At first blush, the idea of a production builder having a build-on-your-lot division might seem like a contradiction in terms. Profits are typically made by wringing additional costs out of the building process, keeping changes to a minimum, clustering jobsites, and taking advantage of economies of scale. How can a builder make money when every new house has the same infrastructure issues as a whole new subdivision?
Those were the kinds of questions that management at David Weekley Homes asked before it started its build-on-your-lot program about five years ago. When customers asked if the builder would build on their lot, Weekley turned them down. But repeated requests and a market study of other successful build-on-your-lot builders convinced them to give it a try. David Weekley spent time with executives from Ohio-based Wayne Homes, owned by Centex Homes, and also studied Texas-based Tilson Homes, another full-time build-on-your-lot builder.
There were plenty of obstacles and challenges to work out before the division started making money.
"We sort of assumed a build-on-your-lot buyer would be thrilled to buy a David Weekley home off the shelf," says Houston area president Rick Moore. "Au contraire. They do more upgrades and changes than anyone else. They've owned their lot for three years in general and looked at all the builders. They know what they want and they're going to get it."
The buyers can choose from about 150 plans. The process typically starts with a discussion of the lot size. In the Houston market, the company has two primary areas in which it offers build-on-your-lot homes. The first is an in-town, inner loop market in which buyers are purchasing small frame houses on 60 x 110-foot lots inside the Houston beltway, tearing down the houses, and paying David Weekley Homes to build a new one. The other market is customers with acreage and large lots. Those buyers typically buy 3,500- to 4,500-square-foot, Texas-style houses with big wrap-around porches.
The one thing the company won't do is build a customer's plan. They've priced them out before and never had a customer go forward. Plus, it's cost-prohibitive to try to build a plan that Weekley homes is not familiar with.
No Hurry Here
One of the toughest parts of the job, company president David Weekley says, is convincing the buyers to finally build the house. In a subdivision, the motivation often is the risk of losing the lot and the price. These buyers are in no hurry.
"They don't have a need," Weekley says. "It's their dream home."
To entice buyers to move forward, the division uses classic retail strategies, offering incentive upgrade packages or a contribution to the closing costs through the end of the month.
"We're still not successful all the time," Moore says, "but that's where we've ended up. They have their lot and they're not price sensitive. It's pretty hard to come up with a legitimate reason to do it today."
It's also hard to explain why the house doesn't wind up being cheaper than if they'd bought in a subdivision with the land included. One reason for the increased cost is the need for extra superintendents. In a typical subdivision, a David Weekly superintendent carries 12 houses, Moore says. Build-on-your-lot superintendents carry four or five because of the distance between them. Plus, there's a huge up-front investment in time. A new start takes about 90 days before building can begin.
"Everyone of these is like starting a new community because the lots can be anywhere," Moore says. "It's the same legwork with regard to permits. We do soil reports, engineering. It's almost custom building."
That situation led to the realization that to be successful, the division needed its own identity and team. After two to three years of struggling to make the process fit within its existing processes, Weekley Homes built a separate sales center on a major freeway. The company set up a dedicated staff, created a separate marketing budget, and offered a referral fee for sales associates who sent business to the build-on-your-lot division. It also identified a different group of trade contractors and suppliers who were accustomed to handling smaller volumes.
"You need different skills to sell it and build it," Weekley says. "We tried it out of existing sales centers and it didn't work. They're used to selling a certain series of homes. Build-on-your-lot people want to look at any home you build. Then there's the whole issue of trying to quote an accurate cost when it's not in their community. With this, you need to do a site inspection. Sometimes we drill water wells, sometimes we do septic. Sometimes they want barns or four-car garages. It's a different business."
They also recognized that the model would only work in markets in which the company has significant name recognition. Without the reputation to drive the volume, it couldn't turn a profit.
It worked. Today, the Houston build-on-your-lot division is doing 100 houses a year, with a goal of doubling that number within three years. That's in addition to the 800 production homes a year the company builds in the Houston market. The company has expanded the program to Dallas and Austin.
For all the internal and external challenges, Moore says, it's been a successful venture. The gross profits average 40 percent higher than production building and the division doesn't take business away from the main product line.
As it's turning out, finding a production builder succeeding in the build-on-your-lot business may not be such a contraction in terms after all. "It seems to be working well," says Moore.
Learn more about markets featured in this article: Houston, TX.