Posted on: July 01, 2002

House Talk

Builders debate the best way to grow companies, manage divisions, and price homes.

By Alison Rice

By Alison Rice. Ambitious growth plans. Pricing tug-of-wars. The challenges of managing divisions (and the essentially local business of home building) from afar. The country's top builders discussed these issues and more at the annual BUILDER 100 conference in Scottsdale, Ariz., in May. Here are the four major issues affecting all builders that emerged from this year's executive networking session:

1. Growing up--and out

For builders large and small, growth--and the forces of consolidation--qualified as a top priority. "There are a number of lurking issues that aren't financially critical now" but will be soon, suggests Anne Mariucci, former president of Del Webb and now Pulte Homes' senior vice president of strategic planning, who ran through the pressures builders face: land, entitlement, labor, capital, insurance due to mold and construction defect concerns, and, for family-owned businesses, succession planning.

Such forces favor bigger builders, of course, but achieving that growth raises serious questions. Should a company concentrate on increasing its size organically? Does a startup in a new market make sense? Or is it time for a strategic acquisition of a smaller company?

Acquisitions are popular right now, but they present their own challenges, as Mariucci and others detail. "You've got to ask yourself, 'Why is this opportunity available?'" says Rick Beckwitt of D.R. Horton. "Is there something wrong with it?"

Beyond that, company cultures must be compatible. So do monetary expectations. "Where things break down isn't in people issues, but in valuation," says Mariucci. And, financial issues such as accounting for intangibles require close scrutiny before the deal is decided. "Acquiring a business that gives you a fast pop in growth versus absorbing that goodwill" is a tough call, Bruce Karatz, CEO of KB Home says. "You have to look at it with some level of goodwill amortization. At pricing levels today, it's difficult to say all acquisitions are accretive."

Such concerns haven't kept builders from making big plans: D.R. Horton wants to have 5 percent of the housing market by 2004, the same year Pulte projects closing 40,000 units.

2. Manage from afar

With such size comes new issues, such as managing far-flung divisions most effectively. For builders, it's a balancing act, as they balance the need for local decision-making against the pressures for maximum efficiencies and profitability.

At Ryland, it splits the difference, requiring divisions to follow the same financial model, providing a certain return on investment, explains Ryland's CEO Chad Dreier, but leaving decisions about architecture, marketing, and floor plans in the division's hands.

3. How to buy

A similar approach applies in purchasing, even with large builders who benefit from the cost reductions of national contracts. "You get more buying power with national contracts, but there may be local service issues or market perceptions," says Bob Short, president of The Genesee Co., a division of The Fortress Group. So while builders have national contracts, they may not require their divisions to use them.

Still, national purchasing seriously reduces hard costs. D.R. Horton estimates it can save $2,000 per house for its new acquisitions, just as a starting point. And after the Del Webb merger, Pulte found $25 million in annual purchasing savings in three markets alone.

4. The price is right

But it's pricing that may generate the most headaches, as builders tussle with salespeople about how to achieve maximum sales velocity at the best possible sales prices. Some negotiate with buyers. Others, such as Forecast Homes, raise prices frequently, but incrementally. Still others adjust pricing at selected spots in the cycle.

And some just play hardball. "You must have the guts to open at the right price," Jeffery Mezger of KB Home told builders at a session on pricing. "Builders brag that they got to raise prices $20,000, when they should be crying that they left $20,000 times the number of homes sold on the table."