- Get in the right survival frame of mind. Many builders are either overconfident, in denial, or frozen in panic and fear. They are not making correct survival decisions. They need to change their mental attitude and react quickly to survive.
- Develop a survival business plan. Determine what decisions you are going to make tied to timing, and the depth of the deterioration of your market and sales. What are you going to do with your staffing? Who is your core and who is going to be released and when? From prior experience, it is better to reduce staff once instead of having multiple releases. What assets are you going to liquidate? These decisions should be done early, not in the heat of the battle when you will continually postpone the hard decisions.
- Get your financial house in order. Hoard your cash. If you run out of cash, you are out of business. Watch your cash flow; it is more important than profits. You need to cover your direct costs and your overhead. You will need good, accurate cash flow forecasting.
- Protect you borrowing ability. Reduce your debt if you are highly leveraged with inventory homes and land. Stay current on your loan payments. Debt on home inventory and land historically has been the cause of builder failures through every economic cycle. Deal with the debt before you get into trouble.
- Don’t hide from your banker. Your banker may be in more trouble than you are. His whole portfolio of loans just became “at risk” and the regulators are watching. You need to put a survival business plan together. It should tie your survival decisions to different levels of deterioration of your sales. You should do this as soon as possible and communicate with your banks monthly.
- Renegotiate your loans before they get into trouble. Work with your bankers to renegotiate the terms and interest rates on your loans and lines of credit. Implement an ability to have a payment holiday on the loans tied to your survival business plan. The holiday would just extend out the length of the loan for the length of the holiday. This all needs to be negotiated now. The banks don’t want your land and homes. Once your loan is in default, the banks have less room to negotiate.
- Diversify your financial institutions. Don’t keep all your eggs in one basket. National banks can be very difficult to work with during periods like this. Decisions end up being made at the corporate level instead of at the bank. You might have great relations with the bank president, but his authority can be very limited. Keep a mix of local, regional, and national banks. Keep your cash in a separate bank from your lending institutions and stay away from sweep accounts. Banks can get into trouble and be taken over by the regulators. If that happens, you are in trouble also, so make sure you have other sources of capital.
- Get rid of your inventory homes. They are a drag on the company, your borrowing ability, and your cash. Sell them to turn them into cash to cover your debt and overhead. Your number of inventory homes will grow as you experience cancelations of sales contracts. You don’t want to be caught with a large inventory of homes. Develop a policy for inventory home limitation.
- Get rid of your land. The holding cost for land inventory is a huge burden to carry during times like this. You need to keep about 18 months of lots and entitled land. The rest should be liquidated to reduce your debt burden. Establish an investment group for land banking to take advantage of the great land opportunities created by this stoppage, seeding the group with your current land holdings.
- Assess traffic, contracts, and cancellations. Monitor your weekly traffic, contracts, capture rate, and cancellations. These are early warning signs of what is happening in your market. Develop strategies and action plans based on various levels of activity in these lead indicators to adjust your company’s operating expenses for anticipated net sales changes.
- Meet with your current buyers. Your home buyers are in a panic state at this point. You need to calm them down and reassure them about the home purchase and determine their current employment situation and their willingness and ability to close on the home. Establish a forecast of the number of potential cancellations, which will increase the number of inventory homes you can expect to be carrying during this shutdown. You need to maintain regular contact with your home buyers through the process to keep them engaged and to keep you abreast of their continued changing situation.
- Work on reducing your direct costs. Attack this on all fronts – design, standard specifications, production efficiency, alternate materials, value engineering, purchasing, and variance control. Redesign the product to make it simpler and more efficient to build. Reduce the square footage. Reengineer the structure and the structural design to reduce material usage. Reevaluate the standard specifications, changing, eliminating completely, reducing the grade and/or the amount of features. Police the waste on your job sites and return all excess material for credit. Monitor and eliminate you construction variances.
- Trim your overhead to balance it with your sales volume. Most of your overhead is staff. Reducing staff is one of the hardest things to do and it is typically delayed too long. Analyze your staff now to determine who is critical for the survival of the company; make a priority list of when people will be terminated and who will fill the voids. The termination list should be tied to sales volumes to reduce the amount of emotions and delays in the decisions. Review and eliminate fixed assets, such as construction equipment and vehicles. Renegotiate your office rent or reduce your office space, possibly subletting some of your space.
- Confirm city inspections permits and certificates of occupancy. Many of the city or county building departments have been closed. Determine how you are going to get building permits, inspections, and certificates of occupancy. Some departments are now taking electronic permit applications, allowing approved private engineers to do building inspections, and issuing electronic certificates of occupancy. Some building departments that are still doing inspections are requesting a protocol for the health standard of the building before they will do the inspections.
- Confirm distributors and manufacturer deliveries. Contact each of your suppliers to determine the availability of the products. Much of the material comes from China. Many states are closed down and products cannot be manufactured or shipped. To assist your suppliers, send purchase orders early and ask them to stockpile the material in their warehouse until needed. They may want to be paid to stockpile; pay half when they stock the product and half when they deliver the product. The distribution channels have been disrupted and could continually deteriorate as the need to food and medical supplies takes priority.
- Communicate with trade partners frequently. Let them know what work you have in your pipeline. Remember, they are more isolated from what is going on than you are and they are in a denial or panic state. You and your trades have the same goal of staying in business. Work with them on how you can become more efficient as a team to reduce construction costs to be more competitive. They know more than you do about where you are inefficient and how to improve productivity. Listen to them and work as a team.
- Establish more health precautions on job sites; fewer than 10 people in homes at the same time, disinfect, supply gloves and masks. This is going to be mandated by your building department. You will need to develop a protocol for healthy and safe job sites, which probably should be posted on each job site.
- Make model home showings, design-center selections, warranty service by appointment only. Many of these meetings were being moved to the internet during the last week. Realtor traffic seem to be non-existent at this point. Online sales and chat is being implemented by many builders to set up model home showing. The design center appointments have also been moving to the internet with one meeting in the design center to confirm the selections. Many of my builders will only allow one buyer in the design center at a time; having most of the selections done online reduces the in-person time needed and allows for more appointments.
- Use video conferencing for meetings – staff, customer, production, etc. With “shelter in place” regulations, establish video conferencing for staff meetings, daily huddles, production meetings, and other internal and external operating meetings. With the customer, establish video conference sales meetings, start meetings, frame walks, and orientations. This will require 3-D virtual tours of the model homes, electronic contracts, electronic signatures, and video home tours. Warranty appointments are now being postponed, or at the discretion of the buyer. Some builders will do external warranty items, but are postponing internal items. They are asking the buyer to still submit their service requests so they are logged into the queue once they are allowed to resume warranty service.
- Celebrate all your wins and keep the morale positive for your team. This is a big shock to everyone. You have to keep the morale of your team high. Each little win as you change the way to do business needs to be celebrated. There will be challenges and stumbles, but use them as learning experiences. You need to stay positive and believe you will survive this crisis.
