How Small Local Builders in Big Markets Give GIANTS a Run for Their Money
Introduction
Patrick L. O'Toole, Senior Editor, Professional Builder
The prediction is that home building soon will be dominated by the biggest of the big. The theory goes that the billion-dollar publicly traded companies are on a march toward capturing 50% (and eventually 75%) of all new home completions annually. Not surprisingly, many executives at the biggest builders subscribe to this school of thought. But data from this year's GIANT 400 punch a gaping hole in the logic that acquisitions and competitive advantages of size ultimately will transform the industry away from its small, local, entrepreneurial roots. In a year when everything went right for builders — low mortgage rates and solid demographics led to 1.65 million home completions — the market share of the GIANT 400 actually decreased in 2002 by 0.4% to 32.2%.
This market-share decrease by GIANTS illustrates what many small builders already know: Home building remains a local business in which submarket nuances and pure hustle make the critical difference with legions of home buyers each year. With an estimated 90,000 home building firms operating across the country, the industry is a picture of broad-based vitality. Many small builders do business where the large national firms don't — secondary and tertiary markets well off the GIANTS' radar. But thousands of savvy small-volume builders operate in places where GIANTS tread heavily, such as Atlanta, northern New Jersey, Southern California, South Florida and Las Vegas.
Professional Builder picked five companies that continually meet the challenge of playing in a marketplace dominated by GIANTS and frequently come away winners:
Get in Touch With Your Inner GIANT Killer
There is more than one way to beat GIANTS on their own turf, but basic behaviors are required.
- Use local knowledge.
Over and over, GIANT killers talk about the difference between buying land on one side of the street versus the other — the right school districts, town mailing addresses and even telephone prefixes that buyers prefer. Needing a lot of land to fuel their growth and with managers who often come from outside the community, GIANTS often sell on the wrong side of the street.
- Develop ties to local officials.
One of our GIANT killers is on a first-name basis with the mayor and council members in every community where he builds homes. Such familiarity can shorten the time required to get zoning changes approved and permits issued by weeks or months. It also means knowing the kinds of projects they want in the community and accommodating them as much as possible.
- Be nimble.
GIANT killers move fast when they see an opportunity to buy "A" lots or parcels. The lack of a GIANT's decision-making hierarchy allows GIANT killers to turn around quickly with a firm offer — speed that land sellers often value when picking land buyers. But nimbleness also relates to design ideas and responding to customer needs. GIANT killers do it better.
- Take advantage of low overhead.
Small builders have lower overhead and therefore can pick and choose their opportunities for profit. GIANT killers can afford to wait for the best combination of land and product to build. They often lay in wait for their moment to strike. GIANT killers are choosier and can afford to be. GIANTS, on the other hand, are often impatient because they have to feed a big corporate machine.
- Be choosy with bankers.
Financing is not a problem for small builders with track records for debt repayment. Many national and regional banks are eager to lend to small builders with small projects because they are locked out of the competition for the business of public builders that have big credit lines and corporate debt. GIANT killers usually find the best rates with solid banking partners.
- Facilitate customer choice and changes.
Taking a one-size-fits-all approach, GIANTS typically don't allow much variation from the plan sold, opening the door to customer dissatisfaction. GIANT killers allow many changes but do so profitably, which takes discipline. Also, countertop and appliance brands are important. GIANT killers let customers select exactly what they want.
- Do joint ventures.
GIANTS do joint ventures with other builders to buy and develop land, and so should small-volume builders. By pooling their resources, GIANT killers compete for big parcels while spreading the inherent risks involved with land development. When small builders band together in joint ventures, they are also more efficient, splitting up the cumbersome tasks of due diligence.
- Control land.
This is by far the most important rule, our GIANT killers say. If you control land, you control your destiny. The best small-volume builders have sterling reputations and often get the first call from land brokers and sellers. But they have much more than that.
Many know how to avoid the risks and pitfalls in land development. EPA Phase 1 permits don't scare them when the right location is within their reach. Through long-term connections with local officials and decision-makers, GIANT killers know how come to market quickly by keeping entitlement time lines as short as possible.
It also takes a measure of creativity and flexibility in terms of product offering. A small site passed over for single-family detached might be perfect for buyers seeking low-rise condominiums, duplexes or townhomes.
© 2009, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.
