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Builders Can Find Alternate Funding Sources Close to Home
With funding from banks and private investors difficult to secure, real estate finance experts participating in a Nov. 13 NAHB audio seminar advised builders and developers to mine their personal and professional contacts as alternate funding sources.
When seeking capital for new projects, Tom Stephani, of Stephani Enterprises, Inc. and Custom Construction Concepts, Inc., of Crystal Lake, Ill., said that the first source of funding is the builder’s own equity.
“The second place I go is to look at the landowner, who can use their land as a subordinated position to any bank debt,” said Stephani.
He also encourages builders and developers to seek out friends and family who may be willing to invest in a project as well as trades and subcontractors who could be interested in taking a piece of the action because they need the work. Finally, he said, a community lender who knows the people and project involved can take a minority stake. “You don’t even need an appraisal to make it work.”
Stephani added that the way to structure the project and determine profit-sharing arrangements depends upon what the landowner, trades and friends put into the deal. “Whether structured as a percentage interest or a piece of the project, it all depends on what their local worth is,” he said.
Wider Latitude When Working With Private Investors
Troy Taylor, president of the Algon Group in Atlanta, which provides real estate and financial advisory services, said that builders can have wide latitude when negotiating with private investors.
“If there are 100 deals, there are probably 110 different structures,” said Taylor. “What each of your investors wants will be different. Decide on the economic arrangements and with good legal advice you can figure out how to best document what you have agreed to.”
When approaching an alternate funding source, builders need to provide market research and data that is both comprehensive and easy-to-understand, as well as detailed information about their business.
“Alternative sources won’t just look to the real estate deal,” said Taylor. “They want to know who they are in business with, who the developer is and their track record.”
Presented by NAHB’s Business Management Department, Executive Officers Council and The NAHB University of Housing, participants in “Alternative Funding Sources: Ideas and Perspectives to Keep Your Business on Track” agreed that it is difficult to get new investors to inject capital into an existing project unless the primary lender agrees to restructure its bank debt.
Best Funding Source for Builders Still Their Existing Banks
The best source of funding for builders and developers who are seeking to work out loan problems is with their existing banks, said bankruptcy expert Harley Riedel, director of Sticher Riedel, Blain & Prossner, P.A., of Tampa, Fla.
“It’s going to be tough to get another lender to come in without a restructuring and if existing banks won’t restructure, new money is going to walk,” said Riedel.
This vicious cycle, Taylor said, is causing some firms to begin Chapter 11 proceedings in a bid to force banks to make decisions they don’t want to make.
But Riedel warned that this is a risky maneuver.
“You ought to explore every alternative you can before filing for Chapter 11,” he said. “But that doesn’t mean you should not talk to your lawyer about the possibility in advance. You need to know what your rights are. It’s a potential tool you can use, a tool that large, publicly traded companies have already used.”
Asked by moderator Ron Robichaud, principal of Robichaud Financial Services based in Laconia, N.H., about the possibility of securing funding sources from Wall Street, panelists agreed that it would be a tough sell for most large companies and nearly impossible for small and mid-sized firms.
“Wall Street capital would like bigger projects,” said Stephani. “If you go after Wall Street money, the company must be packaged extremely well. In 99% of the cases, you must hire advisors that have credibility with these institutions. They are getting hundreds and hundreds of opportunities, so they can be extremely selective.”
“The ability for most builders to attract Wall Street money is basically non-existent,” added Taylor. “Institutional investors are getting hundreds of loan packages. If they get 200 packages, they will look at 40, do due diligence on seven and fund one or two.”
Avoid Spousal Guarantees in Secured Loans
In today’s market, with banks having the upper hand, Riedel said that unsecured debt is virtually unavailable for existing projects.
“What you will find when going for new loans today are loans that will be secured,” he said. “Most banks or lenders will require personal guarantees — unless you’ve got a lot of equity.”
A personal guarantee is a contract, and each one contains its own unique terms.
“The most important thing is to try to avoid spousal guarantees,” said Riedel. “Avoid pledging an exempt asset like a homestead.”
Taylor urged builders who embark on new projects to limit their capital exposure, even if it adds to their total costs.
“If you want to build 600 units, build 100 units to see how they sell,” he said. “If you have existing projects and you need more capital, you will have to restructure with your existing banks. The longer you delay, the more difficult it will be to restructure what you currently have.”
In closing, Stephani said it is vital that builders stay in touch with their lenders.
“When you do have issues with a bank, the No. 1 thing is to continue to communicate. Don’t avoid them. Keep them up to speed on where things stand. Otherwise, they will think the worst.”
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Custom Builders Gather to Survive
More than 100 custom builders from around the country gathered in Austin, Texas at the annual Custom Builder Symposium Oct. 24-26 to share ideas and get a sense of what lay ahead for the industry and themselves.
Two decades old, the symposium offers fresh educational information, top speakers, and a sampling of the most up-to-date products the industry has to offer.
“The greatest thing that I gained was a sense of ‘we can survive,’” said Brad Simons, Custom Builder Committee chair. “From sponsors to builders everyone was positive about the future and how we can all work together to survive the current storm.”
Change to Survive
 One of the highlights of the event was Keynote Speaker, Al Trellis’s, speech “A New World and New Challenges – What’s a Custom Builder to do?” Trellis, builder, co-author of "Building with an Attitude!" and former Custom Builder Symposium chair, insisted that the modern builder must evolve in order to compete in this market and the next.
He suggested builders must:
- Think and act bigger
- Build local and regional alliances
- Buy in groups
- Seek joint ventures
- Build for less, no matter the price point
- Go after lower sector markets
- Upgrade the level of service
- Embrace the process as part of the product
He cited the simultaneous meltdown of the housing and financial markets as a completely new environment in the housing industry unlike anything builders have known before. The rise in housing costs have pushed many out of the market, he said; usually when the market slows, housing slows, but this time, housing has slowed and the market has followed. Because of economics, demographics, competition, capital requirements, and regulation, builders need to approach business differently than before.
Taco Schmidt, of Carlson Homes L.L.C. in Arizona said, “The presentation was great. It’s a wake up and what a stubborn builder needs on occasion.”
The education sessions are one of the key reasons builders attend the symposium.
‘When you are going through hell, keep going’
_web.JPG) This quote from Winston Churchill was the message Stephan Hann, 2008 Custom Home Builder of the Year and president of Hann Builders, tried to relay in his educational session entitled “Survive to Fulfill Your Destiny.”
Hann explained that though there is much that can be done that is simple and common sense, but difficult to incorporate.
Hann suggested the simple advice to start:
- Don’t worry about what others think
- Get straight about where you are and are not, and where you hope to be.
- It may not be pretty, but it is always better to determine the facts than to hope problems will go away
Once a person gains perspective on the situation; put it in writing.
- The process will help you see what you do not know, and what you need to figure it all out
- It will give your team a foundation and security knowing what is going on
- Use your team and others to see what you are missing and what else you need to anticipate.
Finally, when everything is writing, develop a plan.
What to do from here:
- Write your plan for all domains of your life
- Take three to five things from NAHB meetings and education sessions
- Create your personal plan and calendar it
- Take care of yourself
- Look for your blessings everyday
- Enjoy everyday you have on this planet
- Go make a difference for somebody else
Following these simple ideas will not solve everything, but it gives an edge and offers a pragmatic approach to fixing whatever problems may come the builder’s way.
An eclectic event
The symposium had much to offer. Some attendees came early to take advantage of pre-symposium courses on Oct. 22 and 23. Some also came early for a golf tournament held at Crenshaw Cliffside.
One of the highest attended special events of the symposium is the Home Tour. Participants take a half day to tour some of the best homes in the Austin area by leading custom builders. The tour offers views and new perspectives from peers in the field, allowing the audience to gain industry knowledge first hand.
“I always enjoy seeing the homes on the tour,” said Schmidt. “This year a good variety was shown which allowed us to think or stretch our imagination of what we can create or detail in our homes.”
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Ed Nikles, Veteran Builder - Custom Home Builder of the Year
Ed Nikles, CGB, GMB, CGR, and CGP, owner of Ed Nikles Custom Home Builder Inc and the recently named 2008 Custom Home Builder of the Year, has advice for younger builders trying to make it in these tough times. Nikles has been in the business for 45 years; he’s seen the market come and go.
Nikles is the third Custom Home Builder of the Year award winner since its inception. The award is given to the best of the best in the custom home building industry and some of the requirements are being a leader in the industry, an example in community service, and exhibits excellence in customer satisfaction, quality and consistent service.
Advice from a Veteran
“Well, number one they have to pay very close attention to their financials,” said Nikles. “First, builders need to have a budget to start with. If they aren’t maintaining income or expenses are eating up income, they have to make those hard decisions, whether it’s layoff or cut back in other ways.”
Builder need to know their numbers for estimating, said Nikles. A lot of builders he’s seen over the years wing it so to speak. His company has used a computerized estimating system for several years. He says, he can estimate accurately to the last 2 x 4 how much a project is going to cost.
“Knowing your costs going into a project;” he said, “even with the hard times this year, can save your business. We’re still making a profit right now – even though our sales are off. We have been able to maintain our staff so far.”
A builder, finally, must keep the product different from the competition to stay ahead, he said. Appearing different than the competition increases the builder’s the perceived value to the customer. And it’s not necessarily being different in price that will do the trick.
Setting Himself Apart
When all the builders in his area were using Anderson Windows, Nikles bought Pella and it became a recognizable feature in his homes. Customers were willing to pay more for his homes because they were different. Nikles has thought out of the box his entire career, and he’s still doing it.
“Our philosophy has been to do something different than everybody else is doing. If you’re doing the same as everyone else and competing head to head, what separates you other than price?”
To set himself apart yet again, Nikles earned his Certified Green Professional designation from the NAHB University of Housing. But of course, that’s not all he’s doing.
“We are promoting our green building program to the fullest extent,” he said. “We built a small home – less than 1600 sq. ft. – it’s going to score gold on the NAHB guidelines. It’s an energy star house that will save the homeowner 50% of the energy costs over a normal code built house. And we’ve sold a house already off that.”
Nikles has been conducting seminars in his area to educate the local realtors about green building. The seminars educate the realtors on what green building is, how to take advantage of it as a selling point, how to focus on the energy efficiency of green building when discussing the subject with customers. From these seminars, Nikles reports that he’s gotten several referrals.
Know the Value of Meetings
In every part of his professional life, Ed Nikles has taken tried to apply what he learns to his business. He says he every time he goes to an event, whether it’s the International Builders Show, a Board meeting, or Custom Builder Symposium, he takes one or two things away that he is able to make his business better.
“When members say to me ‘I don’t get anything out of a builders association,’ or ‘What do they do for me?’ my response is, ‘What do you do for them? Do you go to IBS? Do you go to education courses? If you don’t do those things, then I can understand why you don’t get a large perceived value. Those of us that do, get a lot out of it.’”
Nikles remembers the early 90s when there was another downturn. He changed his business from homebuilding to remodeling. At that time he went to every remodeler show he could, and by 1997 he owned a profitable remodeling company and had hundreds of projects.
“The information that you get from seminars,” he said, “given by your peers, and they’re talking about the things they went through, I was able came up solutions. You may walk around with one or two solutions, but that’s all you need. Go to the seminars, and take notes. Then pick the top two ideas that strike you. If you try and do all the things mentioned, you’ll never get anything done. But if you get the first two done, then you can move on to the rest of the list.”
A Builder, a Volunteer, an Award Winner
Nikles volunteers at all levels and areas of the industry. For the NAHB, he is a Senior Life Director, a Life Spike member with 402 members, Capital Club member, and former Build PAC trustee and National State Representative. He currently serves on the Custom Home Builder Committee and is leader of the Publications workgroup.
He is a life director and founding member for Pike County Builders Association, PA Builders Association and NAHB. Recently, he was awarded the PA Firewise Community Gold Medal Award for a community Nikles built that is in harmony with the environment.
Nikles has also earned his Graduate Master Builder, Certified Graduate Builder, Certified Graduate Remodeler and Certified Green Builder designations. All of which making him a leader in his community, his region, and the country.
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Listening Can Lead to Stronger Sales, New Book Says
Listening to prospective buyers’ wishes and needs will help new-home salespeople develop a stronger rapport and potentially shorten the selling process, according to a new book available at BuilderBooks.com.
“ValueMatch Selling for Home Builders” by William Nowell, CAASH, presents a selling process that focuses on selling feelings rather than product in today’s market.
“People buy products to get something else they want,” said Nowell. “No one wants a home just for the maintenance and monthly mortgages. They want the feelings associated with homeownership.”
Many homes on the market have all the popular upgrades, but to exceed the average sales rate, Nowell said salespeople have to get away from selling granite countertops and understand what the buyer truly wants.
“ValueMatch Selling” can teach salespeople how to:
- Establish trust and gain control in the first few seconds of the sales process
- Uncover prospects’ true urgencies
- Discover what prospects value
- Present the strengths of the home and community that resonate with prospects’ values
- Help prospects identify the feelings that they associate with a home — security and pride of ownership
- Help prospects find and fall in love with homes
- Overcome problems that arise during the selling process
- Keep the sales process on track
- Extract the value from zingers that may arise during the sales process
- Ask for the sale
“You need to know the prospect’s objections so you can understand and start to alleviate the prospect’s concerns and fears,” Nowell writes in “ValueMatch Selling.” “If you don’t ask for a check, you won’t get the opportunity to convince the prospect to buy.”
To view or purchase “ValueMatch Selling” online, click here, or call 800-223-2665.
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New Consumer Brochure Describes Homeownership Benefits
 Today’s consumers do their research before making decisions, so it is important to have a resource that goes in-depth into why the current housing market offers unprecedented opportunities to home buyers. NAHB Public Affairs has created a consumer brochure to help members and HBAs explain the many advantages of buying a new home.
Download the brochure here.
HBAs and members are encouraged to post the brochure to your Web sites or print out copies and distribute them in sales offices or at parade of homes, home shows and more.
To date, more than half a million unique visitors have gone to www.FederalHousingTaxCredit.com to get information about the $7,500 first-time home buyer tax credit. Are you making sure home buyers in your community know about it?
You can access all of the NAHB tax credit resources here.
If you have any questions, or want to tell us about your local efforts to reach out to consumers, contact NAHB Public Affairs by e-mail or telephone at 800-368-5242, ext. 8447.
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