window of opportunity might be narrow, as other potential startups and their financiers lurk in the background, waiting for the right moment to get into the market. “There’s going to be a new generation of home builders,” Maples says, “because a lot of the regional builders have failed.”
John Caulfield is senior editor at BUILDER magazine.