Top New Home Builder Tips for 2021

2020 has fundamentally changed the home building business—creating new challenges and opportunities for builders. So how can you take the lessons of this last year and apply them to 2021? We asked top industry thought leaders for their insight and tips to take on the New Year!

New Year’s Resolution: Cash Reserves

Bob Whitten, SMA Consulting

It is important to start a risk-minimization strategy while the market is strong, to assist in years when the market is not as robust. The three cash reserves I recommend are:

1. Operating expense reserve - You want to cover three months of your budgeted fixed overhead (payroll, office, and marketing expenses). If your fixed overhead averages $50,000/month, at the end of the year, you want to have $150K in this account. This may require disciplined effort and even flow closings to accomplish it.
2. Capital asset purchase reserves- Review your depreciation schedule with your CPA/tax advisor and find the replacement number needed in the next year. Save that 12-month amount in the same or a new reserve bank/investment account. This will allow you to replace equipment, furniture, vehicles, etc., without dipping into operating cash flow. It may also eliminate the need to place loans on those asset purchases. Pay yourself the interest in the form of additional cash deposits to the reserve.
3. Tax reserves - Calculate the taxable portion of the average budgeted closing for the year. Upon each closing, transfer some of your closing proceeds (the amount calculated as tax liability) into a separate Income Tax Reserve Account.

Remember, these reserves are operating accounts. You cannot rob your operating accounts to fund investments like buying lots or down payments on tracts of land.

Better Customer Service Through Personalization

Carol Smith, Home Address

Multiple studies have shown that consumers’ top priority (surpassing even price) is personalized attention. People want to be treated as individuals, not just job numbers. At the same time, the process adjustments needed due to the pandemic increase the challenges for meeting this need.

Homes are seen as safe havens (Faith Popcorn’s trend “cocooning”). This powerful market driver results in buyers expecting more design choices, regular updates, and close involvement in the build process. Yet currently, to function safely for everyone involved, builders are implementing virtual meetings and video tours in addition to using masks and social distancing for more traditional meetings.

How can professionals straddle the need to keep all parties safe and still create a genuine sense of connection and personal attention? The answer is in the details.

• In virtual meetings, take time to chat about family, work, hobbies, and other non-house related subjects. By asking buyers to complete a profile questionnaire at the point of sale, builders can become aware of personal interests.
• Follow up these meetings with a handwritten thank you note, again working in some personal detail, perhaps something mentioned during the meeting.
• Ensure prompt attention to any open questions. Increase the number of updates by phone or email—using the customers’ preferred method.
• And discuss the need for masks and social distancing at in-person meetings early, framing the conversation with an emphasis on safety for everyone.
• Make it clear to homeowners that reported warranty items will be addressed even if done so more slowing due to precautions and without regard for the warranty expiration.

While the open-ended nature of the virus catastrophe is uncomfortable, you can reassure your home buyers that you are working creatively to fulfill their needs.

Slow Down to Speed Up

Carrie Roeger, White Stone Residential

Home building is achieving new levels of production across the nation. As we enter 2021, my advice is to slow down in order to speed up. If you have processes and systems established in your company, take the time to review them with your team. You may not know where they are broken, but your team does. These inefficiencies create headaches for your team and can have a multiplier effect on costs. Cycle time is the primary system that runs your operation. Your cycle time consists of the soft cycle (pre-construction phase), and the construction cycle.

Often times companies overlook the efficiency of the soft cycle, costing days and dollars in delays. Each player in your soft cycle has adjusted to the new way of doing business, and their processes have changed as well. Be sure to connect with architects, designers, municipalities, and others in your soft cycle in order to understand how their new process impacts yours. Gather your team and work through your construction schedule as well. The same applies here; many of your trade partners have new processes and new demands on their time that impact your schedule. Suppliers are struggling to keep the supply chain filled. By connecting with trade partners and suppliers, you will have time to respond to a change in plan as opposed to reacting when it is too late.

If you do not have formal processes and systems in place, gather the team and establish them before you go any further. You may find that many of your team members have already created bootleg processes that are working. Take the time to uncover the processes, the reason for them, the efficiencies created, and the need for additional processes and systems. Establishing the processes, clear lines of communication, and accountability will improve your company, culture, and bottom line. There will not be a better time than now to tune your organization to maximize efficiencies through processes and systems.

Work Closely with Your Trades to Take on the Challenges of 2021

Ed Hauck, Builder Partnerships

Work with your trades. Listen to your field team. As I worked with builders across the country facing the challenges of COVID restrictions and lumber price increases this year, those who responded proactively seemed to manage to the new circumstances the best. They listened closely to their field teams and subcontractors and were the most successful in coming up with ideas on how to continue operations and modify their production to meet their construction timeline and address cost increases.

People doing the job usually know how best to make improvements. 2021 will be full of challenges; make sure you are listening. Have your ear to the ground so you can stay competitive and respond much quicker to any challenges.

Integrate Your Systems for a Seamless Home Building Process

Georg Gerstenfeld, DocuSign

Agreements are everywhere. Within new home sales the core agreement is between a buyer and a builder, but there are also numerous agreements between you and your suppliers and sub-contractors. In the home sales process, from marketing to transaction close, agreements are everywhere and with using manual, paper-based processes that means there are needless costs, delays, and risks throughout the entire process. The issue isn’t isolated to just new home sales, it also occurs in the construction project management lifecycle as well. From when you break ground to closeout, subcontractor agreements and change orders that are manually processed cause significant delays and costs over the course of a project.

When thinking about your different workflows and agreements, it is key to consider modernizing those processes by integrating your systems so data flows seamlessly. It is also important to ensure the software you select has a large ecosystem of integrations with the applications you’ve already invested in and are using today. It saves time when multiple systems are connected seamlessly. Errors are eliminated, completion times reduced, and everyone’s experience improves.

Fast Tracking Technology

Jennifer Castenson, Hanley Wood

This year, home building has been catapulted into a new era. Technologies and processes that were two to five years away were suddenly embraced after the pandemic hit, fast forwarding the industry into a new way to market and sell homes. The fast and persistent consumer response has also equated to record sales volume.

Builders also are trying to adopt other design and construction technologies to make the process more efficient and cost-effective and to match the growing demand. Builders are motivated by a nebulous timeline to build as many homes as possible, satisfying consumer needs and capturing revenue before an inevitable market crash.

These factors create the right formula for many builders to invest in offsite construction, which may have been on their business horizon, but was expedited because of the environment. Offsite will help home builders achieve faster construction and lower costs with less labor in the pandemic-stricken market. It’s also my hope that this formula brings about new ways to deliver housing at lower costs to ultimately solve the housing crisis sooner than we thought possible.

Focus on Continuous Improvement

Jim Weigel, Builder Partnerships

The biggest differentiator between companies that survive and prosper and those that don’t is organization and a focused mindset on continuous improvement. Companies that succeed strive to have processes in place, and they are continuously evaluating them to gain efficiency or cut costs. If you don’t have clearly defined processes in place now, take the time to define and document them.

Sometimes you must go slower to gain consistency before you can go faster. The time you take now to get your systems in order will pay off in spades later with greater efficiencies, increased capacity, and, ultimately, more profit.

Do Your Construction Managers Have Enough KASH?

Joe Stoddard, Mountain Consulting Group, LLC

We teach builders’ Construction Managers/Superintendents (CMs) that their number one job is to:

“Build and deliver exactly what was sold or specified, on-time, on-budget, defect-free, and with customer satisfaction of 95% or higher” while “Protecting their company’s brand, and the bottom line.”

That takes KASH: Knowledge, Attitude, Skills, and Habits. The attitude and habits are 100% up to them, but they need their company (you) to help facilitate the skills and knowledge.

Here’s a few of the issues:

• Know your company’s mission and unique selling proposition: Can your CMs tell me in one sentence why I should build my new house with you, and not “Brand X”? Can you? If not, how can your CMs ever be effective brand ambassadors for you?
• Don’t play “Beware of the Dog”: If you’re still blacking out the prices or quantities on CMs’ copies of job information – stop it! How can your CMs help “protect the bottom line” if you don’t trust them with the numbers? Grab a copy of “The Great Game of Business” by Jack Stack. It’s the open-book management approach we advocate.
• Provide complete job start packages: If you’re still not using scopes of work, purchase orders, and plans that are drafted to contract (instead of messy red-lines), 2021 is the time to fix it. Your CMs can’t “build exactly what was sold or specified” without complete, accurate documentation.
• Grant the authority to act: Cost over-runs hurt, but enough missed starts or closings can bankrupt you. If you don’t trust your CMs enough to let them have both the responsibility and the authority to ACT, including writing the occasional variance PO, or hiring/firing the occasional trade when needed, there’s no way they can consistently deliver on-time, on-budget, and defect-free for you..

Data is King

Roger Langford, Professional Warranty Service Corporation

With our vast network of builders and builder-focused risk and insurance specialists, we're fortunate to receive a broad range of perspectives on current trends in builders’ insurance and best practices for navigating this hardening market.

Across all those perspectives, one common theme has emerged: Data is king.

Insurance companies have recognized that one of the leading challenges in continuing to offer insurance for home builders is their lack of access to timely and reliable data. As a whole, the insurance industry is looking for data solutions to improve their end-to-end process from more accurately recognizing risk in underwriting to leveraging data to defend and resolve claims.

The litigious nature of construction defects requires builders to adopt detailed risk management practices if they want to effectively minimize the impact of those issues. Builders who are proactively implementing new resources to provide better data supporting their dispute resolution practices, claims spending, and quality will be better able to “sell” themselves as good risks to their insurance providers. In 2021, that’s going to make all the difference.

The Power of Dynamic Estimating

Scott Lang, Simpson Strong-Tie

With the changing and fluctuating market we have experienced this year, home builders will need to take a more predictive approach to the building industry in 2021. The power of digitization collects the key measurement details of materials and embeds it in the intelligence and logic of the estimation process. The efficiency in the dynamic estimation process can reduce the manual input in the key measurement process, eliminate costly errors, and leads to a quick and seamless disbursement of information. This helps home builders minimize waste at the construction site, leading to a more profitable bottom line. Take a look at your processes today to make sure you’re ready for 2021.

Plan to Maximize Profit in 2021

Steve Hays, RubinBrown

Considering the effects of COVID-19 on the economy, no one could have predicted how strong the 2020 home building market would become. The market was driven by record low interest rates coupled with pent up demand and low existing inventory levels. 2021 has every opportunity to be a repeat, as the same fundamentals exist, and builders will enter the year with strong backlogs.

Home builders should make every effect to maximize profit in 2021. This includes limiting any discounts and adjusting sale prices regularly to absorb any material or subcontracting price increases. Given the results of the recent election, tax rates will likely remain stable.

Home buyers have recognized the importance of home ownership. Today your residence is not only your home, but it is your office, your school, your restaurant, and your gym. Product should continue to adapt to reflect these needs.

The home building industry certainly has its highs and lows. The 2021 focus should be to take advantage of the “window of opportunity” available. Lot counts should hold up but will become a significant challenge going into 2022.

Builders Should Learn from Amazon

Stuart Siegel, Cornerstone Solutions

For the first time in their history, builders are feeling the true impact of technology and the need to transition as quickly as possible to the “Amazon World” to survive and thrive. Amazon's phenomenal success is based on one crucial element: a laser-sharp focus on buyer's activity. Their algorithms constantly follow what buyers are looking at and then entice them with sexy suggestions: Perhaps you need a bottle of wine to go with that cheese and crackers you placed in your cart. They anticipate a buyer's probable next selection and make it easy—just a click of the mouse—to satisfy their buying urges. For builders alike, it is more important now than ever to know and understand their buyers.

Some forward-thinking builders analyze their buyers and prospects using data in their software systems to define buying trends and patterns. We recently worked with a builder who significantly increased option and upgrades revenue because it equipped every sales agent with a list of options and upgrades purchased by buyers in segmented groups. It is important to recognize that first-time single buyers have very different requirements from first-time family buyers. Hence, sales agents need the ability to offer appropriate option and upgrade suggestions to each buyer group.

Knowing and understanding one's buyers is not an original concept. However, in the past, builders operated with the notion that if they build it, buyers will come. To some extent, this is still true, but times and buyers are always changing: smart buyers are now well-armed with competitive pricing on their smartphones and can make all kinds of decisions virtually.

While marketing for the building industry is transitioning to the high-tech world, owners and operators must leverage Amazon's lessons and learn how to utilize a myriad of technology to lower costs, increase revenue, and improve the bottom line.

Redefining Customer Experience

Tim Bailey, Avid Ratings

The uncertainty of this past year and path forward is testing the resilience of many businesses and consumers. Being able to adapt has been essential. Australian organizational development pioneer, Fred Emery, posed the question, “Instead of constantly adapting to change, why not change to be adaptive?” A couple of key areas of focus for being adaptive today include:

• Digital discovery and engagement - Consumers have dramatically shifted to digital. Focus on enhancing digital-led experiences and leveraging platforms that can analyze rapidly growing storehouses of data. Consumers are leaving more digital fingerprints, and leading companies are turning this data into actionable insight to serve-up unique and personalized customer experiences.
• Customer journey overhaul - It is important to revisit customer journey maps and process maps. The customer journey has been upended and previous playbooks may need reengineering to reduce friction and increase ease in this new environment of customer experience.

There will be permanent shifts in consumer behaviors that last far beyond this pandemic. Fortunately, sights have been set on “home” for many consumers and most housing markets have rebounded strongly. Moving forward, the most adaptive organizations will continue to be the most successful.

Stay Nimble

Scott Duman, ECI Software Solutions

As I write this, not only are we still in the middle of a global pandemic, but we are seeing cases spike across the U.S. When governments began to lock down back in March, builders were advised to get out their playbook from the Great Recession: cut expenses, reduce staff, stop building spec homes, and first and foremost—conserve cash. Who knew that unrest in cities, work from home, limited resale inventory, and a desire because of COVID to live in less densely populated areas would accelerate new home sales and create one of the best markets in years? Another set of problems emerged: rapidly increasing material prices, strains on supplies, labor shortages, low lot inventories, to name a few.

We’ve also noticed an acceleration in the shift to technology. Many builders are not early adopters of technology, which is perfectly fine. But buyers are moving online, and you need to meet your buyer wherever they are. I don’t see this trend reversing. There are many tools available that can set your business apart from your competitors.

Interest rates and demographics suggest that we could have steady growth over the next couple of years. Consider what investments you should make in your business to succeed in the future. There’s plenty of things happening in the macro environment, so stay nimble.

“Quick Fix” vs. “Fix It Right”

Brad Haubert, ECI Software Solutions

It’s too easy to fall into the trap of “fixing” a purchase order or work order on the fly. In the day-to-day scheme of things, it seems like it’s the right thing to do—make sure you get the information out to your trades and suppliers to keep the job moving.

The wise home builder knows that it’s better to take the time to research and fix the source of the problem instead. This means taking a moment to really figure out why the purchase order or work order is incorrect and setting aside a few minutes to correct the purchasing data.

Why—especially when staffing levels are lean and the work needs to get ordered to keep up with demand? Isn’t it just quicker to fix the PO/WO instead?

Although it may seem quicker to fix that single PO/WO at the time, the chances are good that the “quick fix” will need to be done every time a PO/WO is sent to that trade/supplier (for every house you have under construction) until you fix the error at the source. There’s no quantitative way for you to know how much time those “quick fixes” will ultimately take your staff, but I can guarantee you that it’ll be much more time than taking the few minutes to fix it correctly as soon as you notice it.