Arthur Rutenberg makes the business case for franchising home building

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Arthur Rutenberg, Chairman, Arthur Rutenberg Homes, Clearwater, Fla.

By the time Arthur Rutenberg sold his first franchise in 1978 to Bobby Lyons in Tampa, Fla., he had already been a builder for 25 years. In particular, he had built a large Florida  home-building company operating in 10 cities, merged it with a publicly traded builder (U.S. Home Corp.), completed a secondary offering of shares in that company, and successfully used the resulting funds to engineer a string of major acquisitions from Tucson to Minneapolis across to New Jersey to create the first truly national home-building company.

Like no other builder at the time, Rutenberg was a building renaissance man. He knew how to design and build great homes. He knew how to manage a local building business. He knew how to manage a private multi-market firm. And he knew the benefits and pitfalls of running a far-flung national company. So it was not without a great deal of experience that when the time came for him to re-launch Arthur Rutenberg Homes [1] several years after leaving U.S. Home Corp. that he chose a new way of running a building company — the franchise model.

Today, some 34 years after first franchising Arthur Rutenberg Homes, Rutenberg remains firmly at the helm of the Clearwater, Fla.-based company, even as he approaches his 60th year in the business. In that period of time, the company has grown and has continually refined its home designs and its proprietary business systems — the “secret sauce” of their franchise operation. The company has 30 franchisees; six in the Carolinas and 24 in Florida. Rutenberg touts the benefits of franchising as perhaps the best model for building a national building firm.

“We approach franchising a little differently than most. We have a much thicker package of services. We have a system of doing business that we believe in,” says Rutenberg. “And we support that method by software and data which was designed for the purpose of supporting that business’s methods.”

Early Experience Leads to Franchising

Rutenberg left his hometown of Chicago for booming Clearwater, Fla., in 1953, following his father who planned to retire there. In leaving Chicago, Rutenberg left behind a home-appliance retailing business in hopes of buying lots and building homes. The appliance business had taught him that selling a lower-priced item like a toaster took almost as much energy and time as selling a higher-cost item like a television or a refrigerator. His logic in going into home building was to get an opportunity to sell the ultimate higher-priced item, a new home.

Fast Facts About Arthur Rutenberg Homes

Headquarters: Clearwater, Fla.
Chairman: Arthur Rutenberg
CEO: Frank Pizzica
Founded: 1975
Franchises: 1975
2011 revenue: $82,340,362
2011 closings: 145 (136 in Florida, 7 in South Carolina, 2 in North Carolina)
2012 projected growth: 30 percent
Recent announcements: Gainesville franchisee and current NAHB chairman Barry Rutenberg has joined ARH as vice chairman of the firm; The company is now licensing its business systems and software to independent builders selling under their own brand with their own product.

Almost immediately upon arrival in Florida, he and his brother, Charlie, along with their father, purchased 10 lots on which Arthur built 10 very simple concrete block homes, which sold very quickly. It was from that beginning that Rutenberg over the course of his 20s and 30s built a home-building enterprise consisting of 10 locations around the state of Florida. By 1969, Arthur Rutenberg Homes had grown to become one of the largest builders in the country. But it was in 1969 that Bob Winnerman of New Jersey-based publicly traded U.S. Home Corp. approached the Rutenberg brothers about jointly creating the first truly national home-building operation. In short order, they struck a deal. Though Arthur Rutenberg Homes was larger than Winnerman’s operation, the U.S. Home name was the one selected after the merger was completed that year.

The strategy of the merged company involved a secondary offering of $20 million, which funded a series of transactions to purchase a number of home-building firms around the U.S. Back then, tax-free, stock-for-stock transactions were permitted under IRS code. By August 31, 1971, when the stock-for-stock provision ended, the company had completed more than a dozen acquisitions of large private builders in places like Tucson, Denver, Minneapolis, Cincinnati, and elsewhere.

Having completed his work with U.S. Home, Rutenberg left the company in 1971 and was involved in a number of joint ventures until 1975, when he decided to re-launch under the Arthur Rutenberg Homes name, which he had been able to retain after the U.S. Home merger. This time, he opted for a franchising model because he felt it was a uniquely appropriate vehicle for growing a large, geographically diverse home-building operation. The logic goes like this.

At that time, large regional and national home-building firms were  highly decentralized. Division presidents were given a lot of autonomy to run their own businesses. They chose land based on local knowledge. They chose product to sell based on very targeted prevailing market trends. And at the end of the day, the parent company typically imposed very few systemic controls. Some local divisions of national and regional home-building firms had separate software systems. In this way, says Rutenberg, franchising is an apt solution to a geographically diverse home-building operation.

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Some 34 years after first franchising Arthur Rutenberg Homes, the company has 30 franchisees throughout the Southeast, including six in the Carolinas and 24 throughout Florida. CLICK MAP TO ENLARGE

“It has always been a very decentralized industry,” Rutenberg explains. “It seems to work best that way. The product is certainly not the same all around the country. It is simply impossible to sell the same product in South Florida that you sell in Indianapolis. Therefore, your operations are separate. So you want to take your decentralized person and pay them a percentage of the profits. And usually, the large companies charge something for central overhead, which are parceled out to the various divisions, and that is always a source of controversy. So we decided that the ultimate decentralization was a franchise model, and the ultimate autonomy is a franchisee. And the best way to charge for overhead was to do it as a franchise fee. It is pre-agreed, at the beginning, in the franchise agreement, and you don’t have to discuss it for 10 years, because our agreements are 10 years. That way it is not an annual discussion, and that is the way we do it.”

In broad strokes, a Rutenberg franchise agreement begins with the right mindset of the franchisee. Rutenberg acknowledges that most builders are entrepreneurs, who like to do things their own way. An Arthur Rutenberg builder is someone who wants to embrace the brand and the systems and be willing to follow a proven and defined program of doing business.

The initial franchise fee in Florida is $40,000. Homes sold without a home site incur a 4.25 percent fee. Homes sold with a home site incur a 3.25 percent fee.

“Our franchisees are certainly their own boss. They own the business and it is 100 percent theirs,” Rutenberg explains. “And nobody can tell them what to do. They won’t do as well operating their own way since they are paying a franchise fee. You have to make a profit on a franchise fee. And you can make a profit on our franchise fee easily because we will save a franchisee more money than what they will spend in their fees. In addition, they have the use of our model home network of all the franchises, all that marketing, our plans, and our interior design system. They get those advantages too. So it all works.”

Leading Designs in a Pre-Sale Operation

Since 1978, upper-end home buyers around the state of Florida and in several locations in the Carolinas have come to know Arthur Rutenberg Homes for their quality designs and their attention to detail.
This spring, visitors to ARH’s Gulfport model at Fishhawk Ranch in Lithia, Fla., near the company’s headquarters, were wowed by the home. Selling for approximately $800,000, the Mediterranean style Gulfport packs a visual punch. The front elevation is grand without being imposing, and each exterior detail is well proportioned — from the pitch of the roof to the trim around the windows and doors.

Entering the model, most prospective buyers react similarly. They stand there and survey the perspective of a very large, beautifully merchandised central “great room” with 14-foot ceilings. The great room then opens to a large kitchen — back and to the right from the front door. But the visitor’s eye is quickly drawn directly through the main room and out an opened set of pocketing doors to a large outdoor living program. It is a tropical haven that includes a massive flagstone lanai and patio/pool surround by a grotto-like canopy of professional landscaping. The pool includes a swim-up bar and grill area. All of this hits a buyer while they stand there in the foyer of the home.

Memorable, livable design is a hallmark of an Arthur Rutenberg home. And it is among the key reasons the company prospered in 2011, building 145 homes on $82 million in revenue. Despite the long housing downturn, Rutenberg and his team have continued to invest in well-designed model homes. The company’s design team, led by Mario Vitorino, manages a portfolio of 80 proprietary home designs that range from 1,700 square feet on up to 7,000 square feet.

“You can almost always take something that works and make it look great,” Rutenberg says. “It rarely works the other way. You always shortchange the thing you do second.”

Arthur Rutenberg Homes is well known for the quality of its model homes which showcase the company’s high-end designs and attention to detail. Shown here are the Jacaranda model in Palmetto, Fla. (left); Martinique in Bradenton, Fla. (top middle); Bardmoor in Lakewood Ranch, Fla. (top right); Asheville in Fort Mill, S.C. (bottom middle); and Gulfport in Lithia, Fla. (bottom right).

Arthur Rutenberg Homes typically relies upon its franchisees to build new models. But because of the downturn and tight finances at the local level, as well as the need to keep the inventory of new-home models in front of the home-buying public fresh, Rutenberg made the decision to have the parent company own several new models and to lease them back to local franchisees at an affordable rate.

“One of the things that we have done to help our franchisees in the last couple of years is to build models and lease them to the franchisees,” says Rutenberg. “We own quite a few models today. About half of the new models that are being started in our system now are actually owned by us. We are doing this outside of the franchise agreement. We are doing it because it is the only way everyone is going to get through this time without being decimated and it is having a positive effect. Our model network is growing and it is going to grow 70 percent this year. And it is mostly because of the fact that we are willing to own those models.”

As a group, Arthur Rutenberg franchises have weathered the housing downturn much better than the rest of the industry. And the company is in a growth mode in the Carolinas, (where it opened its first model in South Carolina in 2007 and the first model in North Carolina in 2011), as well as other parts of the Southeast. Right now the company is expanding westward from its base toward Mobile, Ala., and beyond.

The company is built around the pre-sale model. Most homes sold are built on a customer’s lot. There are currently very few spec homes built in the system, therefore an Arthur Rutenberg franchisee is focused almost exclusively on making money from home-building operations as opposed to real estate and other sources of revenue. Thus the backbone of the company (in addition to very attractive model homes) is a set of business systems, particularly as they relate to cost-side analysis, which create opportunities to make money on home-building operations, even now when there is a lot of downward pressure on prices.

“Our system is not difficult to understand, but we do things certain ways, and when you do them that way, they work,” says Rutenberg. “If you use our purchase-order system and you use line items for purchases, then all of sudden you have a vast cost-comparison network available to you that you wouldn’t have any other way. If you use the system well, you see significant reductions in your costs. Then you are making more money and it becomes pretty exciting.” Based upon his own experience, Art’s son, Barry, agrees with this conclusion. Barry, in addition to being the 2012 Chairman of the Board of Directors of the National Association of Home Builders, is also a franchisee in Gainesville, Fla.

Rutenberg’s business systems have been refined over time. They are the result of many different successful home-building business incarnations prior to the launch of the company’s first franchise. In good times, Rutenberg franchisees that stick with their systems can earn 9 or 10 percent pre-tax, says Rutenberg. But circumstances are different today and Rutenberg acknowledges that the typical Rutenberg franchisee is earning 5 or 6 percent net profit, despite extremely tough price pressure. But this, he says, is far better than the average small-volume pre-sale builder today who struggles to earn about 3 percent pre-tax net profit.

“Our systems can do so many things for a builder, and if you use all of the tools, you really fall in love with them,” says Rutenberg.