America’s Best Builders 2007: Focus On Flexibility

Growth Spurt

A slump in Atlanta’s housing market won’t derail Touchstone Homes’ plan to top $1 billion in sales within seven years.

Single-family home construction has dropped by 4 percent in Atlanta in a year, and the pace of home sales there is about 11 percent below that of late 2005. Selling prices are flat, and inventories have swelled to eight months’ worth of sales.

It’s the moment Rick Stein, CEO of Suwanee, Ga.–based Touchstone Homes, has been waiting for.

“I consider this a lucky point in time for us because we have prepared ourselves for this opportunity,” says Stein, who has developed lots and built homes in suburban Atlanta for 23 years. “We’ve been the beneficiaries of good times, but we will be a beneficiary of this, too.”

Stein’s $84 million firm is poised to buy as much land as possible at the deflated prices that accompany a building slowdown, adding to its store of 2,000 lots in Gwinnett, Hall, Forsyth, Douglas, Cobb, Barrow, and Fulton counties. In fact, the builder/developer aims to grow at an “extreme” pace by buying land and other builders, says Stein, who predicts his firm will build 1,000 homes a year by 2010. It closed on 273 homes in 2006, and Stein estimates the company will sell more than 500 this year. While he’s at it, Stein intends to open in a secondary Southeastern market by year’s end.

Bracing Stein’s confidence is his balance sheet: In 2003, Touchstone Homes closed on 191 homes as it tweaked its product in anticipation of the start of its growth spurt. Closings dipped to 167 the following year, but the firm’s net profit percentage almost doubled. It invested some of that money bolstering its own infrastructure, increasing its staff by 30 percent and enlisting employees in a new “opportunity for improvement” program that rewards them for suggesting new profit-making opportunities or cost-cutting steps—to the tune of $6,250 to the staffer with the most good ideas in a year. Meanwhile, it opened a 5,000-square-foot, Tuscan-themed design studio and beefed up marketing and branding of the Touchstone Homes name, and watched as gross profits rose and costs fell.

SURVIVING THE SLUMP
Still, the builder of mid-priced single-family homes and townhomes has not skirted the slump: Over the past year, notes Domonic Purviance, a market analyst with housing market research firm Metrostudy, Touchstone Homes has “been hit significantly.” He says the same about all builders along Atlanta’s fringes, as a healthy portion of buyers around the perimeter are out-of-staters who relocated to Georgia after cashing in when prices spiked on the homes they owned in Florida and elsewhere. Lately, though, those would-be Georgians have had trouble selling their out-of-state homes, so fewer are moving in.

“Atlanta is not a bubble market,” says Purviance, who explains that the double-digit appreciation that fueled markets such as Miami, Washington, and Boston skipped over the Gate City of the South, “but we’re impacted by markets that have experienced a bubble. So in certain areas of Atlanta, you can buy a big house on a big lot on the fringe for a lower price.”

But many builders aren’t as financially healthy as Touchstone Homes, suggests Stein, who expects the downturn to do-in some of his smaller competitors. When it does, he’ll be there with offers to buy. “We’ve basically been holding our fire power for this moment,” he says.

“The future of Atlanta is extremely bright. This [slowdown] is simply a correction. We will deal with that problem appropriately, but our strategy is growth. I’m bullish.”

Dealing with the downturn means reducing inventory, scaling down the size of homes, and cutting construction costs, notes Stein.

“We’re financially downsizing to fit the market,” he says. “If you’re in a market where the mortgage payment is important, you have to build smaller houses. Builders that are going to survive are right-sizing their product.”

To that end, says Bryan Cohen, Touchstone Homes’ president, the firm is offering upgrades that once came standard in the firm’s higher-priced homes—and has found buyers are willing to pay extra for them. “People are buying the options and putting them back in,” he says. “We’re not an everything’s-included builder.”

Leigh Windham, vice president of sales and marketing, says buyers in a housing crunch—especially first-timers—fixate on closing costs. “To them,” she says, “the bottom line is the bottom line.”

Cohen agrees: “People are looking at [homes] as shelter again. They’ve got to squeeze the value. For the last few years, we’ve been spoiled.”

POISED TO PURCHASE
The situation doesn’t faze Stein. “It’s just like anybody in the car industry,” he says. “If you have excess inventory, you have to adjust your product. That’s what every single builder will do.”

And many builders will delay construction on long-planned projects. As they find they can’t afford to hold onto unproductive land for which they paid a premium price, predicts Stein, they will sell low.

“The local builders have too much land and too many lots, “says Cohen, who notes that Touchstone Homes did not acquire any lots while prices were skyrocketing. Stein adds: “We’ll be able to get [Grade A] locations we otherwise wouldn’t.”

Stein is confident the housing market in Atlanta, which has added 100,000 new residents a year since 1980, will bounce back within 12 months or so. “These are short-term issues,” he says. “We’re in a vibrant market with good prices.”

And a Touchstone home is a good value, offers Purviance. “They offer a decent fit-and-finish that puts them at a reasonable price and offers good value … compared to some of the other builders,” he says.

“If I were in the market, they would be the first ones I’d go to,” agrees Bob Nichols, a Monroe, Ga., contractor who serves as president of Touchstone Homes’ trade council. He calls the builder a “forerunner” in adopting code changes, citing the firm’s switch from 10 SEER to 13 SEER for heating and air conditioning before code required it and its standard programmable thermostats in most homes.

“This way, they help the consumer with their energy bills by putting better-quality products in the homes,” says Nichols, general manager of Snellville Heating & Air. “It also adds to their marketing value.”

EXCISING EXTRAS
As the firm looks for ways to cut costs, Cohen says it’s trimming expensive extras that don’t scream “value” to would-be buyers. The builder, for example, has eliminated exterior wall protrusions, such as bay windows, except on the front. Extreme roof pitches, attics, and two-story family rooms also are history. In their place are engineered roof systems, optional top-story “bedrooms in the sky,” and a media room atop the family room instead of a high ceiling and unused space.

“We’ve never been a builder going for the lowest cost per square foot or the biggest-square-foot home,” says Cohen. “When you drive up to the home, it screams at you: ‘Come in, come in!’”

Indeed, a signature Touchstone flair is an elegant front elevation. To squeeze nine units into a 162-foot townhome cluster, for example, the builder designed the interiors first, placing windows where they were needed. Then came the exterior design. The surprising result: The nine splits in the front elevation do not match the boundaries of the nine townhomes; that is, the elevation splits in the middle of two townhome units in some places.

Such finishing touches are nothing new to Touchstone Homes, which began operating in 1994 as the home building arm of United General Industries, Stein’s residential and commercial development company.

Stein, who describes himself as “agile” rather than “creative,” traditionally has customized his product to suit a good piece of land rather than passing on a lot that doesn’t fit the kind of home he builds. “Most builders just won’t buy the land,” he notes. “We’ve come to realize this is one of our strengths.”

As a result, homes in one Touchstone community differ greatly from those in the next. To avoid blunders and save time on the jobsite, the company models everything. “When we try to do something new, 85 percent of the new thing is already known to us,” says Stein. “We model, we estimate, we think it through before we push the nail. We analyze it down to understanding 85 percent of that. Just 15 percent is unknown. We whittle our risk down to nothing.”

A CHANGE OF PLANS
As the company grows, though, that approach might not work, admits Cohen. “It’s become a part of our history, but we can’t keep doing it this way as we get bigger. As we get the numbers up, we will have to change our corporate philosophy.”

The firm could get some help from the smaller home builders it intends to buy over the next few years. “It’s going to pull together all of the expertise we’ve been trying to garner,” notes Stein.

Jeff Abraham, Touchstone’s CFO, agrees. “Every time we create a success, we’re looking for the next opportunity,” he says.

Stein hopes that by 2014 Touchstone Homes’ revenue will grow to $1 billion. His optimism, he says, reflects his attitude.

“It’s the journey, not the destination,” says Stein. “We are having an incredible adventure.”

He adds, “I don’t want it to end. To keep it going, we’ve got to find new ways to do things. It’s a desire to follow an adventure.”