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Houston Builder
Dyn-o-mite!


Joined: 09 Jan 2009
Posts: 351

Lennar, KB now fee building......
PostPosted: Tue Oct 20, 2009 1:34 pm Reply with quoteBack to top

More embarrassment, this is what happens when you can't spend cash on buying land and don't have a strategy that you are confident in. Fee building limits their topside and they have to compete with locals that don't have their 16-8% SGA overhead - you don't see Horton, Pulte or MTH doing this.......sign of more desperation


Big Builders Sign On With Irvine

Source: BIG BUILDER News
Publication date: October 19, 2009

By Teresa Burney

The Irvine Company finally went public on Monday Oct. 19 with what's been an ill-kept secret for months -- the storied California community developer is branching out into home building.

Instead of selling lots to builders, The Irvine Company has developed 25 home designs and is hiring six builders to build them. The builders get flat fees for the construction and The Irvine Company gets the profits.

While the difficulty some builders have getting construction financing may have been some impetus for the change in business philosophy, several of the builders on the list could hardly be called hamstrung for construction cash.

Lennar and KB Home, both with considerable cash on hand, are two of the builders who will be working as merchant builders for Irvine. The other four builders are Brookfield Homes Southland, The New Home Company (led by Larry Webb former John Laing Homes CEO) , TRI Pointe Homes, and Van Daele Development.
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houston
Nitroglycerin


Joined: 02 Dec 2008
Posts: 661
Location: Houston, Texas

Re: Lennar, KB now fee building......
PostPosted: Tue Oct 20, 2009 3:39 pm Reply with quoteBack to top

Just for clarification, you said 16-8% SGA overhead, was that a typo in that you meant 6-8%?

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Last edited by houston on Tue Oct 20, 2009 4:17 pm; edited 1 time in total
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NewHomeDallas
Dyn-o-mite!


Joined: 05 Jan 2009
Posts: 404

Re: Lennar, KB now fee building......
PostPosted: Tue Oct 20, 2009 3:52 pm Reply with quoteBack to top

I don't understand how this is bad for either the builders or for The Irvine Company. Since the only lots builders are buying are foreclosed or deeply discounted; The Irvine Company has no market for it's lots. This allows them to sell a few lots waiting for the California market to come back.

For the builders it's a pure win. They have guaranteed contracts at profits that are set in advance. They have no marketing costs; no sales costs; and more important, no bust-outs. And, they don't have to take-down a specific number of lots that they have to pay for.

Any sale in California is a win considerring that it's virtually impossible to sell a new home at retail in that state. Look at their prices. We sell town homes between $100-150/sq. ft. in nondowntown areas. They are selling the same home for $300.

All things considered, I don't see any problem with this. If I'm wrong, show me. And since Donald Bren bought the 93,000 acres for only $337,000,000 in 1977, it's not a bad return on his investment. He is now worth only $12,000,000,000.
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Houston Builder
Dyn-o-mite!


Joined: 09 Jan 2009
Posts: 351

Re: Lennar, KB now fee building......
PostPosted: Tue Oct 20, 2009 9:23 pm Reply with quoteBack to top

Here is what KB reported as their SGA - it improved to 18.5% Laughing

Overall in the third quarter of 2009, our SG&A expenses as a percentage of housing revenues improved to 18.5% from 19.1% in the second quarter of 2009 and 19.9% a year ago.

NewHome - if this deal was such a winner, why wouldn't all the builders be doing this. Lennar and KB aren't buying many new land deals and the reason they probably got these build jobs is b/c they undercut the builders who can actually buy great land at cheap prices and take advantage of low construction costs. I am sure Horton and MTH looked at this and passed on the opportunity.
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NewHomeDallas
Dyn-o-mite!


Joined: 05 Jan 2009
Posts: 404

Re: Lennar, KB now fee building......
PostPosted: Tue Oct 20, 2009 11:47 pm Reply with quoteBack to top

Houston Builder:

Look past your contempt for KB and look at reality. All commercial construction is done this way. There is no downside for the builder. They sign a contract with The Irvine Co., build it, and get paid. The Irvine Co. sells some lots that wouldn't be sold otherwise.

The reason other builders don't do this is that most land developements aren't big enough. Most are in the hundreds of lots not thousands let alone the hundreds of thousands that The Irvine Co. is. The Irvine Co. covers 93,000 acres. This is 145 square miles and bigger than most cities. Also, very few if any other land developer has the resources of The Irvine Co. Most land developers don't have the capital or the ability to borrow like The Irvine Co.

I still don't see any downside. Without mentioning KB, how about showing me just one downside.
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Houston Builder
Dyn-o-mite!


Joined: 09 Jan 2009
Posts: 351

Re: Lennar, KB now fee building......
PostPosted: Wed Oct 21, 2009 5:31 pm Reply with quoteBack to top

NewHomeDallas wrote:
Houston Builder:

Look past your contempt for KB and look at reality. All commercial construction is done this way. There is no downside for the builder. They sign a contract with The Irvine Co., build it, and get paid. The Irvine Co. sells some lots that wouldn't be sold otherwise.

The reason other builders don't do this is that most land developements aren't big enough. Most are in the hundreds of lots not thousands let alone the hundreds of thousands that The Irvine Co. is. The Irvine Co. covers 93,000 acres. This is 145 square miles and bigger than most cities. Also, very few if any other land developer has the resources of The Irvine Co. Most land developers don't have the capital or the ability to borrow like The Irvine Co.

I still don't see any downside. Without mentioning KB, how about showing me just one downside.


Your point is well made - there is no downside, but there is also limited upside when you don't control the revenue potential for your operation.

NVR and Horton are making money b/c they have a strategy that focuses on location, location and school districts. KB's strategy is the Martha Stewart "this is our version of the I Phone" strategy - this was such a disaster that they don't mention it on their analyst calls.

Lennar and KB treat homes like a commodity - build them cheap and sell them cheap -and in this case, not for a profit, but just a small fee that any builder could earn if they wanted to.

When I see NVR start fee building, then I will believe its the best strategy - fee building is only about survival imo
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NewHomeDallas
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Joined: 05 Jan 2009
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Re: Lennar, KB now fee building......
PostPosted: Wed Oct 21, 2009 6:50 pm Reply with quoteBack to top

One of NVRs companies, Ryan Homes, was doing fee building in Pittsburgh over 30 years ago. And how about Weekley's "Build on Your Lot" program?

I have known and worked for several builders who built on a fee basis, most often town homes. I worked for a home builder who also built apartments and commercial properties on a fee basis. This allowed the home building to be much more profitable since we were able to leverage the building of 10 houses at a time vesus the right to bid on 200 apartments. We got some great bids and quick building for the houses.

In residential, it's not the prime business like in commercial building but it's additional income. It's like companies making Kennmore aplliances for Sears. There are very few situations like the Irvine Co. but there are many mixed use developments where the developer wants commercial, apartments, and condos or town homes. Every condo-hotel building is built on a fee basis.

Look at all the companies Centex started in addition to their home building business. It didn't work because of bad maangement but the business plan made sense.
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Houston Builder
Dyn-o-mite!


Joined: 09 Jan 2009
Posts: 351

Re: Lennar, KB now fee building......
PostPosted: Thu Oct 22, 2009 9:10 pm Reply with quoteBack to top

NewHomeDallas wrote:
One of NVRs companies, Ryan Homes, was doing fee building in Pittsburgh over 30 years ago. And how about Weekley's "Build on Your Lot" program?

I have known and worked for several builders who built on a fee basis, most often town homes. I worked for a home builder who also built apartments and commercial properties on a fee basis. This allowed the home building to be much more profitable since we were able to leverage the building of 10 houses at a time vesus the right to bid on 200 apartments. We got some great bids and quick building for the houses.

In residential, it's not the prime business like in commercial building but it's additional income. It's like companies making Kennmore aplliances for Sears. There are very few situations like the Irvine Co. but there are many mixed use developments where the developer wants commercial, apartments, and condos or town homes. Every condo-hotel building is built on a fee basis.

Look at all the companies Centex started in addition to their home building business. It didn't work because of bad maangement but the business plan made sense.


Fee building works for small privates who have low overhead structures and at the end of the day measure success by dollars, not margins.

When publics do it with their enormous overhead, it makes little or no sense. It also does not take advantage of the public's only advantage - access to capital. This is about survival of 2 builders that have no strategy (this is our version of the I phone!!) and no ability to buy land -

Horton bought cheap lots here in the Woodlands where people actually want to live and Lennar/KB is building for a small fee - who has more upside?
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BigDuke6
Flash in the pan


Joined: 28 Mar 2009
Posts: 40

Re: Lennar, KB now fee building......
PostPosted: Sun Oct 25, 2009 4:30 pm Reply with quoteBack to top

You are acting as if all of Lennar and KB's business is now build for a fee, which I don't believe is the case. Do you? I know that most of the builders in Northern California have attempted to negotiate "build for a fee" deals in the past 10 years, even your beloved DR Horton.
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mikestrong
Cherry Bomb


Joined: 07 Oct 2008
Posts: 118

Re: Lennar, KB now fee building......
PostPosted: Sun Oct 25, 2009 6:31 pm Reply with quoteBack to top

BigDuke6 wrote:
You are acting as if all of Lennar and KB's business is now build for a fee, which I don't believe is the case. Do you? I know that most of the builders in Northern California have attempted to negotiate "build for a fee" deals in the past 10 years, even your beloved DR Horton.

He does seem to have a huge mushy crush on DR. I will never understand it since they treat their customers and employess like total trash. They are known for screwing their buyers on a regular basis.
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