Thursday, February 4, 2010
I recently read an article about what makes a successful builder and developer. The article stated that builders and developers will have to get better at what they do in the coming years. Only about one out of ten builders/developers I have spoken with actually made money building houses between 2002 and 2006. The other 90 percent only made money because their lots appreciated while they were preparing to build on them. Since all appreciation accrues to the land, this factor masked the losses that the builders were experiencing when constructing the improvements. House prices will be constrained by more conservative underwriting by lenders. This means that builders and developers will have to look to productivity increases for their profits, not increasing prices. I don't mean squeezing trade contractors and suppliers - I mean smarter products, more efficiently designed, delivered quickly and competently. The good news is that there is tremendous waste in both the land-development and homebuilding processes. I know this is true because some builders consistently make net margins of 15 percent and above on their homebuilding operations (excluding their profits on land), while the majority think it's normal to make two percent to five percent net margins. Successful operators in this industry will start every project with a reasonable projected market value, subtract their profit, and then build the project out of what's left. This process will be repeated and refined over time, resulting in increasing efficiencies in both direct cost and cycle times, with the end result of increased profits and increased customer satisfaction.
The other major change: ALL forms of capital are going to be more expensive. Bank lending will eventually come back, but it will be much more conservative and require a great deal more collateral than before. I'm already seeing investor equity coming back into the market, but investors will want to see more equity provided by the builders and developers they invest with. This means that company growth will be limited by company equity.
It also means that the successful operators of the future will pay close attention to their operations, since their ability to grow will be enhanced by increases in both their profitability and their ability to turn their inventory more rapidly. So, the choice to be a successful operator in the industry is up to you. You have gone through the exercise of downsizing your operations, so how do you increase efficiencies in both direct-cost and cycle times to bring increased profits and increased customer satisfaction? One company that has been successful in assisting with such increases in profitability and increased cycle times is CB Quantifications (www.charlesanbetty.com). After viewing their website you may want to schedule a phone conference or face-to-face appointment to see just how you can increase profitability and cycle time without the cost of overhead. Are you ready to make some changes to make yourself and your business more successful?
The Time to take Action is NOW!!!