Home builders adopt strategies to adapt
By: Jonathon Bilyk
December 15, 2010
Even at the peak of the boom, Fred Didier never built a large number of homes.
But amid the bust that now defines the housing market, Didier, owner of Didier Custom Homes of St. Charles, like many builders, has been forced to adapt to the new environment.
For Didier that has meant building even fewer homes, while taking on partners and work he would not have just a few years ago.
“Custom homes are what we do best, and will continue to do,” said Didier. “We used to build three to four homes per year.
“With the slower market, we are building one to two homes per year, and now doing additions, renovations and basements.”
Throughout the U.S. and more locally as well, builders of new homes have struggled in the past three years to find work.
As the housing market has crashed, the customers that once came in a steady stream for many builders have dwindled to a trickle, as loans have proven harder for buyers to obtain and many of those who can find loans are taking advantage of relatively low prices for existing homes, including many that were sold through foreclosure or short sale.
That scenario has left many builders seeking new strategies to survive and position themselves for growth in the future.
Many builders have proven unable to do so, said Stephen Melman, director of economic services at the National Association of Home Builders.
He noted that many large public builders have gone bankrupt. Locally, that list of bankrupt home builders has included Kirk Homes, Kimball Hill Homes, Neumann Homes and B&B Enterprises, all of whom were in the midst of building homes in Kane County when they were claimed by the housing bust.
But while many large home-building companies enter and struggle to emerge from bankruptcy, an even larger number of smaller builders have simply opted to find new ways to survive, said Melman.
He noted that an untold number of builders appear to have simply gone dormant as they await better housing market conditions in the future.
“We don’t know how many there are, but the number is likely very large of smaller builders, who maybe just did a few homes a year, who have just put things on hold while they ride this out,” Melman said.
Locally, a number of builders have largely stepped out of the new home construction market, taking up the purchase and renovation of many of the large number of foreclosed properties that continue to flood the market.
Others, like Didier, have altered their businesses.
Didier’s strategy was two-pronged. First, in early 2010, he sold a number of undeveloped lots in Blackberry and St. Charles townships to a Florida group known as Lear Real Estate Enterprises.
Didier said the group is headed by a “former business colleague from college” who has become a partner in the venture.
The joint venture arrangement infused cash into Didier’s business immediately while eliminating debt on Didier’s properties.
“This joint venture will allow Didier Homes to grow and expand our opportunities for the future, even during these difficult economic times,” Didier said.
In the months since, Didier has also broadened the kinds of projects he will take on, expanding his business to include renovation and remodeling projects. He said about half of his business now comes from renovation work.
“If we get back up to three to four custom homes per year, we may scale back on the smaller renovation projects,” he said.
Such strategies appear common for smaller builders, said Melman, noting that builders throughout the country have indicated that they are seeking “alternative sources” of financing to the commercial bank loans that no longer fuel the industry.
“Large builders can tap the equity markets to find the financing they need,” Melman said. “But smaller builders are having to find other ways to pay for their projects.”
He said NAHB surveys indicate that about a quarter of builders are turning to such alternative sources. And of those, only about 25 percent report successfully obtaining the financing.
Larger builders, however, have begun to craft increasingly innovative strategies to attract buyers to their new homes that have become more and more difficult to sell.
In far western Aurora, just east of Sugar Grove, Pennsylvania-based Orleans Homes has in the past 90 days resumed work on their Verona Ridge subdivision.
Brian Fink, vice president of sales and marketing for Orleans Homes’ Chicago market, said work on the development had been halted in March when the company entered bankruptcy. However, Orleans – which also had developments under way in Lake in the Hills, Oswego and three other communities in suburban Chicago – managed to find investors willing to inject enough cash for the company to secure approval to emerge from bankruptcy and resume operations in August, said Fink.
And in the weeks since, Fink said the company has adapted to the new market conditions by adopting new market strategies.
Among the most successful, he said, has been Orleans Homes’ partnership with Marketplace Homes. Michigan-based Marketplace offers programs to builders like Orleans Homes that allow the builders to offer customers an alternative to the need for selling their current home immediately.
Essentially, Marketplace Homes guarantees that if a buyer purchases a home through an affiliated builder, like Orleans Homes, it will lease the buyers’ existing home.
The lease will remain in effect for six years or until the old home is sold, promising new home buyers that they will not need to pay two mortgages at once or wait until their old home sells before they can close on a new home.
Fink said the partnership with Marketplace has been a key to Orleans early emergence from bankruptcy.
“It’s not just helped us get customers in here,” said Fink. “It’s created a whole new market for us among people who otherwise wouldn’t have even considered buying right now.”
He said the program has been particularly appealing to people who are “underwater” on their mortgages – meaning they owe more than their house is now worth – and do not have enough cash on hand to pay off the loan at closing, if they were to sell.
Fink said the leasing program has quickly grown to account for 70 percent of all of
Orleans Homes’ sales in the last three months.
Melman said NAHB surveys indicate only about 3 percent of home builders nationally have thus far latched on to such programs, either guaranteeing a home buyer a sale or a lease of their current home in exchange for buying a new home through a builder.
Melman would not speculate on whether that number is expected to grow.
But Fink said programs like the Marketplace leasing program will be key to helping new home builders, like Orleans, compete in coming years, as low home prices and a large number of foreclosures continue to flood the market of existing homes with bargains.
“We’ve still got years of foreclosures and short sales coming,” Fink said. “So we’re going to need tools like these to help us do what we do.”