Epcon Experts Series With Al Trellis of Home Builders Network

 

Al Trellis, president of Home Builders Network, discusses supply and demand in the housing market, market opportunities that builders are overlooking, the seven keys of leadership and more in this episode of the Epcon Experts Podcast.

“One of the truisms of life is that people always see things bigger than they are, or smaller than they are, or worse than they are, or better than they are. Everybody wants to push everything out and not let it be where most stuff is ‑‑ it’s in the middle.”

Host: Today we are honored to welcome Al Trellis, president of Home Builders Network. Thank you so much for joining us, Al.

Al Trellis: My pleasure.

Host: I’d like to start out today discussing a research paper that you shared recently at our Epcon National Conference. The research you did was related to supply levels in the housing market during the 2020 lockdown. Could you share some of the key takeaways you found in that research and what they mean for the next several years of potential demand for housing?

Al: The research I did went all the way back to 1990. I plotted housing starts against what I believe is the underlying fundamental demand, which according to the Harvard Center for Housing, is somewhere between 1.35 and 1.4 million. I used 1.4 million. You could see from 1990 to 2005, how we were building more houses than the underlying demand until we had an oversupply of almost 4 million houses.

Then the market collapses. You can see a shortage every year from 2005 to 2012 till we get back to even. If you think about it, the market didn’t really recover. Most builders didn’t do well again until 2012. Then from 2012 to 2019, the shortage continues to grow.

We went from over‑building to zero. It’s 2012, we’re building 800,000, we’re 600,000 short. Then the next year we build 900,000. We’re 500,000 short. Now we’re cumulatively 1.1 million short, until we build up to 2020. Now, we’re 4 million short. We’re the same short that we were long in 2005.

Then, COVID comes and everything freezes for three months. Everybody’s terrified. All of a sudden, COVID facilitates the reality that there’s a shortage. I’m one of the people who’d like to make a change, but that’s not easy because there’s a shortage. All of a sudden, we go through and we cut the shortage back down to a little over two million.

The point is we’re still short two million. We’re not long. This is what I kept telling everybody. It can’t be like 2006 because you don’t have four million houses oversupply, and you don’t have all these loans that were poor loans. Credit for the last 10 years has been very well run.

There’s a thing called analogy thinking, and this is the way most people think. When faced with a situation, we look for an analogy of other situations that we’ve known of before, experienced, seen, read about.

I see a lot of people run to the last recession to find the analogy. I’m like, “This is a terrible analogy.” The world is different. The supply is different, the pricing is different, the lending is different.

Why would you run back to 2005? If you want to run back to something, go run back to the last time we had rampant inflation and we’ll talk about that recession. People have been doing that now more.

The bottom line of that research is, I believe that for housing, at least for US housing, and I think probably globally, this recession will be shallower and shorter than many people say.

If you look at your builders, I would argue that your builders build more to equity buyers than to payment buyers. I use that phrase. To me, a payment buyer is a person who if they can’t qualify, they can’t buy. Whereas an equity buyer, I can buy. If I want to buy, I can buy.

To me, that’s the conversation.

Host: Yeah, I appreciate that. It’s great to hear your viewpoint there. I think, based on what you just said, we can agree that there are opportunities for builders, especially those who want to be bold, to go out and gain market share in the next couple of years. Would you agree?

Al: Absolutely. I believe that all slowdowns create opportunities for those who look for them.

Host: As we’re talking about those opportunities for market share, how important would you say marketing is when it comes to gaining that market share?

Al: I think marketing is always important. I think one of the great dangers is that marketing is often listed together with sales. Partly because I used to work at NAHB a long, long, long time ago. We had the Sales and Marketing Council. You always hear about people talking about sales and marketing. The trouble is they’re very different. People confuse them.

To me, the way it used to be said was, in the old days, marketing is designed to make the phone ring. Now I would think we would say that marketing is designed to get an email on your website. Marketing is not really trying to sell anything other than the idea of considering me. Before you buy, consider me.

As a market slows, marketing becomes even more important. Think about the last two years. I kept telling people, “Be ready to spend more money on marketing, because this isn’t going to last forever.” Right now, I had a couple people cut their marketing budgets by 80 percent.

Yet when the pandemic started, I had one builder, we increased our marketing budget from $30,000 a month to $60,000 a month for six months at the beginning of the pandemic. Then we said, “This is crazy.” We cut it back to $15,000. From 30, to 60, to 15. Guess what we did three months ago now? We went back to 40.

Yes, marketing is very important. Now, what does it mean in the real world of today? You want to spend your marketing money wisely. You need to think about what do people need? How do you appeal to their needs and their wants? Convince them to consider you because you’re a better solution for their problem than somebody else. That’s what marketing is all about.

Host: All those are great insights, Al. Certainly, it appears as though not just marketing but being focused and understanding where you are. Sometimes we see builders who aren’t as hyper-focused into what they’re spending. Maybe they couldn’t tell you exactly what their budget was. Then you give the example of the builder who changed his four times. That means they’re paying attention, right?

Al: If he’s not paying attention, I’m paying attention. I’m going to make him pay attention. Specs matter. Here’s a good example. People think about spec houses as a way to make more money. There’s really 11 different reasons to build spec houses. Only one of them is to make more money.

One of the reasons we build more spec houses is in slower times, they act as extra models. People see them. They create more awareness. You don’t want to build too many in a slower economy. You got to be careful. What specs to build?

In a neighborhood, I might build the same spec house as my model plan to make sure I have one if someone likes it and needs it in a hurry. In a slow time, I may build a completely different plan in a more visible spot just to get people to see two different things.

Spec houses is an important thing to think about when you do marketing. I think event marketing still has a big place. Grand openings, close outs in neighborhoods, events, holidays. Anything that gives you an excuse to get them to come talk to you.

Cicero says, “More is lost by indecision than wrong decision. Indecision is the thief of opportunity.” Here’s where we bring the word opportunity back. What I wrote about that quote is so often we hear quotes that exhort us to action. He who hesitates is lost and luck favors the bold are the first two that come to my mind.

After they’re all done, after all the planning and evaluation is complete, we either act or we don’t. The work is either done or it isn’t. The mission is either accomplished or it’s not. Without action, there is only talk or speculation. Conception without conclusion. Action alone makes things happen. Without it, we cannot impact our future or shape our own destiny.

To me, this quote talks about how if we don’t do something now, indecision is the thief of opportunity. There are opportunities here, but we have to do something to take advantage of it.

Host: Absolutely. I agree. Indecision is the thief of opportunity. Love that line. While we’re talking about these market opportunities, which market opportunities are out there that you think most builders are overlooking?

Al: I have two builders who have made major land purchases in the last 60 days. Significant. They weren’t around four months ago, six months ago, eight months ago. The jury’s out about whether we made the right decision to buy them both. I think we did.

They’re big. One builder is spending $15 million and the other builder’s spending $9 million. They’re 400 miles apart. They’re very different builders. One’s a little bit higher volume, lower price. One’s a higher price, a little bit less volume.

In both cases, we talked about it extensively. We think strategically, these are good land buys. Are we a little nervous about them? Yeah. But there are opportunities that weren’t around and they won’t be around again unless we take them.

I think you’re going to see some land things come up. You have to make a decision about, does it work for you? I’m not saying go out and buy in a land-buying binge.

I’m saying if the right piece that you wanted, and you really wanted six months ago, now comes up, maybe you still want it. Maybe you don’t. That’s a conversation about how strong you are financially, how much you need the land, etc.

Same thing’s going to happen with people. Some builders will lay off some people. I’m thinking of one in particular. One of my builders had 11 people offered to them as a builder is leaving a marketplace.

That’s more than we could find four months ago, when we couldn’t find anybody who was breathing, let alone who knew what they were doing. To me, those are the two opportunities, I think, that you’ll see the most of.

Host: Fantastic. Before we dive in a little bit deeper, Al, for those that aren’t familiar, can you tell us a little bit about your background and how you work with builders around the country?

Al: Sure. I’m an engineer by training. When I left the army a long, long, long, time ago, I went to work for the National Association of Home Builders for six years. I was the Director of Technical Services. I used to represent all the builders in the codes.

I always loved design. I helped the design department. We wrote some books. Then I was a builder for about 6, 8, 10 years. I wasn’t a great builder. I was a mediocre builder. Then I started speaking and writing. People really liked what I had to say. I did more and more of that.

One day, I was a custom builder. I had a client who was really, really, really difficult. I said something to him I shouldn’t have said, and realized that it was time to move on. I became a speaker, writer, consultant about 30, 35 years ago. I’ve been doing that ever since.

I have 43 clients now as of today across North America. I build about 3,500 houses, plus maybe another 500, 600, 800 rentals. I don’t work for nationals.

I wrote a paper about the 15 functions of a home building company. Most of my advice is on strategy, on land, on financing, on product, and just general psychological coaching of people ‑‑ this sounds trite ‑‑ to be all that they can be. I used to think of myself as a consultant. Now I think of myself more as a coach.

Most of my builders now know how to play the game, but they need to be sharper, better. They need to work on little things. You know how to do it, but I think you could do it better because here’s why I think you’re not doing it right, or here’s the part you’re missing, or here’s the part you put too much focus on, or here’s the part you don’t put enough focus on.

I’m fairly astute at observing situations and people. My clients like that. They like that I bring a different view. I have an ability to look around and see things that a lot of people don’t see. That’s the greatest strength I bring to my clients. I look at the world differently than most people.

Host: That’s really strong. You’re almost talking about that cognitive diversity that you’re able to bring to these outside companies. That’s so important inside and with coaches such as yourself.

Understanding that you’re typically working with these builder leadership teams, do you have any points of standing advice or guidance that are cornerstones to your methodology that you would give builders regardless of the market conditions they’re in?

Al: Absolutely. Number one, think. I see so many people who act before they think. Don’t think it to death, but think. Don’t overreact to things. Dynamic thinking means that we adjust our thinking to the environment in which we find ourselves.

Six months ago, I told all my builders, “Don’t sell your spec houses till six weeks before they’re done.” Now I tell my builders, “Release your spec houses for sale the minute you know what your lumber costs.” That’s the largest single variable we got right now. That ability to adjust your thinking.

A year ago, everyone’s riding on top of the world. In fact, they’re upset because they can’t build what they could sell.

Now they’re being told we’re in a recession, and they see sales dropping and they don’t get a lot of traffic, and, oh my gosh, that’s disaster. The reality is they’re both to some degree an illusion. In three months or six months, we’ll talk about whether it’s really a disaster. Even then, it won’t be the disaster that people make it out to be.

One of the truisms of life is that people always see things bigger than they are, or smaller than they are, or worse than they are, or better than they are. Everybody wants to push everything out and not let it be where most stuff is ‑‑ it’s in the middle.

I had a good month, it’s fantastic. I didn’t sell anything this month, oh my gosh. If you average the two months together, it’s exactly what we expected. We said we’d sell three a month. I sold six one month and zero the next month. Some of that is a statistical anomaly. Some of that is seasonality. Some of that is stuff happens.

If you get all excited by the six and all depressed by the zero, you’re a fool. After we’ve had four months of zero, we’ll talk about getting depressed. When people bring me a data point and they want me to tell them about it, I tell them, I ain’t telling you jack about a data point, it’s just a day. I don’t know what the heck it means.

People call me up. I must have talked to 40 builders in the last two months. “Al, what do you think?” I think I need three more months to understand what I think. That’s what I think. Anybody who makes prognostications today is a little ahead of the curve. You’re either going to be a hero or a goat.

My answer is it’s going to be smaller, shorter, not as bad, but give me a couple more months, I’ll tell you what I really think. I’m helping my builders make some big decisions based on this. Maybe we kick some of these decisions down the road a little bit. Maybe we think about what the downside is.

If the downside really can hurt us, we’ll make the big decision.

The indicators that I look at show me that inflation is getting better. It’s still here. The Fed, they need the right symbolism to hang their hat on to stop raising the rates. Until they get it, they’re going to keep raising the rates.

They’re going to raise it a half a percent next month. That’s already cooked into the market. The market knows that. The Fed know that. The Fed knows that I know that they know that. The minute they get some good indicators, they can say, “We’re winning. I’m declaring victory. I’m going to stop, or slow or whatever the rate.”

That’s what they’re looking for. They were looking for it last month. They couldn’t find it. They got bad news instead. You notice they didn’t go to one percent. The reality is they waited four months too long, six months too long to act. A lot of this stuff is posturing.

Host: A lot of food for thought there. To expand on that a little bit, as you’re sharing this standing advice with folks, I’m sure you get some pushback on occasion. Is there any of your advice or guidance that leads to a little pushback or struggles with builders implementing or taking that than others?

Al: Yeah, absolutely. The ones who are too bold, when I tell them to slow down, they don’t want to slow down. The ones who are too cautious, when I tell them to speed up, they don’t want to speed up. I could put them all into those two categories.

Host: Just for the fun of it, why don’t you share the outcome when each one of those things happens? Those are the two extremes.

Al: They resist me at first. We talk about it. The ones who’ve been my clients the longest acknowledge that I’ve been right more times than they’ve been right. They try it. It works. Then they go, “Yeah, you were right.” Which is very hard to get out of them. Eventually, they come up with it.

I’m not perfect. There have been a couple of times I’ve been a little slow to make a decision. In general, I think if you asked all my clients, through the years, they liked the advice I give. That’s why more than half of my clients have been my clients for over 16 years.

All the ones who I have who are less than 6 years, most of them were referred to me by the ones who I’ve had for more than 16 years. The only people that I typically lose are people that can’t handle the heat of my advice. I don’t give my advice easily. I’m not the easiest person to work with. I have strong opinions.

I tell you, if you want someone to come, pat you on the back and tell you you’re doing a good job, don’t hire me. I’m not that guy. My job is to figure out what you’re not doing right and show you what that is. Point it out to you, and help you figure out how to do it better. Anything less than that, I’m not doing my job.

I’ll try to be complimentary when it’s deserved, but that’s not my number one mission. My number one mission is to make you better. By the way, while I’m making you better, the good news is my secondary mission is to make myself better.

I can probably thank all of my clients for making me a much better coach than I was 10 years ago. 10 years ago, I was a much better coach than I was the 10 years before that. Every one of them, every one of these experiences, I learned from. It makes me better.

I think that’s why I try to encourage all my builders. Just get better every day. Pretty soon, you’ll be the best. You may not be the best you can be, but you’ll be better than everybody else. As far as they’re concerned, you’ll be the best. Doesn’t mean we’re our best, but we’re the best.

Host: Very good. I appreciate that. Let’s talk about one of the hot‑button topics briefly, which is wanted to ask your opinions and thoughts regarding build-to-rent. Specifically around how you see that strategy holding up over time. Does it become a bigger part of the puzzle?

Al: I advocated build-to-rent for builders about 15 years ago when I started pushing it lightly. 10 years ago is when I started pushing it harder. Seven years ago, I was like, “Listen up, why aren’t you building anything for your own account?”

I have at least five of my builders who now have portfolios in excess of 300 rental units. They’ve all done amazingly well. The good news is there’s still some opportunities. Those opportunities are limited by certain market conditions and certain markets.

It’s hard to build, especially single family or attached single family, for rent in places where land is really expensive. Up until recently, the rents just couldn’t justify it. It’s hard to build something for $500,000 and make it cash flow.

We were seeing some of the big single family rental companies paying $450,000 to $500,000 in certain markets for certain products as rentals. In general, you want to be under 350, under 375 to make a rental work.

Most of the builders I work with, I advocate a mix of single family townhouse and apartment products if you want to own a portfolio for a lot of reasons. I love single family for this reason. I can get out of it one at a time. Once I build a multi‑family building for rent, its value is linked to its cap rate.

A single family rental in a high cap rate time would probably be a time where money was expensive, things were inflating. I might be able to sell those single families to buyers for a lot more than the guys who on the cap rate basis would pay. That’s why I like them.

Host: I think that’s a great point that you made. That it’s got to be the right product at the right price. A very powerful tool in those certain markets.

Al: Where it was best was in the southwest and west when land was relatively cheap still, particularly in the southwest and southeast. You could build single families for 250, 275, 300. Those would work. You can make the economics work on that.

Anybody who wants to talk to me, I’ll be glad to go over with them. I have some tools and some models I build for single family rentals. You got to always ask yourself, “Am I playing the short game, the mid game or the long game?” Rentals is the mid to the long game.

Yeah, there’s been some opportunities to build them and flip them, but that’s not what it’s about. It’s about getting other people to pay your mortgage. Waiting 20 years until there is no mortgage and you own a whole bunch of real estate for free. That’s what it’s really about. If you get positive cash flow along the way, that’s amazing.

Host: Yes. All right. One last question here for you, Al.

Al: One last question. Does that mean that the good times are almost over? Is that what that means?

Host: No, just for now. This is just goodbye for now. If you could offer one builder any advice regarding working with their trade partners during challenging times, what might that be?

Al: I think I’d offer them the same advice that I would offer them about working with their trade partners all the time. Be respectful of what they do. By the way, when’s the last time you stood out in the 102‑degree temperature framing all day?

Pay them promptly according to your terms. That doesn’t mean some of them can’t wait 30 or 45 days. It just means if you say 30 days, it’s 30 days. If they say they need 14 days, figure out how to pay them in 14 days. Once we set the terms, meet the terms. Understand their problems. They got problems, too. They can’t find labor. They got jacked up by their supplier. They got issues.

Having the ear that says, “I hear you. I feel your pain. I got it.” As opposed to, “You’ll be there on Thursday or I’ll fire you.” That doesn’t work in today’s world. That’s a different mindset. I’ve never been that guy, unless they push you to be that guy.

I write a lot about leadership. Having been an officer in the Army, I was taught certain things about leadership. I believe certain things about leadership. I love to write about leadership.

I have a little article about the seven key traits of a great leader that I’ll be glad to share. Of all the things I’ve written, it’s one of the ones I’m the most proud of.

Host: Would you be willing to share those seven keys of leadership?

Al: Number one, set the example. Authority can be given, but respect must be earned.

Host: That’s perfect.

Al: Number two. Whenever possible, explain. Not all situations allow for explanation, nor is one necessarily required. Almost everyone responds better to direction when they understand the reasoning behind the command.

Number three, never display uncertainty. Once you’ve collected the facts and made a decision, don’t waffle. Often, a less than optimal choice, well‑planned and executed, will result in a successful outcome.

Number four. When circumstances change, be prepared to change with them. Even the best decisions have to be modified or reversed as facts and situations are altered. Good leaders recognize the shifting environment and are not afraid that changing their position appropriately will be viewed as flip‑flopping. Stubbornness is no more a virtue than indecisiveness.

Number five, be objective. We all have our own biases and prejudices. To be a great leader is to acknowledge your preconceptions and prejudices, and make sure you always do your best to put them aside and make the right decision.

Number six. Try to be fair and equitable, but remember that’s not always possible. The leader’s job often requires that he has others to sacrifice disproportionately. For it is his responsibility to put the best people in the position where you have the greatest opportunity to accomplish the mission.

This may result in situations where some appear to work harder than others. Yet while fairness is a desired outcome, it should never be the motivation of a leader. Good leaders do what they must do for all to succeed.

The last one, you can’t change what you don’t understand. To change a person’s behavior or an organization’s culture requires the investment of time and thought necessary to truly comprehend the existing circumstances.

“First impressions can be deceiving. Good leaders recognize their obligation to have and understand all the facts available before making decisions and developing strategies. Bad decisions, which are the result of inadequate research or review, must be seen as a failure of leadership to fulfill one of its most important responsibilities.”

Those are my thoughts on leadership.

Host: Very, very strong stuff, Al. Really appreciate you taking the time to share those with us. With that, I’d like to thank you for this time that you spent with us today. We look forward to having you back sometime very soon. Thank you.

Al: It’s my pleasure, always. Thank you so much.

To hear more from Al Trellis, check out Q&A With Al Trellis, President of Home Builders Network.