Builders and Developers Rebuild the Business

By Kristi Waterworth 

Housing starts are climbing – up 21.5 percent year-over-year in July nationally and a whopping 33 percent year-over-year for the Chicago area, according to the US Census Bureau.

Based on July’s numbers, 2012 could see as many as 812,000 home starts – the highest since October 2008. The last few years have been gaining steam, with 587,000 starts in 2010 and 609,000 in 2011 – a far cry from the pre-bubble high of 1.5 million starts, but certainly trending in the right direction.

Local builders and developers are finding banks significantly less willing to commit to building projects have turned to niche segments in order to keep their companies viable.  For some, this has meant reinvention or rebranding.

“You’ve got to be a lot more client-centric these days,” explained Orren Pickell, CEO of the Orren Pickell Building Group, which was recently sold in an ABC sale to investors to stay afloat.  “You need to focus on what you’re good at and try to be as client-centric as possible.  There’s no magic bullet nowadays, just a lot of hurting people.  The intangible of doing something important for people and having them appreciate it is huge for those of us who do it.  We’ve got hope that the economy will turn around soon, and I think it will.”

Around 2006, Orren Pickell was doing $60 million in business in the construction company and another $15 million in land, when sales dropped 10 percent the first year, then 20 percent the next year. “There were even times when there were no sales at all, for months and months,” he said. “There were years when no properties sold.  I’ve never seen anything like it. Even in the Jimmy Carter days when mortgage rates were at 17 percent, people were buying.”

Many builders were burdened by heavy debt and taxes on their many real estate holdings when the market went south.

Lakewood Homes was one of the top five home builders in the Chicago area for a 20-year period, building close to 1800 homes a year at its height. It even won the JD Power award seven or eight times, according to Chris Shaxted, executive vice president of Right Residential, LLC and former executive vice president of Lakewood Homes. “We had a great reputation for customer satisfaction, and then the market turned and we spent five years after the collapse regrouping,” he said.

Rethinking, Rebranding, Starting Fresh
Struggling construction companies found varied ways to keep their foothold in the market secure. Pickell’s company, for example, sold shares to Black Dog Holdings, an investment group that paid off much of the company’s debt. Even though Orren Pickell is no longer the sole owner, he retained the largest share in the company. Black Dog Holdings has made it clear that they don’t want to interfere with business as usual, allowing the company to continue to function as a family business. Orren Pickell’s daughter serves as the company’s COO and his wife works by his side. Although the transition was nervewrecking, the results have been promising.

“I still have pressure to make money for the investors, but they understand that it is a function of the economy,” said Pickell. “They’re betting that building is going to come back – I’m just waiting for the economy to turn around.  The good news is that the company doesn’t have any debt and now has an excellent line of credit with investors. I couldn’t have asked for it to work out any better.”

Lakewood Homes took a different approach to the problem. Instead of selling to investors, they formed Right Residential, LLC, with the goal of giving new life to distressed homes.  Their marketing approach remained largely the same, with Buz Hoffman, the owner, continuing as the face of the new company. While their marketing focus has shifted to incorporate direct marketing to both brokerages and buyers, the real estate community was already familiar with the quality of Lakewood Homes’ work.

“We had a very large following from the standpoint of referral business [as Lakewood Homes],” Shaxted said. “Sixty percent of our business came to our door through referrals. Right Residential is not at that point yet, but we’re beginning to see that the realty community knows us. They’re getting emails from us with new products that are coming to the market, we’re creating a following. Realtors link us to Lakewood Homes – it does make a difference from the standpoint of trust. They understand that when we’re done, their client is going to be satisfied with the purchase that they made.”

Tough Decisions
Survival in the post-bubble market meant making sweeping changes in the way construction companies were running.  Sacrifices had to be made across the board to compensate for significant loss of income from new construction sales.

“We’ve gone from 132 employees down to 22 since 2006,” Pickell said. “We’ve moved from a 20,000-square-foot office to a 4,000-square-foot office. We still have the showroom, but we’ve gone to a smaller office space.  And unfortunately, we’ve lost a lot of good people, but we’ve kept our key people.  We weren’t known for remodeling, but when things got really tough that was what got us through.  Remodeling was probably 30 percent of our business before the recession, but that figure became closer to 70 percent from 2008 to 2010.”

Although a loss of labor would severely impact many companies’ bottom lines, when there aren’t sales enough to support full time employees, subcontractors are key to filling the gaps. Catapult Real Estate Solutions is running a tight ship with only eight people on the payroll and multiple subcontractors who come in to complete specific tasks.

“You end up sounding small, but in today’s world, you don’t want to have office space or pay benefits when you don’t have to,” Dincin said. “We manage the process, using a lot of subcontractors and vendors.  We don’t have a staff of carpenters, but we have a laundry list of some real go-to people.”

Focused on Customer Service
The Orren Pickell Building Group opened a maintenance company, which served as its recession strategy. An additional source of income for the company, as well as an added convenience for customers, they opened a maintenance company available to the owners of Pickell homes for a nominal fee. Currently, Pickell’s maintenance team has contracts on 250 homes.

“When people are worried about how long financial woes are going to last, they may shut down maintenance for a year or two, but they understand that you’ve got to maintain or everything is going to break down,” Pickell explained that by offering low-cost maintenance, he could also keep in touch with past customers and ensure that when houses went up for resale, they were in excellent condition.

Homes built by Pickell are given a free inspection before they are listed by a brokerage to ensure they show at their best. Repairs can be contracted through the company for a small fee. “We make sure that everything is tuned up and owners are not inconvenienced in any way with their house,” said Pickell.  “It’s amazing when the client has the builder come back a few years later and actually writes them another check.”

Another service is drafting plans to “fix” homes that are difficult to sell because of awkward or outdated floor plans, and add an addition or remodel that the agent can include in the home’s presentation package. The company includes an estimate for the construction so buyers can make an informed offer on the property.

Lakewood Homes was intimately familiar with the affordable housing market, building homes almost exclusively in that price range.  When they formed Right Residential, the group had no intentions of abandoning this key demographic.  Instead of building, though, they found distressed homes in need of owners and made them move-in ready.

“We provide housing for police and school teachers and the average working guy,” explained Shaxted. “We saw a void in the need for quality housing on the resell side. So many homes were being sold as is, from owners that hadn’t done much work over the last several years.  These people don’t have the desire or ability to put more money into their homes to maintain them properly, so when they go onto the market, they look a little tired.  We buy them up, put a little work into them and make them ready to live in.”

By doing this, it helps keep capital reasonably liquid and buyers acquire their first or second home at prices they can manage.

“We like to provide good value and the market responds to this strategy. Real estate doesn’t really age very well, it’s not like fine wine,” said Shaxted. “We often sell homes within three days of listing them. Certainly, if you hold anything 45 days, there’s something wrong. Right now, we’re seeing multiple offers because there are so many buyers out there – it’s location, it’s good value, and it’s the condition of the home, all those factors combined.”

Another Type of Service
Builders are also creating new niches for themselves where little to no opportunity existed before. Tandem Developers, condominium experts, founded Catapult Real Estate Solutions with a different goal in mind.  Instead of focusing their efforts primarily on development, they would assist banks that found themselves in possession of multiple unfinished condo units and commercial properties.

“I started with bankers that I knew that trusted me and recognized that I had integrity and expertise.  I let them know what I was doing, but it took a while,” Paul Dincin, Founder of Catapult Real Estate Solutions, explained. “Fortunately, I started out being well-known as a condo developer, so I didn’t have to prove that I knew how to develop a condo. My experience gave me credibility, and then I built the company from there.”

Unlike with single-family homes, foreclosed condos often come in packages of unfinished units. As a former condo developer himself (as well as a licensed attorney), Dincin had the skills to act in place of the absent condo developers to finish these projects on behalf of the banks that suddenly found themselves in the condo market.

“People look at the bank like they’re the successor developer, but they’ve really just inherited 10 or 20 or 30 units. We come in to get those units sold,” Dincin said. “Otherwise, they just languish and the bank has to dump them for pennies on the dollar. We deal with half sold, half built condo developments in general and resolve all the problems that are stopping sales while trying to maximize the price of the asset for the client.”

Dincin’s company handles things like stalled marketing, new promotions and repricing and rebranding.  We also deal with condo associations that may be very disgruntled, as well as any past problems with the former developer.”

Recently, Catapult Real Estate Solutions opened Catapult Realty to provide further assistance to consulting clients struggling with gluts of condos or commercial packages. Instead of relying on an investor coming in to purchase a lot of finished condos, broker Terrie Whittaker, who runs the division, has the option to break lots apart and market individual units toward the individual condo owner.

The Future of the New Construction Market
According to the NAR’s Chief Economist Lawrence Yun, housing starts are not keeping pace with demand. Today’s new construction home inventory is at a 50 year low despite the increase in home prices.

“Even with the increases in the past year, housing starts remain woefully below the long-term average of 1.5 million new units that are built each year; today’s data is only half that,” stated Yun. “It looks increasingly that America could encounter a housing shortage in the next year or two if housing starts do not ramp up significantly.  Already, the continuing declines in apartment vacancy rates and the steady fall in the inventory of homes for sale are hinting that there are fewer and fewer housing units to go around in a country that is adding about 3 million more people each year.”

Local homebuilders across the country are eager to get started, but many face significant challenges securing financing from the iron-fisted banking system. Larger builders have funding from Wall Street, creating a situation where they can thrive with little local competition.

”You’ve really only got maybe 10 builders in the market right now, but they’re mostly national builders,” explained Shaxted.  “Until there is some ability to get bank financing, the non-public builders will be small or not very involved in the game.  I think the banks’ hands are tied.  They’ve got restrictions and real problems in terms of capital requirements.  When those restrictions are placed on banks, it’s obviously going to slow the system down until someone comes in to help that side of the business.”

Despite the significant challenges, homebuilders remain confident that the market will continue to grow. The American Dream is still strong, no matter how tough the economy has been.

“It’s all about confidence. When people are confident in our country, our economy, and the world, there’s a huge demand for everything,” said Pickell. “There’s a lot of pent up demand at the moment. There are a lot of kids that are living with their parents that are waiting to buy – there are a lot of things that should cause the tides to turn. I still think people want the American dream, they don’t want to be living with their in-laws or be living with Mom and Dad.”