Custom Builders Just Stayin’ Alive

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After returning from the NAHB Spring Board meeting in late May, I have both good news and bad news to report.

First, the good news:

• Housing prices have likely bottomed
• Existing-home sales are up
• The economy seems to be coming out of recession

Now the bad news:

• New-home starts are at historic lows
• Credit is ultra-tight, especially for AD&C loans
• Appraisals are unrealistically low

The really bad news, though, is that although things are going to improve, they will improve slowly — very slowly. Depending on the market, we may be looking well into 2011 before the home-building industry will see any substantial recovery. So, after surviving the downturn to this point, what’s a custom builder to do?

Many small-volume and custom builders have either entered or re-entered the remodeling business, only to find that the playing field is already crowded with qualified, experienced remodelers. More contractors chasing less business does not make for a good survival strategy.

If you can’t afford to hibernate and wait for this long winter to end, here are several niche opportunities to consider:

• Change your focus to a smaller and greener product. Get your Certified Green Professional (CGP) designation from NAHB and start marketing your qualifications to build a sustainable and energy-efficient home. Homes that are Certified Green to the new ANSI standard represent one of the few differentiation opportunities for builders.
• Change your contracting methods. If you typically do fixed-price custom presales, consider offering construction management services at a lower margin. It means less risk for you and a lower price for the customer.
• Ramp up a low-cost marketing strategy. Employ Web optimization, social media and networking skills to get the word out. Offer to talk to Realtors, chambers of commerce, Rotary Clubs and other groups. Prepare a short presentation on green building or an example of why prices for a new custom home will never be this low again.
• Investigate short-sale opportunities both for investment and redevelopment. With a push toward smaller and greener homes, there may be opportunities right under your nose. Old homes on double lots or large lots that can be re-subdivided are two that I have identified in my market. Consider a real-estate LLC dedicated to buying and building these types of projects. Funding may be available from private sources.
• Opportunities may also exist right where you bank. Your bank likely has Real Estate Owned (REO) properties obtained through foreclosure. Some of them could be substandard and in need of repair or completion. Banks do not want to own real estate, and they don’t know how to repair homes or finish building projects. You may be able to help them work out their problem properties.

Be flexible, be inventive, but most of all, be optimistic. Things will get better. It’s just going to take longer than we would all like.