The following was recorded live at the 2019 International Builders’ Show in Las Vegas, Nevada. It features a panel of Epcon home builders discussing how they’ve remained a viable competitor to national builders in their local market.
Host: Thank you all for joining us this morning. Really glad to be here with you in sunny Las Vegas. I wish it was a little warmer. Anyone else with me on that? Got a few hands. We are going to be talking this morning about how to compete more effectively with national builders.
We have a couple other franchise builders here who are doing that today. You get to hear objective from the experts. We have a very short 30 minutes, so I’ll get right to it.
Our objective is to give you the opportunity to hear directly from these guys, as I mentioned. To be able to ask some questions about how they are succeeding in their markets, talk more about the communities that they developed, and how they’re doing with those today.
So glad I tested this earlier to find out what that button does. I am joined today by Pat McKee of McKee Homes and Justin Bauer of Clarity Construction. I want to give you a little background on each builder for reference.
First of all, starting with Clarity Construction. Justin Bauer here on your right, my left, has built nearly 400 homes in his career. He’s not new to this game. He founded Clarity Construction in 2008. Clarity quickly became an award‑winning custom builder in the Des Moines area, so was having some great success in his market.
They entered the 55+ market with Epcon in 2015 and now have two active 55+ communities, plans for a third in the area, as well. Then, a fourth is a possibility in another state that they are considering now.
Then, Pat with McKee Homes. Pat has built over a thousand homes in his career. He is based in North Carolina. He entered the 55+ market in Fayetteville with Epcon in 2007. Founded McKee Homes in 2010, which builds 55+ communities, as well as first‑time home buyer homes.
If you look at the map here, the green stars are Epcon communities, the 55+. The other stars are his other communities. He does have those five communities. He’s planning to add a sixth coming up here in 2019. We’d like to get a sense of who we have here in the room today. If you’re currently building 55+, can you raise your hand?
OK, great. How about those of you who are currently building other product? All right. Excellent. Thank you. Those who are looking to consider the 55+ market or you’re in it today, go ahead and everyone put your hand up. OK, very good. Pat and Justin, what was happening in your local market, and why did you choose to pursue the 55+?
Pat McKee: I’ll start. Thank you. I got into the 55+ market in 2007 when the housing market was obviously getting hurt and taking a turn for the worse. It’s fortunate that I was still in that market during the recession because our market declined some, but not as great as so many other markets. That helped us weave through that piece of the market.
Justin Bauer: I got the 55+ market in 2015. I was a custom builder before then, and our market is extremely underserved for 55 and older. The demand, the numbers, the demographics of it all is just insanely good. It still is.
I don’t really have a specific competition for what we do. We do have 55 and older complex, centers, and places like that. But, we don’t have competition for stand‑alone units with this common clubhouse, common pool ideas. It’s been the best we’ve ever made.
Host: Excellent. Thanks guys. Can you tell me a little bit about what kind of reaction you’re getting from your community on 55 and over product building today versus what you’ve built before?
Justin: I don’t know about a specific reaction. I can tell you that one thing is nice with this 55 and over market. They have money. They’re not afraid to spend it. Once they get to that point where they’ve committed, they love this concept and love the idea, they’re not afraid to spend the money.
We average about $75,000 in upgrades from when we start from a base price to the things that they upgrade in their homes. Coming from a custom market or a custom builder before that, I feel like as a custom builder, everyone’s trying to penny‑pinch you for that last upgrade in life or any upgrade, they can squeeze out of you for nothing.
We are set up or we have a list of standard options. That’s already pre‑priced, pre‑set. When they come in, it’s all set. I don’t have to get penny‑pinched. Either they want it or they don’t. In this market, they seem to want it most of the time.
Pat: I’ll echo a lot of stuff that Justin said. Our market’s a little different and that we have quite a few national builders in our market. I think we’re the third highest concentration of national builders in the country. We have several dealt with communities and other large communities.
What we’ve tried to focus on with our 55+ is smaller communities that aren’t as amenitized as say a Del Webb community is. We found that not all buyers want all of that, nor do they want to necessarily pay for it.
Host: Got it, OK. Let’s talk about the competitive landscape. What happened to strategies that you guys have employed that have helped you? Talk more about that for us.
Pat: Yeah, because we have a lot of national builders in our area, we have tried to focus on what I call the B‑markets sitting around and the areas that they’re not really playing in. As Justin said, there’s a lot of underserved markets in the country.
We have found that there is plenty of demand in those so called B‑sub markets around our major metro markets that are not being served by the national home builders and other builders in that light. That’s been our focus where we can find a pocket area where we could do anywhere from 30 to 50 to 80 homes and not try and come in and do a massive 2,000 home community in those areas.
Host: Like bed and breakfast versus a cruise ship?
Pat: For myself going from the custom market to this 55 or older, probably the biggest strategy that gives me the biggest advantages, I went from doing a custom house where you had to go find a lot. Sometimes, they knew where they wanted it, maybe they had a lot. A lot of times, maybe they didn’t. You got to go find a lot. You got to buy from someone else. Price out the house, and build it.
You make money just on building the house. I’m making money on the development side for the ground, still making money on the house, which there’s a higher profit margin on the upgrades, I would say substantially higher.
Then even the way that coin is a modeled from the sales side of things, I feel like we make a little bit on the sales side as well.
Host: OK, thank you. One of the things that you guys had mentioned in prior conversation is about how being involved in your local home‑building association was also, you felt, like an advantage to you. Can you tell us more about that?
Justin: I’ve been very involved in my home builders association. I was president years ago. I don’t think it ever hurts to stay involved and give back to the association and help each other fight the battles that we all fight each day regarding code changes, energy code increases, all that stuff.
Seems we are at constant battles, we try to keep the costs down. We were just talking before these costs just keep rising and rising. Specifically our home builders association, I think does a very good job at trying to keep it competitive.
Pat: For me, also I’ve been involved locally as president of board of directors of our homeowners association. To me it’s more about the networking and working with the other builders in our area. We’re all fighting the same fight. We’re all in this together. We don’t look at them as competitors. We look at them as partners.
In addition, I am also part of NAHB, is a builder 20 group too. Where other builders around the country, we get together on a similar size in nature. That along with my affiliation with Epcon, where we get together on a regular basis, other Epcon developers get together. It gives us the ability to be able to share best practices and things that they’re seeing in their markets.
I can take those back to my market and help us better be more competitive locally, because of all of that knowledge that I’m able to gain through those groups.
Host: Very good. You guys are also involved in giving back to your communities, have done that in your businesses. Can you tell us more?
Pat: In 2010, when we founded our company, my dad had passed away from Alzheimer’s. I made it my mission and put my company in his name. We formed a fund in my dad’s name, is called the The Joe McKee Memorial Alzheimer’s Fund. We take a percentage of every home that we sell. We put it in that fund, and we use it to help support the Alzheimer’s association in all the communities that we build in.
The hundreds of thousands of dollars that we’ve given to that fund and to the local association pale in comparison to the benefits that we have gotten back. For our case, there are many causes out there, that one is near and dear to our heart, near and dear to many people’s hearts.
Even in the 55+ community, almost everybody there knows someone that has suffered from it, or is inflicted from it, or is dealing with it now. That gives us a connection to be able to start talking to our customers about it.
In addition, we’ve also held events, walks, walked in Alzheimer’s in our 55+ communities, which brings hundreds and hundreds, if not thousands of people to our community, for a reason not to buy a home. While they’re there, they’re able to look at homes since we’ve been able to leverage that from a marketing perspective as well.
Justin: We’ve been involved in an organization called Homes For Hope, maybe some of you have heard about it. They go to third world countries rather than just drop food or give them shelter or whatever.
They actually give them business loans, small business loans. It could be as small as $100, $300, to start a business, and be able to provide for themselves. Instead of having to continually find that food for them or give them shelter, they can actually build and sustain a business and be entrepreneurs.
Host: Great. Growth and capital, we’d like to learn more about how you guys have been able to streamline your processes and get better access to capital with the way that you’re working today.
Justin: As far as capital, I think one of the biggest advantages, not necessarily directly linked to capital, because we are building more units. I went from building five or six custom homes per year, which was about $3 million, $4 million in product, to building…
We made as many as 40 this year, which may be as high as $16 million in product. When you have that much business, you get a little better economic help and pricing from subs and things like that, and interest rates from banks.
Pat: For us, it’s a little bit of a different scenario. Similar to Justin, as we got larger, capital was more readily available. We’re also extremely well capitalized as a builder. That will do about 300 homes this year.
Playing in the 55+ space as well, it’s a good story to tell banks, and they have confidence in the market. All you have to do is show them the different graphics and the numbers. They understand that that market is underserved.
It’s very easy for us to be able to pitch the projects that we’re doing, especially on the 55+ side, to our banks and other investors out there because they know there is a need out there. It will weather downturns better than the other markets will.
Host: As far as your processes, your systems, and buying power, what kind of benefits are you seeing there?
Pat: Being affiliated, as I said, with NAHB’s Builder 20 Group and also with Epcon, we were able to take advantage of larger purchasing capabilities through those groups.
Also, local to national association of home builders organizations as well and local markets. Leveraging that allows us to have the buying power for a much bigger company than what we are. Taking advantage of that in your local markets is important.
Justin: Ditto. I’ll leave it at that. I agree with everything he said.
Host: Justin, you had said something about your margins changing.
Justin: We average $380,000 per unit on a house. In West Des Moines, it’s about 400,000. If I were building a $400,000‑dollar custom house, a lot of the times, I’m making more money on these than I am in a custom house, and the custom house was way more work.
We have six plans that we deal with at Epcon. In my area, it’s called P‑series and R‑series. We’re building those plans over and over again, which, the more you build it, the better you get at it. You learn each time you build.
I tell people all the time, I’ve built 400 houses. I’ve learned something from every single house that I’ve built. Being able to repeat those, it gets easier as you go. It seems like it should get easier anyway, sometimes it doesn’t. You learn each time you do that, and you get much more cost‑effective, efficient by repeating it.
Host: Not only are you getting more efficient in what you’re doing but it sounds like you’ve been getting good feedback from your customers as well on their experience with the product.
Justin: Yeah, absolutely.
Host: Company and culture, can you tell us a little bit more about what you have done within your company that has helped you succeed in the 55+ market internally with the people that you work with, and then with your vendors, your subs?
Pat: Ours ties back to our association with the Alzheimer’s association, my dad’s fund. When we got started as a company, it was my wife and I pushing and driving the company culture, pushing and driving, getting involved in the communities.
The amazing thing that we have watched over the last eight years as we have stayed dedicated to that cause and do what we’re doing is we’ve seen now it’s our employees that are taking the lead and are making it happen. Our entire culture is built around that, giving back into the communities that we’re in.
When a potential home buyer sees that culture inside your company and sees your employers, your salespeople, your superintendent speaking as passionately about what you do and why you do it as you can, then you know that you’ve arrived. It gives you goosebumps really, to think about the potential and power of being able to do that.
Justin: One thing I’ve noticed is that the people that we’ve built for, most of them, I’m not going to sugar coat it, they’re not all peaches and cherries. For the most part, they’re in a good point in their life, they’ve made it. This is the time for them to enjoy it.
When they commit to building this house, when we get done, the joy that they get from it is very rewarding. In my past, building a custom house sometimes, maybe you’re building for a 30‑year‑old. They’re young and upcoming.
Usually, they’re building maybe a little more house than they should. It can be stressful. They have jobs. They’ve got kids. They’re working. They’re stressed out. For the most part, this clientele, they’re a little more calm, relaxed, and excited about what they’re doing, and it’s a little less stressful.
Host: Justin, what advice would you give to someone when they’re considering entering the 55 and over market? What advice would you give them on working with the customers? What specifics have you employed that have helped you to be successful with that group?
Justin: My comment about, they’re not all peaches and cherries. Sometimes they have more time on their hands. You’ve got to be good. You’ve got to be really good. They will watch. Typically, they’ve been around the horn. This isn’t their first rodeo. They’ve built before.
Sometimes they’ve built multiple houses in their life so they know what they’re looking for. They know what they want. They can be pretty particular, but if you can deliver that product and do it well, they’ll be extremely satisfied.
Pat: I don’t know what you’re saying. I don’t have any difficult customers.
Never had one. To us, it’s about being authentic and being local. In the markets that we’re in, it’s being local and they know who you are. They know what you stand for. That means a lot to this buyer. That’s something that we promote.
Host: Very good. I think we’re going to have time for a few questions here, so raise your hand if you have a topic in mind that you’d like to ask these guys about.
I have lots, if you don’t have something off the top…oh, there we go, right there in the back.
Man 1: Ross out of Frederick, Maryland. Have you heard the word rental? We were discussing next door much in the H55+ is not going to be able to afford the product.
Our people who have worked in service for our nation and/or for their communities don’t have an S‑Pay. What are we doing to create H55+ where it’s got to be on the rental market? Because they’re not going to have enough money and equity coming out of that house that they sell.
Pat: Having done this for 10 years, in the 55+ market, what I have seen is the product that we build for sale sometimes naturally fits as a rental product as well too. We have toyed around with the ideas of building the strictly for‑rent products.
We’ve struggled with finding financing for the for‑rent side that’s not extremely expensive. We allowed certain percentages of our homes in our 55+ communities to be rented out, and we find that there is a huge demand for that. We considered doing more, but we don’t have a great answer for that at this time.
Justin: I would say that locally in Des Moines we have some people who are building that type of rental property. Some of them are apartments. Some of them are duplex units. We do have that product in Des Moines that’s being offered. For us specifically, we have had some interesting buyers to the point of…I’ll give you two examples, because we hit the broad end of the spectrum.
Number one, I built a $3‑million house, a custom house, in 2012 for a gentleman. In December, he came and met with me. He wants to sell his $3‑million house and move into Epcon.
His house is 11,000 square feet. He spends half of his time in Hawaii. He is spending more and more time in Hawaii on Smart Lake. He wants to sell his house and move into Epcon. He entertains sometimes, but we have the clubhouse where he can have his political parties and things like that that he puts on.
There’s one end of the spectrum. The other end and do points on rentals. My business manager’s dad just lost his wife in the last year. Lee lived in a $150,000 house for the last 40 years. He didn’t have a lot of money. He just brought a $300,000 brand new Epcon product using the HECM Program that we have.
It’s a great program. I know a lot of people, even customers, when we talk to them if you bring up the HECM Program and instantaneous some of them will get mad at you. They’re like, “No, I’m not doing a reverse mortgage.” There are people out there that it works very well for. It’s a tool for them to get into a house.
Host: Great. Thank you. Who else has a question? Go ahead.
Man 2: Did you talk a little bit about the product type itself? I know you mentioned to differentiate yourself from the traditional development, 130 to 80 units, somewhere in there. Then, you’re not able to amenitize to the level. Could you talk a little bit about buying clubhouses with pools, etc.?
Justin: Epcon Corporate has some different rules that they follow as far as whether they build a community with a clubhouse or with a pool. Sometimes, they’ve done with just a cabana and a pool.
For me, where I’m at, it seems the magic number is that we need to have at least 75 units to make the clubhouse make sense. I’m not going to do a development without at least 75 units. We need at 83 applies to 91.
We have different size clubhouses. You could dial those in or up. We have a 2,700‑square‑foot clubhouse in Ankeny. I did the 3,700‑square‑foot clubhouse in Clyde because there are a few more units. We felt that Ankeny was being used so much that we could use a little extra space out in Clyde. That, to me, in our area is the key, that clubhouse. That’s one of the main selling points.
Our group gets together to play cards Monday mornings at 9:00. Wednesday, they have coffee group. They use that clubhouse. For me, the product is key. The plans that we use at Epcon are phenomenal and people love them. They’re extremely unique.
I don’t want to put one aspect more important than the other, but then on top of having that clubhouse and pool, our communities are very unique. People love it. When they come out, they fall in love pretty quickly.
Pat: To answer your question from a product perspective, so anywhere from 1,600 to 2,100 square feet all one level‑type product, and then the ability to do a second story. We find that maybe 20, 25 percent of our customers actually put a bonus suite or second story on top.
Because only about 20 percent of my business is Active Adult, dedicated towards that, I find plenty of other neighborhoods that I’m building in where older folks are coming in. They’re buying houses that I’m building and they’re sacrificing because it’s all that’s available for them. It happens to have a master bedroom on the first floor, but there’s plenty of living space upstairs.
It’s not really what they need, but it’s all that’s available. I’ve found that most of the other builders in our area, that’s what they’re offering up for the Active Adult community. It’s not really what they want.
We find most of our Active Adult buyers want all single‑level living and the ability to be able to grow into that house, or age into that house as they get older. That’s what’s missing. That’s what we’re trying to provide in this concept.
Man 2: For follow‑up, real quick, are your Active Adult communities lock‑and‑leave, no maintenance?
Pat: We used to use the term no maintenance and we found that was probably a little misrepresentation, but low maintenance. Depending on the community, different types of maintenance are offered. Typically, it’s landscaping and it’s some exterior maintenance, so yes.
I happen to also build in a military community. This product has been attractive to military folks who are actually younger. They get deployed for a year and they know they can leave their home. It’s fine and taken care of while they’re gone.
Justin: Yeah, I would agree with that.
Host: Go ahead.
Man 3: How have y’all dealt with community transition house development and close‑out? That’s a key area that big builders don’t do very well. It’s really, really important for our buyers.
Pat: I’m involved in a community that I’ve been in entirely too long. You start taking care of lots of things that really should not be yours as the developer’s standpoint. Being truthful to your word and being honest about what you say you’re going to do, and doing what you say you’re going to do. A lot of the bigger builders come in, they build everything and then they get out.
You can’t ever get a hold of them and get anything fixed. Being available, but draw on that fine line of what really is mine to take care of and what is not. If you’re not careful, you will get drug into so many things that are not yours that you should not be taking care of.
Justin: Epcon Corporate as a whole, they put a good game plan out there for getting the homeowners involved. I’m the declarant, so I’m in charge of the association and dictator until I’m done building my last lot. At the same time, I have association meetings with homeowners. I’ve put two homeowners on the board already. They don’t really have voting rights…
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