Building 1,200 homes in a year means Trend Homes must keep on top of the logistics of construction...
By James Buchanan
Despite being located in the Southwest desert where rain is rare and snow or freezing rain is even rarer, Trend Homes of Arizona still faces some daunting challenges to maintaining its competitive edge in the homebuilding market. However, through innovative uses of technology, thoughtful management of its inventory of developable lots, and strategic management of its subcontractors this company has managed to maintain average growth of 15 percent per year.
The company began its life in 1966 in Salt Lake City under the moniker Trendsetter Homes. In 1989, the founders made the strategic decision to move the company to the Phoenix, AZ., area where it has remained since then under its current title.
Trend Homes is actually one of a few companies held by the umbrella company PFP Holdings, Inc., which is intended to vertically integrate key elements of the homebuilding/buying business. Along with Trend Homes, PFP owns Classic Communities, which builds condominium communities; Home Show Mortgage, which offers home loan products; and its own title company. Trend Homes fits within the portfolio by building single family homes for first time buyers, second home buyers, and luxury homes.
According to Reed Porter, CEO of Trend Homes, the company builds an average of 1,200 homes per year and at any one time has between 600 and 800 homes in various stages of construction.
Maintaining Their Building Schedule…
With so many homes in process at one time and being built in a single year in a number of communities, Trend Homes is forced to focus much of its energy on maintaining their aggressive building schedule.
Essentially, the process of finding and buying a home from Trend involves a series of decisions designed to provide the homebuyer with an experience that allows them to select, site and design a home that fits their individual needs, budget, and aesthetics. The process begins with the customer coming to one of Trend’s model homes where they can see a number of standard floor plans and design elements. They are also able to see how the homes are sited within the lot and how they fit to form a neighborhood and community.
Then the customer is shown a number of available building lots from which to select the site of their new home. Once a home plan and lot are selected the customer is invited to meet with one of Trend’s six designers in their 4,000 sq. ft. showroom, which is set up like a design gallery. Customers select designs and color schemes to suit their taste, which are incorporated into the house plan they have selected.
Once the initial selection and mortgage processes are finalized Trend begins building the home, which takes from six to eight months.
To manage all of the moving parts involved with building a home Trend takes a page from how a factory might operate by relying on a master schedule. “All the homes are placed on that master building schedule and all of the homes have to hit that schedule or else it is a ripple effect and it starts to affect all of the homes,” says Porter. “The subcontractors that actually build the homes all work off that schedule and each project has superintendents employed by us whose job is to make sure the homes stay on schedule.”
The master schedule also incorporates the relevant municipality’s need to inspect construction at several points during the building process. Days are set aside to allow inspectors to the site in a timely manner. Because subcontractors can see that a day or days are set aside for inspections they know that their crews can work on other properties not being inspected.
As part of Trend’s drive to employ technology to its best advantage, the master schedule is placed on the Internet and updated daily. Subcontractors, suppliers, various Trend employees and others involved with the building of the homes can easily check the schedule. They all know where they should be in the building process and what work they have coming up.
According to Porter there are two areas where the schedule could be compromised. The first is what they call horizontal improvements, which are streets, curbs and gutters, and street lights – all of the things that need to be finished before a family can move into a home. “This is why the master schedule is updated daily,” said Porter. “If there is a glitch in this area then all of the homes in that community could be held up.”
The second relates to an event at a particular home such as a burst pipe or some other unforeseen issue. In this event, the house is removed from the master schedule until the problem is resolved. Then the house is placed back on the schedule, which is not necessarily an easy thing to do. With so many houses being built and so many aspects to the process thought must be given to how an individual house can be brought back online.
Obviously, if a house or series of homes are removed from the schedule or completion is otherwise delayed, the new homeowner may very well be inconvenienced. Porter says the key to maintaining good relationships with their customers is constant communication so surprises can be minimized and effectively dealt with.
Throughout construction a Trend construction superintendent regularly inspects the homes under his watch to ensure the quality of workmanship and as a check that all phases of the building process are meeting deadlines.
Further, within any given community there are model homes that are air conditioned (no small thing in a desert climate) and staffed. Customers are able to use the staff as a constant resource during the building of their home. The sales representatives are also tasked with keeping in near constant contact with the customers that have bought homes in that community.
Managing many moving parts…
Building a new house from the ground up in less than eight months requires not only good time management, but supply and muscle as well. The key to bricks and mortar and manpower are the subcontractors hired to build the houses.
Subcontractors that want to build a Trend Homes house must go through a rigorous process even before they are allowed to submit a bid. They must be able to meet specific criteria that proves they not only have the skill sets to build a Trend designed home, but that they have the resources of men and materials to keep to the company’s rigorous building schedule. Further, Trend employs trade relations specialists to vet out subcontractors. They check references and visit job sites to ensure the subcontractor has the capacity to do the work. Once a subcontractor is given a thumbs-up, they must then bid. Bids are selected based on cost.
The next challenge they face is managing their supply chain. The biggest obstacle here is the international market for products such as steel, concrete, PVC piping, copper, and lumber. Supply for these products can be limited by natural events not unlike hurricane Katrina, and competition for materials from places such as China as that country continues to grow at a rapid rate.
“One of the glitches that can happen,” says Porter, “was during the past 18 months there has been a real shortage of concrete. You come to realize how many products are concrete-based on a house. Out here all of the roofs are made out of Spanish tiles, which are concrete, and of course foundations and other elements are made of concrete. So you don’t know if you are going to have enough tiles show up on time, you couldn’t pour the driveway and so on.”
Porter adds that it is difficult to plan ahead for these kinds of shortages because all of these products go through cyclical price variations. If he were to pre-buy there is the chance he would be stuck with product at a higher price after prices have come down. “That makes it hard to compete on price, so it really is a monthly balancing act we have to do,” he says.
One way they have found to counter this challenge is to rely on the symbiotic relationship they have with suppliers – if the supplier doesn’t have product when it is needed they don’t make money either. “We rely on our suppliers to be the experts in their industry and know how to manage for price and supply fluctuations,” Porter says.
Further, their partnerships are usually trilateral as opposed to bilateral. For example, they partner with Anderson Windows for all of their houses, but they purchase through Anderson’s Southwest distributor and negotiate with them for price reductions. With Anderson they negotiate for marketing cooperative dollars, which means they purchase ad space on a bill board or on TV and split the cost while advertising for both companies.
The risk of Trend Homes purchasing too much product at any one time is mitigated through their agreements with the subcontractors. Subcontractors are responsible for making sure they have the supplies they need so they store and are responsible for their own building materials. For example, Trend Homes has a cooperative agreement with Delta Faucet, but it is up to the subcontractor to know to use these products and ensure they are at the job site when needed.
Lastly, the life’s blood of any homebuilder is having an inventory of available lots to build on. This requires more than just purchasing land because housing developments must go through local zoning and platting as well as other considerations that could take up to three years. Therefore, it is important to have a number of build-able lots in the inventory to maintain a steady flow of sales. This can raise issues as to how to carry these lots on the balance sheet. “Financing is a very big part of what we do,” says Porter.
Fluctuating Markets…
Traditionally, Phoenix is known as a very steady housing market with approximately five percent growth per year. However, in 2004 steady-Eddie turned into something quite a bit more volatile as housing and land prices climbed by $50,000 to $100,000, says Porter. This accelerated growth in prices caused in overall slowdown in the area housing market because many people could no longer afford to buy a new home.
Not unlike the stock market, though, the housing market has seen equally dramatic readjustment downward, forcing homebuilders to scramble to remain competitive. Trend Homes reacted to this changing dynamic by entering into negotiations with its subcontractors and suppliers (anyone with a financial interest in homebuilding) to try and get costs down. According to Porter, builders that couldn’t, wouldn’t, or didn’t do this have suffered with reduced sales as they are no longer competitive in the new dynamic.
Those who did say to their subcontractors and suppliers that nobody wins if costs aren’t brought down and successfully found amenable ways to lower costs have been selling quite robustly, he says.
Remaining competitive even when markets are steady is a challenge for any builder in the Phoenix area, which is known for affordable and available housing. Therefore, Trend Homes invests heavily in award winning architecture and color design to ensure that their floor plans and houses are unique to the market. Their efforts have been recently rewarded by being chosen by the City of Phoenix as a partner for a large redevelopment project. The selection was made after the city’s committee toured one of Trend Home’s communities.
Trend also would like to shorten the time it takes to build an individual home. However, with an already quick six to eight months from inception to completion it is difficult to find even more efficiencies in their process. For example, prefabrication is not an option as the reasons builders in other areas do this – rain, snow, freezing rain, cold, etc. – are not applicable in Arizona. The weather is just too good, which makes the idea of operating a prefab facility and shipping components less efficient than building onsite.
Where they could gain on building time is through more effective management of their subcontractors. Availability of subs to match the amount and timing of the work is key and the challenge to this is not to over-hire so subcontractors don’t have enough work to make it worth their while, or under-hire so you don’t have enough at any one time.
Another area is in the complexity of the design of the homes. The more complex the design the longer it takes to build. “Obviously you are trying to hit the sweet spot,” says Porter, “where the customer says ‘wow, this isn’t just a roof and four walls.’ But at the same time you aren’t trying to do intricate Italian marble patterns, which could add months to the project. So balancing design and ensuring subcontractor availability meets sales velocity is a monthly balancing game.”
Operating and succeeding in a vibrant housing market where consumers expect high-quality at low cost is a monthly and daily challenge that requires rigorous management skills and adaptability. Porter says Trend Homes has managed to meet these challenges through a process that depends on a monthly balancing act with regard to its supply chain and adherence to a universally available master schedule.