On Your Lot

IN AN INDUSTRY CONSTANTLY STRIVING TO IMPROVE PRODUCTION efficiencies, the notion of a high-volume builder constructing homes one at a time on customers' own lots seems antithetical. However, a variety of forces—most notably, the need to find new ways to expand—has production builders looking at the potential of the “bring-your-own-lot” business either through start-up programs or acquisitions. While five years ago the concept was viewed as a specialization tactic better left to custom and niche builders, several of today's biggest builders now offer a build-on-your-lot (BOYL) program to customers, and others are beginning to consider it—or creative variations of it.

“This is a big deal,” says Ralph Spargo. As vice president and general manager of Standard Pacific's Gallery Communities, Spargo coordinates the resources within divisions to expand the company's nontraditional products. “It's really outside the box for us, but if land is 50 percent of our costs [in a community]—and we can eliminate that—it gives us a better internal rate of return. It's about carrying costs, cash flow, and rate of return more than a bottom line savings.”

Standard Pacific is currently negotiating a joint project with Newport Beach, Calif.-based Irvine Co. Planning for semicustom homes that start with a price tag over $3 million, Spargo says he sees opportunities in creating a unique process with specific parameters. As a result, the company is exploring a start-up BOYL program. Instead of carrying the property, the company is exploring a system where lots are signed over directly to the buyer at the commitment stage. At that point, as the “owner” of the lot, the buyer has an opportunity to choose from a variety of preapproved plans from Standard Pacific, or build a custom home—with someone else. “The key is that we would let a buyer buy our product, and we would build it for them,” says Spargo. “We don't build their product.”

For Standard Pacific, the benefit is clear: eliminating land costs. For a buyer, the benefit is speed: By sticking to a predetermined mix of floor plans and options, all jurisdictional issues are already addressed. “If they would decide to go with a custom plan, it would be another 18 months for approvals,” says Spargo.

Accelerating Opportunities For several years, Hovnanian Enterprises dabbled in the “on-your-lot” business by seizing opportunities as they were presented. But in 2003, the company expanded its operations with the acquisition of Summit Homes, a BOYL home builder with more than 50 years of experience throughout Ohio, Western Pennsylvania, and West Virginia. Headquartered in Canton, Ohio, Summit designs, constructs, markets, and sells residential homes for first-time and move-up home buyers who already own a home site. In the year prior to the acquisition, Summit closed more than 500 homes with an average sales price of $128,000.

“The acquisition of Summit Homes provides a successful and profitable platform from which we can grow our home building operations and target a wider universe of home buyers within our existing markets,” said Ara K. Hovnanian, president and CEO of Hovnanian Enterprises. “This acquisition is an excellent fit with our strategy of diversifying further into wider segments of the housing market.”

The acquisition, which also marked Hovnanian's entrance into Ohio, is consistent with the builder's record of integrating smaller building companies into its culture. “We will gain from Summit's production knowledge and capabilities, and we will learn from their unique operating model,” says Hovnanian. “We also expect to apply our benefits of scale and capital availability toward further growth of the Summit operation.”

Centex chose the acquisition route as well, buying Uniontown, Ohio-based Wayne Homes. By bringing Wayne Homes into the Centex fold in 1998, the company instantly gained 25 years of experience in BOYL business. At the time, Wayne was producing about 500 homes a year with an average price of $100,000. Today, Wayne reaches 12 states with its operations and is expanding on its own—into markets where traditional Centex products are not being offered. Wayne's entrance into the slumping Milwaukee, Wisc., market late last year was unwelcome news to the area's 300 or so mostly small-scale contractors. But for Wayne, it seemed like smart expansion given the region's penchant for buying land and then shopping for a builder. Even entry-level buyers expect a degree of customization in this market. As a result, Wayne has had an opportunity to succeed where a traditional production arm of Centex may not. And through it all, the company promotes value with Wayne Homes priced from $100,000 to $290,000.

Discerning The Differences With benefits like these, it only makes sense to consider a way to let customers become more involved on the property side of the building process. But, like any specialized business, BOYL sales have their nuances. For builders considering expanding into these uncharted waters it's imperative to understand the unique needs of BOYL projects. By developing a successful start-up operation that's richly supported by marketing efforts and a dedicated staff, David Weekley Homes has successfully navigated a course of expansion.

In the late 1990s, David Weekley's organization developed an appreciation for the business model of on-your-lot builder Wayne Homes prior to its acquisition by Centex. After identifying it as a viable business opportunity, the company then decided to launch its own program. This year, David Weekley will complete about 125 homes in Houston alone (up from 100 in 2003) and now operates BOYL business in Austin, Dallas, Atlanta, and Florida.

While driving along the highways in any major Texas housing market, you're sure to see the signs: “David Weekley Homes Will Build On Your Lot.” The newspapers boast ads too. By launching a dedicated marketing effort—supported by customer education programs—the company has been able to reach a whole new group of buyers. The focus is part of the company's strategy to grow its niche business of building on lots supplied by a home buyer. “There is a huge opportunity and upside for BOYL programs in the [Dallas and Ft. Worth] Metroplex,” says Russell Rice, Dallas/Ft. Worth area president for David Weekley Homes.

“Of course, there is certainly a desire to increase the amount of BOYL business we do,” says Rice, who speculates that BOYL revenues constitute less than 10 percent of the business within these markets. “But it's a complicated business. We have learned that you need to be disciplined as you grow.”

And after five years in this specialized arena, Rice cites geography as the most difficult hurdle to overcome. “You have to be very disciplined in identifying the distance you are willing to go,” says Rice, who notes that efficiencies are greatly decreased if contracts are not established within a logical string. “There are only so many hours of windshield time you can have and still be productive,” says Rice.

That's one of the reasons that the company offers BOYL only in its markets that include a New Home Center. And David Weekley will only accept a contract that falls within a 40-mile radius of the center. Another issue becomes accessibility to an experienced and qualified trade base in more remote locations. “Each of these BOYL jobs requires the same steps you go through when opening a neighborhood as far as dealing with different municipalities for permits, processes, approvals, soil testing, etc.,” says Rice, “except that you are doing it for one house at a time.”

Due to logistics and intensive project management, the BOYL business at Weekley is run as a separate operation. “It takes a different type of builder,” says Rice. “He has to be very independent and much more knowledgeable and he has to, more or less, manage himself.” A typical BOYL builder is tenured with the company and has been hand-picked for the job. And the opportunity to become part of this program is seen as a “badge of recognition,” according to Rice. In return, the company is able to enjoy higher profit margins per house than those in a master planned community, “but you have to bear in mind, there is no lot,” says Rice.

With thoughtful planning, the company has developed programs to attract, educate, and assist home buyers. Each region offers BOYL seminars that address home-site considerations: choosing the right builder; choosing a floor plan; and explaining the building process and timeline. The Weekley Web site clearly identifies information on BOYL projects for customers.

While the company offers buyers its standard plans, it supports those with a BOYL plan mix—also accessible via the Web site. Included are options within Weekley's more affordable Imagination Homes line and the higher-end Park Cities Custom Collection. Still, while there is volume, the company realizes that not all BOYL customers are going to be David Weekley customers. “Some are going to want a more affordable product and some are looking for a custom home,” says Rice. “We aren't going to do this at all price points.”

NOT FOR EVERYONE Production builders pursuing a build-on-your-lot business strategy remain in the minority.

Learn more about markets featured in this article: Dallas, TX.