Between 2005 and 2010, new-home sales in Birmingham, Ala., decreased 75 percent. Dwight Sandlin and Jonathan Belcher, owners of Signature Homes paid attention, made the right decisions early, and protected the company’s equity, borrowing capability, and cash. Signature not only survived the housing recession but exploited it, taking advantage of a once-in-a-lifetime opportunity.
In 2005, Signature controlled 1.3 percent of Birmingham’s new-home market and 12 percent of its primary market in Hoover. Today, Signature commands 13.4 percent and 64 percent of those markets respectively. In July, Signature had a record month with 72 contracts. This year, its nine communities will generate 375 closings for an average of 3.5 per community per month.
Before the market showed signs of the recession, Sandlin and Belcher began to raise private equity capital, which they used for land acquisition and development (A&D) to protect the company’s equity. To keep things simple, they raised the capital locally and have been able to roll over the equity money and expand the private equity base.
In 2006, Signature’s townhouse project experienced rising cancellations. As the market turned, Signature was long on land it had bought at or near peak prices and was preparing to open four new communities. In the end, that proved to be a benefit since the company designed new product to match the market and did not have to discount sales.
Sandlin and Belcher decided they needed to liquidate their high-priced land to generate cash flow and keep the organization together. They also needed three to five sales per month at each community. They opted for volume over gross and net profits to build out of the high land cost. Armed with market research and knowledge of the competition, they offered a unique home priced at or below the competition. In 2008, Signature had its highest total revenue with the lowest gross margin in the history of the company.
Sandlin and Belcher also met with their bankers to discuss how they were going to work through the land and speculative inventory. They did not ask for any negotiations, deals, or write-downs. They put together a realistic business plan showing the good, the bad, and the ugly. Quarterly, they gave the banks updates and audited financial statements. They continued to pay off the construction and A&D loans.
As the salespeople began to face objections, Sandlin had them develop scripts for each one. They role-played so the scripts became second nature. Instead of stressing features and benefits, they appealed to buyers’ emotions. Signature also revamped its marketing efforts, hosting parties and events in its models. Responding to customer feedback, it replaced renderings on its website with real photographs. Designers stripped down plans and developed smaller homes. Referral sales increased from 30 percent two and half years ago to over 50 percent today.
In 2009, Signature began to offer customization, using established systems of material take-offs, estimates, lot-specific plans, and purchase orders. Sandlin says, “The customers came up with lots of great ideas, which we incorporated into the current plans and standard structural options. Now we are doing much less customization because we’ve gotten the plans right.”
As with all builders, Signature had to make tough personnel decisions. In 2008, it laid off half the production staff, which had become overstaffed during the boom. The company kept the management team together, and today it is expanding customer care and the CAD departments.
Signature has sold through its low gross margin projects, which was essential to maintain velocity, liquidate expensive land, and reduce leverage. It’s now able to buy land from banks at distressed prices while several new communities are starting to generate superior gross margins. Signature Homes is now in good position to take advantage as the housing market recovers.
Learn more about markets featured in this article: Birmingham, AL.
