The Official Online Weekly Newspaper of NAHB
As home building begins to recover from the worst downturn in its history, the market will provide many opportunities for those who position their companies to take advantage of changing market realities.
Builders poised to succeed should consider adopting the following business practices:
Accept and Adhere to New Lending Requirements
In the foreseeable future, builders will be forced to operate with less land and fewer spec homes and models.
Under these conditions, purchasing lots in favorable takedown schedules will be standard operating practice. While projects will continue to operate with fewer models, they should be carefully determined based on expected sales velocity.
Banks will expect a higher level of assurance — such as an audit, review or compilation financial statement — from an outside CPA firm to represent the company’s financial position. Internally prepared financial information may no longer be acceptable.
In addition, banks will expect real-time access to current internal financial information. Software systems must be capable of providing this data to external users.
Company and owners’ financial statements, tax returns and personal financial statements must be prepared, filed and available in a timely matter. The days of providing information on the last extension date will no longer be allowed.
Banks also will establish and closely monitor covenants — such as debt to equity ratios, distributions and owners’ compensation. Expect these covenants to be reviewed periodically throughout the year — not just at year’s end.
Maintain a Strong Website Presence
Builders can expect to spend more of their advertising and marketing budget on Internet tools and marketing, rather than on print and other traditional media, as more home buyers rely on the Web for their home buying information, at least initially.
Builders who do not have current information about their projects and models available on their website — such as specs available, house and community amenities, schools, nearby shopping and transportation — will quickly be eliminated from the competition as buyers plan trips to projects based on information gathered through the Internet and builders’ websites, rather than spend their precious time driving to communities for initial details.
Builders will need to evaluate social networking tools, such as Twitter, Facebook and YouTube, to meet the rapidly changing needs of their potential buyers. A builder’s ability to quickly and effectively communicate with their prospects will be highly important.
Be Able and Available to Purchase ‘Revalued Lots’
Many lots that have been foreclosed or re-priced based on current market values will become available in the next couple of years. Builders must be flexible to acquire these lots in order to regain some much-needed gross margin because of their lower costs.
Builders may also have fewer lots, with many builders having their lots scattered among multiple projects. Under these new conditions, they will be facing several operating challenges.
Continue to Manage Overhead and Fixed Costs Carefully
Builders have been forced to make painful cuts in operating costs and personnel in order to survive the recent turmoil. That has led to more personnel cross training so that fewer people today can perform more multiple tasks and activities. This lesson learned must continue.
As the market recovers, technology will continue to provide builders with opportunities to improve their operating efficiencies. Builders will have to implement new systems and processes that can take advantage of the new market realities and accommodate buyers who expect immediate access to information.
Re-Engineer All Plans and Models to Achieve Cost Savings
The early theme of the coming decade is to offer smaller floor plans to minimize builder costs. However, buyers also will be expecting nice features at the new value-driven cost.
To accomplish this, builders must review all models and plans and remove all unneeded costs that buyers are either unwilling or unable to pay for in the sales price of the house. Models and plans that do not appeal to a majority of prospective buyers should not be created or built.
Builders will also have to monitor their model home’s decorations. The days of lavish furnishings that often exceed the household budget are over. Builders must now focus on carefully designed features and amenities that are within budget.
Steve Hays is the partner-in-charge of the Home Builders Service Group of RubinBrown LLP, certified public accountants with offices in Denver, St. Louis and Overland Park, Kan. RubinBrown provides accounting, tax and business management consulting services to more than 25 groups, primarily in the Midwest. For more information, visit www.rubinbrown.com; or e-mail Hays, or call him at 314-290-3336.
Three New Biztools Business Guides Available Free to Members
Three new Biztools builder business guides ― created to help NAHB members manage their businesses more effectively and increase their profits — are now available free to members through the NAHB Web site.
The guides offer members tips on technology, business planning, how to ensure the financial health of their businesses and more.
Produced by NAHB's Business Management and Information Technology Committee and found in the business management resources section of the NAHB Web site, the new 2010 Biztools builder business guides include:
- “Business Management for Home Builders: Poising for Recovery as the Market Turns”
- “Financial Management for Home Builders: Measuring Key Metrics to Plan Your Path”
- “Information Technology for Home Builders: Using Technology to Better Market Your Business”
All three concise guides ― which include lists of other valuable NAHB Biztools resources ― are written by experts in the field and can be downloaded by members for free at www.nahb.org/bbg.
Free Earlier Edition Biztools Business Guides Also Available
The 2006, 2007, 2008 and 2009 Biztools builder business guides are all available free to NAHB members and can be downloaded from the NAHB Web site in a PDF format only.
To view or download these guides, click here.
The “Cost of Doing Business Study, 2010 Edition,” available through NAHB BuilderBooks, enables home builders to compare their business operations with like-sized builders across the country so they can fine-tune their businesses and boost profits.
The study analyzes several operational business categories ― including volume, operation type and land vs. no land costs ― and enables builders to identify their strengths and weaknesses, increase efficiency, set realistic budget targets and improve business practices.
The categories have been analyzed, where applicable, by average and by the top and bottom 25% of performers by net profitability.
Builders can use the study to develop proven strategies to succeed in an increasingly competitive market.
To view or order the “Cost of Doing Business Study” online, click here, or call 800-223-2665.
NAHB’s Technology Solutions Directory is an easy-to-use comprehensive directory of technology vendors that enables builders, remodelers, contractors and other industry professionals to find information on software, IT solutions and technology services for their businesses.
Listings on the directory, sponsored by the Business Management & Information Technology Committee, are now available at lower prices.
Software and technology solutions providers interested in being listed can sign up for:
- Enhanced Listing — Listing includes company name, URL, e-mail address, mailing address, phone number, company/product description, company logo. Click here for more information.
- Standard Listing — Listing includes company name, software brand and phone number. NAHB members can post standard listings for free. Click here for more information.
For more information, e-mail Agustin Cruz at NAHB, or call him at 800-368-5242 x8472.
The Technology Solutions Directory is solely for educational and informational purposes. Nothing in the directory should be construed as policy, an endorsement, warranty or guaranty by the National Association of Home Builders of the listed software, IT service or the software/IT vendor. The National Association of Home Builders expressly disclaims any responsibility for any damages arising from the use, application or reliance on any information contained in this directory.