Charlottesville Builders – Local is Good (and Bad)

Editor’s note – Guest post from a local citizen whom I agreed to keep anonymous. I can personally attest to what these guys gave back to the community. Whenever I called and asked for a few bucks for charities, they gladly gave. This isn’t an ode to Church Hill (but they are the largest local ones to go so far, so naturally they are on the top of everyone’s minds) or any other builder – but a focus on the benefits of “local.”

The most recent headline news on this topic was regarding the demise of Church Hill Homes. Reading all of the press on this topic and much of the discussion that ensued online, I was very disappointed. I was disappointed in how many readers immediately cried foul and fraud. This is ridiculous. The economy is challenging the local home builder community. Unless the current trend in home sales starts to change, it will present more challenges going forward. The general public does not hear more about this because lots of these builders are very small businesses. They don’t have many, or in some cases, any employees. They don’t have the exposure of large advertising budgets. In other words, they are not as newsworthy as a builder the size of Church Hill Homes.

To make a long story short, the owners of CHH invested every dime of credit they had into building that business and they were the last to want to see it go. They had the option to pull the plug via bankruptcy and walk away and chose not to. They have been working to help as many people impacted by their situation and continue to do so everyday. Bankruptcy for CHH and each of the owners is inevitable. There are no golden parachutes. Just people doing the best they can to pick up the pieces and move on.

The CHH story was significant, but it is already history. The real story is what is going to happen going forward. I do not know of a local homebuilder who is not challenged by this economy. Many are struggling to survive right now. Most cannot even start a spec home right now. Of course, the inventory is so high we don’t really need any more spec homes, however, for many smaller builders this is the only way to attract customers. This impacts our local economy in ways most don’t realize. When new construction winds down as much as it has, there is no way to work through the situation. The work is gone.

The economics of the circumstances are simple. The local home builder, in most cases, has to borrow money to purchase land. Land acquisition was the most challenging part of being a homebuilder during the boom. Often times this land was purchased years before it was ready to be improved. Many, many homeowners who bought at the top of the market, who now need to sell, are upside down in their mortgages. This is the same problem for the builders. The land has depreciated to the point that the sum of the land, materials, labor, and fees are greater than the market value or sales price. It’s not always that the builder spent his money on something other than the subs who worked on the home. Sometimes, there just isn’t enough money to pay everyone. The argument that everyone should have seen this coming is pointless. We have arrived, and there are A LOT of people impacted by this real estate market. Especially for those who make a living buying and selling real estate.

I am saddened by the loss of CHH and will be saddened if this area loses any more of our local homebuilders. CHH was delivering a high quality, stylish home with a level of service that created their great reputation. They were local business men who championed a lot of local charitable causes and hired a lot of local sub contractors. They are gone. There is a discussion on the national level that has been going on for years. There are two business models for the home building industry. There are privately owned companies and publicly owned companies.

The publicly owned, regional or national builder has a different business model. They do not purchase land, they option it. (By option, I mean they put down a deposit with a commitment to purchase lots as they sell homes. If the market turns or sales are not occurring at a profitable pace, they can walk away from the deposit.) They do not speculatively build homes, they only build once the home is sold. They bring in their own subs from outside the area. When this market turned, they walked away from their overpriced lots and renegotiated. They are nimble and flexible and are able to adjust to the market place. They will survive. In this area is one publicly owned builder really making an impact. In 2007, they represented a 27% market share for the region. In 2008, they are projecting a 37% market share. In 2009, they expect to exceed a 50% market share.

For many years, Charlottesville has been an area that offered many home and community choices in the form of many small to medium privately owned home builders and developers. It seems this market could change that going forward. As this market corrects itself, land values will come down and opportunities will be created going forward. The question is who is going to be in a position to take advantage of them. I for one do not want to lose any more of the local homebuilder community.

Editor’s note #2: I’m sharing this point of view to let people know what is going on from a different perspective. While this market has created challenges for the local home builder, it has created opportunity for the local home buyer. I’m seeing some buyers take advantage of some opportunities that haven’t been seen around this area for quite some time. Regarding the last sentence – my advice is constant

If you’re looking to buy and stay for a while, you may want to strongly consider buying right now.

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2 Comments

  1. Mark December 9, 2008 at 16:16

    As someone bothered by the “off with their heads!” comments under the Hook’s story, this is a refreshing perspective. Too much logic and facts for most of the aforementioned commenters, I suspect, but I enjoyed the explanation, particularly of land optioning.

    It is a shame that the one national builder will gain from this, because the houses they build are crap, objectively as well as compared to those of any of the major local guys. I would think that quality would become more important in a downturn, but the “sold out” signs in front of their development off Cherry Ave. say otherwise.

    The major advantage any builder has over most private sellers is flexibility in price: often a builder can negotiate away some profit but still makes money. Upside-own home “owners” don’t have that luxury. Advantage, builder.

    Jim, I disagree that one should strongly consider buying right now. There is no way houses will be more expensive going forward. If that 4.5% deal comes through then it might be worth buying the right house (and definitely worth a refi), but there is way too much uncertainty to advocate buying. House prices sure as hell are not going to go up in the next year.

    One may as well stay on the sidelines, unless (as the Bubble Bloggers advocate) you really like the house and think you and yours will enjoy it and it will increse your happiness. This is a completely (and refreshing) non-financial basis on which to make a decision.

    Reply
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