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Homebuilders -- Wake up and smell reality

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I have taken the liberty of modifying the 1980's adage of "Wake Up and Smell the Roses" which is probably the product of a mixing of metaphors -- "Stop and smell the roses" (i.e., appreciate life) and "Wake up and smell the coffee" (i.e., get real).

The smell of roses and even coffee is usually quite enjoyable but what I am smelling lately in the homebuilding industry is something far less pleasant. And we all need to take a deep breath of that reality and let it sink in so that we fully appreciate the implications if we are to survive and prosper in the future. And that reality is the possible demise of the smaller, local production homebuilder who may well be forced into a permanent niche as an even smaller custom builder and remodeler.

When I started in this business the homebuilding industry in this country was totally localized and smaller local builders dominated. By the 1970s, the larger and more successful local builders expanded regionally and then, both through growth, merger and acquisition, the "nationals" came into being. In recent times, aided by the downturn of the last decade, these industry giants have grown to the point that within the next couple of years they will account for over 50% of all new single family homes built in the U.S.A. and that is in addition to their overwhelming share of the multi-family for-sale segment.

My uncle was one of those smaller local builders in the 1950s, 1960s and 1970s operating in the Chicago area and producing 30 to 50 new homes per year on in-fill sites. He was quite satisfied to continue with that operation as vacant lots were plentiful and construction financing readily available and he made a comfortable living.

Certainly conditions have changed -- improved vacant homesites are scarce or non-existent in most locales and almost all of the choicest sites have been picked up by the nationals. Prices of land suitable for development are rising almost beyond reason and A & D financing often still remains elusive for smaller builders. Competition is fierce with the "nationals" typically often enjoying price advantages due to economies of scale and national contracts providing cost savings and also from economies of scale in marketing.

Instead of just rolling over and playing dead, however, I believe that there still substantial opportunities for smaller local builders to prosper in every market if they will make the commitment to properly research and analyze their markets and create a strategy for success! That strategy will identify realistic opportunities in the market and provide a step by step program for implementation and success.

Rather than trying to compete directly and head-to-head with the "big boys" (same location, same products, same price points) and accepting their leftover sales, it is important to identify and create one or more "niches" that minimize direct competition. Depending on the local market conditions and the actual strengths and abilities of the smaller homebuilder, a few of the many opportunities would include:

  1. Providing customization to differentiate from the big builders and their necessary production style of operation;
  2. Selecting geographic locations that generate smaller shares of the total marketplace -- too small for the larger builders to generate their necessary volume to support higher production and sales operations but appropriate for the smaller builders utilizing broker sales;
  3. Directly attacking the weakness of the big builders -- if they have the "price" position going for the "quality" position (or vice versa); if they build single family then building townhomes; if they concentrate on ranch homes then designing and building superior two story homes; if they build subdivisions then creating communities with visible themed differences;
  4. Creating a unique "look" for your homes that immediately says to the market that your homes are better (while respecting local market preferences) -- if they build "all brick" homes then providing attractive and appropriate alternate low maintenance designs utilizing stone, painted brick, stucco or fiber cement siding (Hardiboard );
  5. Creating unique and desirable "included" design features and benefits within your homes that the big builders do not offer (the demand for which become apparent through competitive and consumer research);
  6. Partnering with other smaller volume builders and, possibly, the developer in a semi-custom or custom housing neighborhood -- pricing above the large production builders and providing corresponding higher levels of finish and customer choices but combining sales and marketing into a single, centralized, cohesive and cost-effective operation;
  7. Pursuing "niche" opportunities such as urban in-fill housing operations, either scattered site or smaller parcel size or even small mixed-use buildings or developments or creative higher density products in prime, proven locations;
  8. Expanding a conventional remodeling/home improvement business to include purchase and remodeling/renovation/rehabilitation of older homes in prime locations (and, when appropriate, "extreme" remodeling opportunities such as gutting an existing home, adding a second floor or converting office or industrial buildings to residential).

It has been my experience that as the intelligent homebuilders pursue these strategies and their businesses and successes grow, they become more visible in the marketplace and are afforded new opportunities by lenders and land owners that previously did not exist. As they continue to take advantage of these new opportunities their business can grow exponentially until they are no longer small builders and then a whole new strategy is required to compete head-to-head as a big homebuilder with the other big builders while also protecting themselves from the smaller builders following behind and nipping at their heels.

The reality is that business for the small and mid-sized homebuilders will become more competitive and more challenging in the years to come. To survive and prosper they will need to make fundamental changes in their philosophies and operations. But that's just my opinion.

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Mr. Levitan is acknowledged as one of the nation's preeminent residential development strategists providing feasibility analysis, valuation determination, community positioning and repositioning studies, optimization studies, marketing strategies (more...)
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Homebuilders -- Wake up and smell reality

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