Meeting Customers Head On

In 2009, the median age of a single-family home builder was 53 years old, according to an NAHB survey of its members. And a destabilizing recession hasn’t helped housing replenish its ranks with fresh talent. But despite—or perhaps because of—market conditions, a generation of builders in their 30s and 40s is asserting itself with new ideas and energy.The following profiles feature four such builders whose distinguishing characteristic is their willingness to try new things and shift gears when experiments don’t work as planned. These builders also rely more than their predecessors on systems and processes to monitor their financial and operational performance, as well as their customers’ preferences. To quote one of our subjects about his company’s early success, “Everything we’ve been doing we’re doing on purpose.”

Getting to Know You

Todd Ullom has worked for his share of builders whose operating systems have left much to be desired. When he came on board as COO of Matthews Brothers Homes in Atlanta in 2003, that company had 37 homes under construction without permits. As WCI Communities’ then-new vice president of strategy and home building in 2007, he audited one community whose subs were working at only a 42 percent efficiency rate, which led Ullom and his team to compose a production manual that included fundamentals such as tracking variances and sticking to schedules.

It’s not surprising, then, that the Georgia Tech grad, who once toiled at FAST Management Group before and after it merged with the e-commerce site BuildNet, sees systems improvements as the answer to most operational questions. Often, those solutions have revolved around accelerating cycle times without diminishing quality to boost sales.

As co-founder of Couture Lifestyle Homes, a four-year-old custom builder in Jupiter, Fla., the 45-year-old Ullom is again relying on systems, in the form of a unique and intimate methodology that matches homes with how their prospective buyers live. Through its “Lifestyle Discovery Process,” Couture observes prospects’ environments and habits by embedding employees in buyers’ homes for extended periods. For example, Ullom’s partner, Gary Hartogh, recently spent three days living with one client in the prospect’s house in Chicago.

The goal, says Ullom, is to tailor the house around those lifestyles by understanding the customer’s preferences and aesthetic and financial tolerances for options and upgrades. He tells a funny story about one retired couple whose beloved cat, a 16-year-old arthritic feline named Max, drove many of their design choices, such as special shelves for water and food bowls and a litter box integrated into the laundry room. “When I come back, I want to be Max,” laughs Ullom.

The Lifestyle Discovery Process leans heavily on the social science known as ethnography, which is “a commercialized version of anthropology,” explains Bob Worrell, founding principal with the Minneapolis-based product design firm Worrell. Worrell first met Ullom when he purchased a WCI-built home and later helped the builder develop the Lifestyle Discovery Process. Worrell says most customers “actually don’t know what they want,” so observing behaviors is the best way to determine what they need in a new house. Couture even encourages prospects to keep video diaries of their daily activities. “It’s like a deep dive to understand the subtleties of the culture,” says Worrell.

Ullom and Hartogh—who in another life was one of South Africa’s largest builder/developers—believe the Lifestyle Discovery Process is the foundation for achieving their larger ambition of licensing Couture as a brand. Couture is currently beta-testing its licensing concept with another builder, Orlando, Fla.–based Arturo Barcellona Homes, whose own ethnographic process is geared toward developing standard house plans.“We’re never going to build 50 to 100 homes in one market,” says Ullom, whose company expects to complete five homes in 2012 and 20 in 2013, averaging 8,000 square feet and selling for $2.6 million before land costs. “So we need to find 20 like-minded builders in different markets” to expand Couture’s business. Couture will select builder-partners by following its customers, many of whom own houses in the Northeast, Chicago, Denver, and Arizona.

Ullom has been kicking around this idea of branding for a while. In the early 2000s, he worked with Martha Stewart Living on its first home-design program. And while at WCI, Ullom helped to develop a Ralph Lauren–branded concept. “The problem was that the house would have cost $17 million,” says Ullom. (WCI eventually did build a Lauren-branded house that sold for $5 million.)

Ullom envisions Couture becoming a brand “for the rich and famous, like Armani and Chanel,” but admits it has a long way to go before it reaches that status.

Meanwhile, Couture continues to refine and grow. It recently completed a 9,751-square-foot house in 165 days that was the first in Palm Beach County, Fla., to obtain green certification through the NAHB’s National Green Building Standard. The builder also recently signed an agreement for a seven-house community, its first.

And in August, the company hired its first full-time architect. Couture has employed architects from Canada and Italy in the past, and Ullom says he’ll still hire outside architects to keep Couture’s designs fresh.

Period of Adjustment

After six years of losses, Harcrest Homes in Buford, Ga., expects to be profitable once again in 2013. Getting to that point, in one of the country’s weakest housing markets, will be a monumental achievement for Mike Smith, Harcrest’s owner, who along the way has had to reframe Harcrest’s financial “story” to convince bank lenders and trade partners that the company could survive the recession when so many competitors were falling by the wayside.

The 45-year-old Smith, who joined the company in 1991 as a superintendent’s assistant, assumed ownership on Jan. 1, 2005 from Carl Riden, who started the business under his own name in 1977 and was retiring. Smith agreed to pay Riden monthly from the proceeds of home sales in Harcrest’s two divisions.

At the time, Harcrest Homes was flying high. In 2005, its 66 closings, $29 million in revenue, and $4.6 million in profit were records. Earnings remained about the same the next year. However, in 2007, just as Harcrest “had opened the doors for a new subdivision,” recalls Smith, the market imploded, “and by mid-year we realized we weren’t in a good position.” Harcrest lost money that year for only the second time in its history, as closings fell to 18 units and revenue to $9.4 million.

It’s important to note that Harcrest’s average price in 2007, $524,441, was nearly $35,000 higher than the previous year’s and nearly $86,000 more than when Smith became owner. This inflation became the albatross around Harcrest’s neck otherwise known as legacy lots, which were bought at between $120,000 and $140,000, with some carrying $35,000 in interest.

As business conditions worsened, Smith made three rounds of personnel cuts that eventually reduced his staff to five from 22. Harcrest moved into smaller offices and closed its design center. And Smith put whatever profits Harcrest made back into the company for a rainy day fund equal to six months of overhead expenses.

But then Bank of America called in 2008, demanding that Harcrest pay down its $600,000 loan. Smith realized more drastic measures were needed.

So that year, he developed a suite of house plans called New Traditions that eliminated certain features and, in some cases, shrank his product’s size by 400 square feet. These changes allowed Harcrest Homes to drop its selling prices by nearly $100,000.

Smith also revalued his lots to a more realistic $90,000 (which is what they could sell for at that moment, and what his company actually owed on them). That reset, from an accounting standpoint, allowed Harcrest to recalculate its profit/loss statement to show that, in 2010 and 2011, it made money (see chart, above right). “Internally resetting lot prices allowed us to realistically look at each job for competitiveness as well as profitability,” Smith wrote in his business plan.

As it paid down its land, Harcrest’s cash flow improved and last spring, Smith finally paid off his legacy lots.

From then on, Harcrest Homes took an opportunistic approach to its business. It became more open to building on scattered lots. In 2010, it took on a $1.3 million contract to complete 101 homes for Bank of America. The company also accepted more remodeling jobs. And Harcrest’s losses led to around $900,000 in tax-loss carryforward refunds.Smith knows his company isn’t out of the woods yet. “I don’t want people to read this article and think I’m doing great; we’re struggling and still trying to figure it out.” But his adjustments at least give Harcrest Homes a fighting chance to be around if any of Smith’s three sons decides to go into home building.

Focal Point

Baessler Homes of Greeley, Colo., once did just about anything for customers: built custom homes, worked from old floor plans, remodeled an existing house.But over the past few years the builder has reconsidered “who we are and what are our goals,” says Jamie Baessler, the 35-year-old vice president who runs the company his father, Ted, founded in 1968. “We’re a custom builder utilizing production processes to design and build a customer’s house,” he declares. And, “we have defined systems to control the cost and time frame” of construction.

This year, Baessler Homes expects to close nearly 75 homes, compared to 37 in 2011. Its strategy has been to build on scattered lots in smaller towns with scarce inventory between Denver and Fort Collins, Colo. Last year, the company installed a Web-based software package that allows it “to handle work more efficiently,” says Baessler. That includes being able to “size out” a house on any property within 48 hours and complete the construction of that home in 75 to 120 days.

“Baessler Homes has strong systems in place that allow the company to turn prices quicker, ” says its sales manager Robbie Miner. He notes, too, that pricing the house and land separately “gives Baessler Homes a competitive advantage.”

Miner, a local real estate broker for 14 years, came on full time last January. He is part of a management team that Baessler has been assembling for more than a year. He hired a controller last November, his vice president of operations, Larry Archer, signed on in July 2011, and Archer’s son Kevin—a superintendent since 2009—became the builder’s purchasing and estimating vice president in February 2011.

Baessler, himself a licensed broker, says his role in the company “has greatly changed” in the past year. It’s become more strategic, particularly in the areas of land acquisition and growth. During the early 2000s, Baessler, who joined the company in 1995, recalls being “frustrated” by his father’s reluctance to take on debt to expand. But his opinion changed when that conservatism “protected the company” after the market unraveled in 2008. Right now, the only debt the builder carries is an operating line of credit.

Baessler also subscribes to his father’s philosophy about taking down real estate as needed. Miner says Baessler Homes has option agreements for about 600 lots with private owners, developers, and banks. Baessler isn’t averse, either, to picking up five or 10 lots here and there, small quantities that larger builders generally avoid.

While Baessler Homes continues to design and build custom homes, it recently created a dozen floor plans, which Baessler intends to double, “so we don’t have to reinvent the wheel every time we build a new home. We’re trying to make the process the same every time for all of our departments.” (The builder’s homes range from 2,600 to 6,000 square feet, and are priced from $170,000 to $700,000.)

Baessler Homes’ growth is abetted by a 60 percent drop in new-home inventory in its markets, says Miner. Baessler also attributes success to his family’s Christian faith, which informs its relationships with customers and trade partners. “It’s the way we handle ourselves; we try to walk well.”

Earlier this year, Baessler Homes walked away from its division in central Wyoming so it could focus on improving its corporate systems. Baessler believes his company can generate 150 closings per year within a 60-mile radius of its headquarters. And within 18 to 24 months it should be ready to open a second division in Colorado or maybe even Wyoming again.

Round Two

It’s 2008. Jay Mezistrano and Marc Rousso are basking in the glow of the recognition of their company, JayMarc Development, as one of the 100 fastest-growing businesses in Washington state by the Puget Sound Business Journal. The partners have known each other since college and started developing land in their late 20s. By 2008 their assets included 240 residential lots valued at $40 million. The future looked bright.Until Seattle’s housing market crashed, that is, and they were forced to liquidate land and rental properties. “We were pretty close to bankrupt,” Rousso recalls. But unlike other real estate companies in the same tough spot, Rousso and Mezistrano never sought court protection from their creditors, and spent the next 2½ years working out their debt issues with lenders.

That experience became a badge of honor that gave the partners the courage to begin again, this time as builders. In October 2010, JayMarc Homes was born, although getting a new venture off the ground in the middle of a recession had its hiccups. “It was a lot of ‘No’s,’ and then more ‘No’s,’” says Mezistrano about seeking financing.

The duo scraped together seed money from friends and family. And after a few small projects clicked, JayMarc Homes attracted the attention of a family real estate investment trust in Vancouver, British Columbia, whose private equity fund provided the cash JayMarc needed to purchase land. Mezistrano admits he wasn’t sure at first if JayMarc Homes would be long for this earth. “I had doubts every day. The market was shaky, we had zero cash, and we were new to the business.” In their first year, neither partner drew a paycheck, and they pumped whatever they could back into the business.Now both 42, Rousso and Mezistrano are feeling more confident that their new venture can survive. The company expects to close between 30 and 35 homes and generate between $20 million and $25 million in 2012. It’s shooting for 40 closings next year.

Rousso attributes his company’s relatively quick success to having its systems in place before it opened its doors. The partners specifically credit Shinn Consulting for assisting them in developing criteria for such items as the scope of its vendors’ work, a purchase order system, and establishing accounting protocols. “We spent a lot of time thinking about what our business was going to be,” says Rousso, who drew on his experience as a real estate broker and land developer, as well as his participation in the MIT Sloan School of Management’s Entrepreneurship program.

The partners put together a 56-page business plan that included detailed processes and procedures for every facet of JayMarc’s operations: organization, marketing, sales, construction, estimating, purchasing, and warranties. “We wanted to become an organization, not just a builder,” says Rousso.

First and foremost, the business plan provided for having a customer service program and a customer service manager in place before JayMarc met with its first buyer. “We wanted to make sure they were 100 percent taken care of right from the start,” says Rousso. The company’s construction process included an 80-day cycle time goal and a 276-point quality checklist. Rousso adds that JayMarc is “proactive” about its warranty program, meeting with every home buyer one month, six months, and one year after the sale.

Sol Avzaradel, a broker with John L. Scott Real Estate, who handles all of JayMarc’s sales, thinks the builder’s advantage is in its owners’ receptiveness to different ideas and suggestions. For example, many of its customers are Asian families living with grandparents, “so the floor plans conform to their lifestyles,” observes Doris Quan, Mezistrano’s wife and a principal with Mother of Pearl, a local marketing firm that helped JayMarc Homes develop its branding message.

JayMarc’s homes, priced from around $440,000 to $1.45 million, are marketed as offering affordable luxury. The company builds in Renton, Newcastle, Bellevue, and Mercer Island, Wash., where half of the builder’s business comes from infill opportunities, says Rousso. “Last year, they got more into buying one- and two-lot deals, most of them teardowns in high-end areas,” says Avzaradel. Next month, JayMarc is scheduled to start a 15-lot project in Renton Highlands, which is flooded with production builders and where JayMarc goes head-to-head with Toll Brothers. But, says Rousso confidently, “We’re the little train that could.”

Learn more about markets featured in this article: Miami, FL, Atlanta, GA.