Chicago Home Builder Buz Hoffman’s Unique Survival Strategy

Buz Hoffman, 56, wanted to follow in his father's footsteps, a daunting prospect: his father, Jack Hoffman (who died in December at age 85) pioneered production home building in Chicago, built a whole town that is now named after him (Hoffman Estates, Ill.), and was the first president of the Home Builders Association of Greater Chicago. But along with big dreams, Buz inherited from Jack an inclination to champion the cause of little guys, namely young Americans striving to own their first home. It's a tougher battle in the Chicago suburbs these days, but Jack would be proud of his kid.

"I was excited when he took us to the sales office on weekends," Buz now recalls. "I loved the yellow pennants out front, and all the workmen on the site were like honeybees around a hive. It was just tremendously exciting.

"Even before I got to high school, home building was all I wanted to do. I thought it was very cool."

Lakewood Homes has five locations with 29 employees, compared with nine locations and 214 employees in 2005, when Lakewood peaked in revenue at $398.6 million from 1,714 closings. "As a value-oriented builder of mostly entry homes, we have to buy land right. Land prices were so ridiculous in 2005 that I couldn't do it. As my existing locations built out, I didn't replace them."

Whether foresight or luck, Lakewood Homes stumbled into a strategy that just might allow the company to survive, which now looks like a major accomplishment for a private builder with bank financing on a project-by-project basis. Lakewood has gone into hibernation, waiting for the market to turn. If the federal government's stimulus package and foreclosure avoidance measures work at all, Lakewood could be one of the first home builders to benefit:

• As an entry builder, Hoffman can sell to buyers using the $8,000 federal tax credit that's in place until the end of the year only for first-time home buyers.
• Lakewood's buyers are mostly coming out of rental apartments. They don't have houses to sell, so Hoffman doesn't have to deal with contingent sales contracts. And pent-up demand among entry buyers has been building for three years.
• Unlike some entry builders who sell primarily on price, Lakewood has a strong reputation for quality and customer satisfaction, verified by J.D. Power trophies for six of the last eight years in its office lobby. "We operate on a steady referral rate of 40 percent," Hoffman says. "Customer satisfaction means revenue, and our people embrace that."
• If he survives until the market turns, Hoffman is also in position to capitalize on myriad opportunities for advantageous land buys that will suddenly pop up. And because he builds small, entry-level houses, Hoffman will be able to ramp up production quickly. "I'll start hiring when I start building," he says. "The thing I most look forward to is calling the people we've laid off over the past three years and bringing them back. I'm going to make some of those calls myself."

When that will happen, he won't predict, but he doesn't think financing will be a problem. "This thing doesn't even need to really end for financing to suddenly become available," Hoffman reasons. "There is so much money out there, among private investment funds. But it's not going to loosen up until those investors see the market hitting bottom. But at the first sign that the downturn is beginning to end, the floodgates will open."

Hoffman likes his prospects when the market heats up; he says the entry market is the best place to be right now. "If you can get buyers qualified, FHA mortgages require a 3.5 percent down payment, but that's better than 20 percent. And our buyers don't have houses to sell."

However, Hoffman won't make any moves until the market shows him the time is right. "We don't need to do anything until houses start selling. We have to think like a very small builder," he cautions. "A small builder can go into a shell, stop doing business and just wait. If pricing takes hold in the existing home market, the new home market will respond instantly."

He says he'll start buying land again when he needs it. There will be lots of it available at good prices and terms, Hoffman believes, both by doing workouts for banks and joint ventures with investment funds that hold land and want to grab part of the margin from building on it.

The Austin model at Lakewood Springs in Plano, Ill. is one of Lakewood's most affordable. The 924-square foot plan has two bedrooms, 1½ bathrooms and a single-car garage. It is priced at $134,990.

Hoffman says he will not even formulate a plan until he sees how federal stimulus legislation affects not only builders, but banks. "Right now, they're paralyzed. The banks don't know what's going to happen, but currently they're funding us, and we're moving forward," he says.

He's anxious to see what will happen later this year, when he believes many attractive land parcels will land in the hands of not only banks but private equity investors. "Most of those investment groups don't have building capability. We want to be their builder of choice to add value to that land," Hoffman says with a smile.

Even more important than changes in the forms of financing, Hoffman thinks home buyers will be very different, especially in the first-time buyer market. "Generation Y is now coming of age for home ownership," he says. "Green building is likely to be more important to them because they've been indoctrinated in the idea of green all through their school years. In the past, we always saw first-time buyers take upgraded cabinets or carpeting before energy-saving features.

"These new buyers may be willing to invest in saving energy and saving the planet," Hoffman reasons.

They also shop for homes differently, as Hoffman and other builders notice.

Hoffman believes product design will have to change to capture the fancy of this new generation of home buyers, but he's not sure exactly how. "I started thinking about what I call 'rebirth product' — things we can do that might be considered contemporary architecture in this market," he says. "It would be way different from what Californians would call contemporary."

Increased density is not part of the package. "Small lot zoning just won't happen here," Hoffman says. "There are no 50-foot lots in the Chicago market. Even 60 feet is virtually impossible. With a mix of lot sizes, you can get some 65-foot lots, but in most places, 70-foot frontages are the minimum. The Midwest is just so conservative, and it's hard for me to imagine a local politician getting re-elected if he allows density to increase."

Buz Hoffman worked in his father's company, The Hoffman Group, until two years after Jack sold it and retired in 1988. He became disillusioned with the way municipal government-enforced "spec-creep" channeled the company to the move-up market. He founded Lakewood Homes in 1990 to get back into entry housing.

"When my dad started in the late 1940s, he was building for the returning World War II vets. Like Levitt in the East, he put them up and the vets lined up to buy them," Hoffman says. "They were value-oriented homes — one bath, three small bedrooms and a carport. But everything became go-go by the late 1980s. Houses just kept getting bigger, and they were priced out of reach of entry buyers.

"That's what I wanted to do, get back to building affordable homes for first-time buyers. When the public builders try to hit that market, they get the price right, but they don't always give people a floor plan that works. We've learned how to value-engineer the product and still end up with livable spaces," Hoffman says.

He says he's built his company on his understanding of these buyers. "We hold their hands and tell them, 'No, you can't have three different colors of carpet in the three bedrooms,'" he says. "It's very gratifying to help young people get their first home."

His firm has no mission statement. "I hate pretension. I think companies with mission statements are trying to convince themselves they're something they're not. If we had one, it would be the Golden Rule ... or maybe, [1] Make a profit; [2] Satisfy your employees; [3] Satisfy your customers. If you don't have happy employees, I guarantee you won't have happy buyers," he says.

Buz Hoffman can't wait for recovery when he'll be able to buy land at prices that will allow even lower prices, if he can sweet-talk Chicago's suburbs into accepting more entry-level instead of insisting on mansions for the rich and famous.