Off-Site, On-Your-Lot Business Protects Some Builders From Recession's Blows

Through the first three months of this year, Seda Construction’s off-site division, which handles its sales to buyers who own their lots, had booked more business than the 20 homes it built in all of 2008. “We’re having a great year,” says Linda Semanik, the division’s president and co-owner of this Jacksonville, Fla.-based builder.

Since launching an off-site division in 1997, David Weekley Homes in Houston has averaged 90 home sales per year, at prices that recently have ranged from $180,000 for a 2,000-square-foot unit to $1.5 million for a 5,900-square-foot home. “It’s a very profitable part of our business,” says Tom Wadley, Weekley’s Houston division president. And where this builder’s salespeople might have between five and 10 prospects to call upon, one of its off-site salespeople has 1,400 on-your-lot prospects in his database.

The demise of Jim Walter Homes—once the industry’s largest on-your-lot builder, which closed in January—did not necessarily reflect the relative health of what other builders say is a small but robust sliver of the housing sector. “It’s a good business model to be in right now,” says Bill Post, COO and co-owner of Wayne Homes of Green, Ohio, near Akron, who with his partner Dave Logsdon bought back their company from Centex last year. Post explains that the main advantage for on-your-lot builders is they aren't encumbered by land assets, whose eroding values in the downturn have crippled other builders’ balance sheets.

The Census Bureau estimates that owners contracted to build 74,000 single-family homes on their lots last year, with another 32,000 units built for rental. That compares to 103,000 and 31,000, respectively, in 2007.

Still, it does appear that on-your-lot builders are weathering the recession a bit better than others. Wayne Homes’ sales were off 11% in 2008, to about 450 units. However, the markets where it builds were down 42%, “so we’re definitely outperforming” many of its production-builder competitors, Post says. Another Ohio-based on-your-lot builder, Schumacher Homes, saw its unit sales fall by 15%, to around 500, last year, “which isn’t so bad,” says owner John Schumacher, whose 18-year-old company operates in 10 states.

These builders concede that off-site construction is very different from conventional production building. For one thing, lot owners aren’t always the easiest prospects to bring to contract, partly because there’s no urgency for them to buy. Many are also taken aback by site costs like utility and sewer hookups or septic system installations. Wadley notes that David Weekley often builds on lots within flood plains, or in established neighborhoods in Houston that have strict drainage requirements. “Buyers just aren’t ready for those expenses, so we have to manage their expectations,” says Danny Britt, off-site division manager for Collins Builders in Jacksonville.

Last year, Collins closed 138 homes that it built on developer-owned finished lot. But in 2007, it launched an off-site division “because we were getting so much interest from customers,” recalls Britt. Last year, that division wrote 10 contracts with lot owners and expects to write 15 in 2009. Often, these owners have owned the land for decades, and it’s not uncommon for them to be living in manufactured housing on the property. Others might have riverfront property they want to monetize. What Britt hasn’t been seeing much of lately, though, are owners with lots within existing subdivisions. “I guess developers aren’t releasing those for sale,” he speculates.

Britt and other builders agree that on-your-lot construction is a custom-home business, regardless of how many house plans a builder has available to choose from. (In its literature, Collins states that it has no fewer than 11 scheduled meetings with lot owners during the construction process.) Schumacher Homes, for example, has 250-plus plans, but what gets built, says Schumacher, is almost always dictated by an owner’s tastes, priorities, budget, and lot location. (He points out that customers can use one of its plans to design their own house from his company’s Web site.)

“They already have the location, so what we need to provide is a great experience and product,” says Post. Wadley adds that buyers “are sizing us up against other custom builders in the area,” and that the design process alone for off-site construction can take two or three months.

Because customization is demanded by on-your-lot customers—“so they can call their house their own,” says Schumacher—construction costs are all over the map. Stanton Homes in Raleigh, N.C., is building 2,200- to 3,200-square-foot houses on scattered lots for between $90 and $150 per square foot, says Penny Hull, this builder’s vice president of business development and operations. “Plus, we’re offering a ton of advice to customers who aren’t that anxious to buy in the first place.” Seda’s starter homes begin at $68 per square foot, says Semanik.

Post says Wayne Homes resists marketing its homes on a per-square-foot basis because that would “commoditize the product. We’re more about value.” Wayne targets entry-level and first-time move-up customers with 1,300- to 3,000-square-foot homes that sell in the $130,000 to $180,000 range.

Wayne Homes and other off-site builders seem to rely heavily on their longevity in a market and the word of mouth generated from satisfied customers as their main marketing avenues. “We’ve been doing ‘my plan on your land’ for 27 years,” says Semanik. Hull says Stanton Homes conducts “outreach events” with lot owners and real estate agents, with whom it also connects through its Web site and other social networks.

However, these builders might need to step up their promotional efforts, as more builders take on scattered-lot construction to get them through the recession. “They’re getting into it, even though they don’t advertise the service,” says Collins Builders' Britt about some of his competitors. Wadley of David Weekly Homes wonders, though, about other builders’ long-term commitment to this customer. “I don’t think they realize the upfront costs in people,” he says. Weekley, for example, maintains two satellite sales offices for its off-site division, which is also supported by a 14,000-square-foot headquarters facility that includes a design center as well as room for designers and eight to 10 salespeople.

Wadley also notes that in a sprawling market such as Houston, the productivity of contractors that Weekley hires for scattered-lot construction must be measured differently. “They have a lot of windshield time” driving from job to job, explains Wadley, so the number of homes they can build is lower than what a contractor working in a concentrated subdivision might complete in the same amount of time. (Weekley’s off-site division builds within a 50-mile radius of its headquarters, but will go out another 20 miles for an extra fee.)

The builders interviewed for this article hesitate when asked how many homes they’ll close with on-your-lot buyers this year. Post thinks Wayne Homes’ business might be off another 10%. But to a person, each of these builders is optimistic about the future. Wadley says Weekley is hoping its off-site division can pick up business in Galveston, where Hurricane Ike wiped out 3,000 houses. “The potential is there, but right now those people are having appraisal and insurance problems.”

John Caulfield is senior editor at BUILDER magazine.