Scenario: Whenever possible, Barry likes to build his custom homes on land he controls. This gives him another profit center (he marks up the land) and allows him better control of the buyer (if they want the land, they have to use him as the builder). The downside is that Barry spends a fair amount of time looking for the right pieces of land. In the town where Barry works, there are three other builders with similar marketing strategies so there’s always competition among them for the best lots.
In one of the nicer areas of town, Barry has found a beautiful piece of ground. It has 24 acres of gently rolling wooded hills and easy access to shopping and employment centers. The land is approved for 40 half-acre lots with space left over for a community park. The problem is, there are too many lots for his own needs. At Barry’s current rate of sales, it would take him five years to build all the homes, and the investment is more than Barry is comfortable with. But he’s afraid that if he doesn’t buy the land one of his competitors will grab it. What should Barry do?
Solution: Barry should form an alliance with two of his competitors and buy it with them. That way they all have access to good land, and they can divide the costs of developing and marketing the community three ways. By pooling their resources they have a better chance of obtaining the land and avoid a bidding war among them.
Once they agree to jointly develop the land there are several ways they can allocate individual lots. They can create separate neighborhoods, each with its own builder, or they can scatter the distribution among the builders throughout the community. The advantage of the second approach is that they can phase development better and avoid up-front development costs.
One group of builders we know even shared a sales office. Since each builder had assigned lots, the prospective buyer could either select a builder first, and then choose from the lots available to that builder, or choose a lot first, and use the builder assigned to that lot. Cooperative alliances like this are one way that small builders can compete effectively against bigger builders. It’s also a way to control the quality of the neighborhood.
Many builders feel that having competitors in close proximity divides the market and reduces sales. But what we’ve learned from the auto industry and the food court at the mall is that the opposite is true. Because car buyers like to shop around they will visit areas where multiple dealers have showrooms, rather than driving to isolated dealers. At the food court, they enjoy the variety and convenience available. The sellers may be dividing the pie, but it’s a larger pie.
In forming an alliance, Barry should choose his partners carefully. He wants builders with similar philosophies of doing business and comparable levels of quality construction. He wants partners who are financially stable and can carry their own weight. The last thing he needs is for one of the builders to get into a cash bind and start cutting prices or lowering quality to move product.
Al Trellis, a co-founder of Home Builders Network, has more than 25 years of experience as a custom builder, speaker, and consultant.
