Epcon Experts Series With Bob Whitten of SMA Consulting

 

Bob Whitten, managing partner of SMA Consulting and founder of elite builder coaching groups comprising SMA’s Inner Circle, discusses how home builders can take advantage of opportunities at every stage of the market’s cycles in this episode of the Epcon Experts Podcast.

“In a down market, I like to maintain market share. In a going‑up market, I like to maintain market share. At the top, obviously, the best of the best can grow. You have to be prepared for it. You have to prepare for the upturn.”

Host: Today we have with us Bob Whitten, Managing Partner of SMA Consulting and founder of elite builder coaching groups comprising SMA’s Inner Circle. Welcome, Bob!

Bob Whitten, Managing Partner of SMA Consulting: Nice to be with you. I always enjoy my opportunity to speak with the good folks at Epcon.

Host: Bob, the home building industry has been going through some changes recently. What are you hearing from builders around the country?

Bob: Everybody is concerned about the immediate and longer‑term future of the housing industry. All indications in the last quarter to six months are that we still have some fairly significant housing demand.

There’s probably going to be a little bit of a blip in the radar, if you will, for sales. Maybe, construction starts at some point in time in the next six to nine months based upon the affordability issues that we’re seeing out there. Not to be unexpected.

I wrote a management message to our Inner Circle group last week, and I entitled that, “The Sky’s Not Falling.”

Host: I love that.

Bob: I think that’s about the right thing to say about it. Don’t panic. It’s not a time to say, “Oh, my goodness. I’m going to…” That management message came about because of a conversation between one of our coaching groups. They like to text or email each other back and forth with ideas and suggestions and new things or questions.

One question that came out was, “I’m thinking, with the change in the market, that I might concentrate on remodeling for a while.” Oh my goodness, you don’t need to change your business model because we’re going to go through a little hiccup here.

It’s interesting, historically. You get to be in the industry as long as I’ve been, which is over 40 years now, you see the ebb and flow of the markets. We used to have this ebb and flow from shortly after World War II.

Right after the World War II through 1996, in about a five- to seven‑year period of time, averaging six years, we had a down part of the market. We had an up part of the market. We had a little bit of going down and going up.

Probably the up lasted a couple of years. The down lasted a year, year and a half. Going each way lasted someplace between six and 12 months, and that constituted that cycle.

The benefit of that cycle of ups and downs in the market, mostly controlled by the interest rate by the way, the benefit to it was that the builders never got sold far into one aspect of the market ‑‑ good market, bad market or in between. They were constantly seeing the market change, and when they got to the bad part of the market, they knew it was short‑term.

When they got to the good part of the market, they knew it. We better make some money now and save it, because the market is going to change, and we’re going to have to rely on that.

Then what happened in 1996, we got onto this ‑‑ depending upon which part of the country you were ‑‑ extended positive to flat market from 1996 to 2006, almost 10 years. I know in the East Coast, Florida, second quarter of 2006, we started to see the boom and all of a sudden it went down.

Then what did we go? Three to four years depending upon where you’re at. Three to four years of down‑market cycle. Didn’t start in places like Utah and other places until the financial crash of October 2008, but everybody was in the throes by ’09 and ’10, and starting to pick up the pieces in ’11.

Didn’t really come back out of it until ’12 or ’13 depending upon where you were. There’s this long cycle.

Now ever since then, the market’s been gradually building back up again. Then COVID hit. What was that? 2020 first quarter, and then ‑‑ I find it interesting ‑‑ nobody remembers this today. What is it?

Less than two years and a couple of months later, they don’t remember that, “Oh my goodness, everybody for about six weeks thought the housing market was going to totally crash.” It was going to be worse than anything that we had.

A matter of fact, it probably is what contributed to a lot of our supply chain issues that we’ve had in this country. I felt the same way. March 15th, 2020, I said, “Man, I could see a 40, 50 percent decline in sales in the housing market.”

What happened? We had a two-week to six‑week hiccup while some of us couldn’t work, depending upon what state you were in, the lockdowns, all that stuff. Then all of a sudden, we had the biggest housing boom in a year, we’ve basically ever had.

I think a lot of the manufacturers, when they hit that 2020 hiccup in March, they said, “Oh man, we need this. We need to limit production, or else we’re going to have warehouses full of stuff.”

Just‑in‑time delivery, the demand is going to be low, and so they started…I don’t know if they closed plants, but they certainly didn’t try to bring anything new on. They didn’t try to increase production or orders of raw materials, etc. The next thing you know, we have this unprecedented housing boom.

That’s a long‑winded way of saying a lot of people in the industry, they’ve never lived through a downturn. If they’ve been in the business only six, seven, eight years, almost 10 years, everything’s been a gradual positive to fabulously positive uptick in the market.

The market used to self‑adjust. We are in a period right now ‑‑ the very beginning period, I believe ‑‑ of adjustment, self‑adjustment.

We have two things going on. We have a little bit of a sales decline, but traffic remains strong. Construction remains strong, because those houses that we sold or converted to the spec production six months ago are now hitting the ground.

The trade contractors are so busy. They’re not interested in talking about, in most cases, reducing their price, or looking for work. I’m starting to hear the very first examples of, “Hey, I had a couple of trades come in last week and asked if I had any work for them.” That’s the first time I heard that in several years. That’s the first sign of adjustment.

What will happen is we’ll get the cost under control a little bit. Why is this happening? Well, because the Fed raised the interest rates, and the mortgage rates went up. It fluctuated back and forth, but they went up a point, point and a half, between February and today. They’re back down a little bit now, and it depends.

The truth is that interest rates are still inexpensive. It’s just that people don’t remember when they were this expensive before. In my lifetime, I saw it. I personally bought a house with an interest rate of 17.5 percent. You still sell houses. You still build houses. That was 1980 or 1981.

Production probably had 400,000-500,000 single‑family detached homes built in that year. Somebody bought them with that kind of interest rates. Then, we had double‑digit interest rates until the late ’80s and very early ’90s. Maybe 1990, we might have had a 12 percent, someplace between 10 and 12 percent interest rate, mortgage rate.

It came down, but it came down very gradually. Until 2000, it was at eight percent. It came down to single digits. It would go up a little bit, and come down a little bit. It bounces around like the stock market goes up and down, up and down, up and down.

If you look at the trends over the course of a five‑year period of time, you usually see a fairly straight line. It’s time for the interest rate to go up a little bit because it’s going to help the market get back to a rational level of production.

At some point, last year, we were on a pace to build 1.7 million houses. I don’t think we have the capacity to build 1.7 million houses, especially with the supply chain issues that we’ve had over the last 20 months. You’re probably very aware of it. Everybody listening knows what I’m talking about.

It seems like every week, something, if it’s not garage doors today, it’s HVAC system component parts next week. Flex duct, most recently, has been a big issue. Nobody can get it. You can’t get it in [my] part of the country.

I talk to people all over the country. “That was last month’s problem out here. Now, we have that. We can’t get windows over here. We can’t get doors over there.” It depends. It’s time for the industry to catch up.

What do I see happening? This is a long‑winded way of answering your one question. I see a little reset in the market depending upon the local market and the regional market. How long will it be? How much it will be?

I’m telling my builders, I’m thinking of 15 to 20 percent decline in sales, and then eventually construction. Typically, we usually have sales happens one month. Construction on those sales for pre‑sold homes start 60 to 90 days later.

People have been so far sold out because of the crazy exuberance of the market that now, we’re selling houses, and not starting those same houses for three to four or five months sometimes. It’s going to be a protracted period of time when we see this market adjustment take place.

Host: That’s interesting, Bob. I think that you’re in a unique position to gauge what is happening at the builder level today.

I’m curious, you mentioned some of the challenges that builders are facing right now. I would love your perspective on who you’re seeing meet or exceed those challenges that stand out above the rest within your groups, or within the industry in general. What do you think are the character qualities that make them rise to the top as they do?

Bob: Probably fair is to point out that my typical client has a certain profile. They build someplace between 20 and 250 houses a year.

I have some that build more than that in our Inner Circle groups, but that’s our target market. We don’t work with public home building companies, so I can’t speak to that. I personally think they’re in a little bit different business than the rest of us privately held builders, especially at the size that I mentioned.

With that caveat stated, time of construction, because of so many of the supply chain issues and a totally exuberant market in terms of too many sales, has been a big issue.

The supply chain is still an issue. Length of construction, as a result, is still an issue. We’re in a people business. The biggest issue that we’re going to have is trade contractors who have gotten very independent.

It’s like it’s upside down. It’s almost like you have an employee, and the employee’s telling you what to do every day. As opposed to you explaining to the employee what you’d like to have them do, and then hoping they conform to that so that you can continue to pay them long term.

The trade contractors got very demanding. Many of them will not work for the originally agreed‑upon price. They want more money.

I used to tell my trade contractors when they would come to me and get a little independent like that, or say, “Hey, I’m not willing to give you the two‑month notice on a price increase, or 30‑day notice on a price increase. I need it on the very next house. I can’t, otherwise, I’ll do it.” I said, “Don’t forget, I have a very long memory. Don’t forget.”

I see some changes coming in the marketplace. I’ve seen some very good builders. I have a builder in Boise who’s setting up their own truss plant. He builds a couple of hundred houses a year, and trusses have been a big issue for him. It held up his time of construction, caused his operation to be…They are sub‑vertically integrating within their little market.

In his case, he’s a one‑market builder, and he’s setting up a truss plant. He’s got, between his business and two or three other builders that he knows who committed, it’ll be a full‑time, a two‑shift‑a‑day truss plant to produce trusses, and they’ll absorb them all.

I have a builder in Idaho who concentrates on…He runs a very unique operation. He does everything out of cash. He builds a few on‑your‑lots but mostly in subdivisions on land that he owns. He doesn’t borrow any money from the bank. As a result, when the market gets tough, nobody’s coming knocking on his door, asking for curtailment or anything. That helps.

The other thing that he does is he limits his production. He could sell more houses. He could probably build more houses, but he limits his production, one market, to 60 houses a year. The reason [is] he wants to build 60 houses a year in 90‑days construction time, how he measured from start to finish.

Last year, he built all but one house in 90 days or slightly under. The one house had some kind of a countertop that got mis-cut or something, had to be reordered. By the time they got there, it was 105 days or something. Other than that, he’s built, let’s say, 59 out of 60 houses and made that 90 days, and proving that you can do it.

Meanwhile, what I’ve seen is the majority of my clients went from 2019 to 2021 closings, their time of construction increased by 25 percent. Very typical that, and more. It wasn’t atypical for a 180‑day builder to go to a 240‑day builder, which is 33 percent increase in time. Most of them are around 25 percent, 20 percent.

First of all, the builders started to adjust to the market conditions. Second, the market is starting in some areas to adjust. What we’re seeing is like a 10, 15 percent improvement. If this year, we improved 10 or 15 percent more, what will happen is we’ll be right back to where we were at the time of construction, 2019, which was healthy.

There are some builders out there, some builders have learned to use escalation clauses, which now we’re eliminating because sales are getting tougher, and other things that protect profitability.

We saw a lot of people who in late 2020 to early 2021 saw their profit margins grow by as much five percent because we couldn’t price the product fast enough, increase the price fast enough, to make up for the cost increases that we’re seeing. We couldn’t control the cost increases because of law of supply and demand.

Host: It sounds like your best clients are the ones who are problem solvers, who are looking for ways that they can rise in the market and create unique advantages for themselves, like the builder you mentioned who created their own truss company.

Bob: Matter of fact, in that management message I mentioned that I sent out last week, “The Sky’s Not Falling,” I mentioned to somebody…At the end, I tried to summarize it on a positive note. I said what I legitimately feel is that this is a type of market condition, what I think we’re about to get into and are into, that I like. It’s what floats my boat.

I like to challenge builders to be creative. When the market is really good, and you can just wake up every day and the money’s there at the end of the week. Everything’s going OK. It allows us to get fat, lazy, sloppy.

Sometimes, we have to get creative. We have to. Where do you think adjustable‑rate mortgages came from? Because the mortgage industry, had to get creative. The only group of business professionals that hurt more when the mortgage rates get crazy than the homeowners is mortgage loan origination people. Boy, they get creative in a hurry.

I like builders to get creative in a hurry going to them and saying, “Hey, what would happen if I…?” I remember the first time I ever went into a financial company, and said, “Well, what would it cost me to buy at an interest rate of two percent?”

This is back when interest rates were 12 percent or something. “Well, how much money do you need?” “Well, you know, $12 million. I want to buy down two percent interest rate on a $12 million house.”

A little bank in Central Ohio, scrambling all over the place, trying to figure out what would we do and how would we do it, and eventually came up with a solution. Go to a lumberyard and say, “What would it take for you to lock my prices in for six months?”

Host: You’re seeing opportunities in every stage of this industry’s cycles.

Bob: The best of the best are the ones that can be quick on their feet. The guys who run their own businesses, the people like we talked about that are both your clients and my clients, those guys are the ones that have been most creative. Those are the ones that can do very, very interesting things.

When you get a group of them who are very closely matched in terms of what they do and how excited and enthusiastic, not necessarily how smart they are but how creative they can be within the industry, boy, it’s an interesting meeting for a couple of days. Sitting there listening and watching them grow, and seeing them do things that you never thought possible.

Host: I would love to hear more about how you’re advising builders to take advantage of opportunities that are present in the market.

Bob: I think most of these builders, again, are one-market builders. I do have a few guys that are divisionalized and have four, five, six divisions around the area of the country, regional area, but most of them are single-market builders.

Our company in Ohio was exclusively Ohio, but during my tenure there, we had seven divisions within Ohio. Each one doing 60 to 100 houses a year.

That was a nice kind of market because you were big enough in the state or in the area to command some attention from trade contractors and financial institutions and others, but you were small enough to be, “Hey, we can all get together in one day, all the decision makers and make decisions and lead there.”

We may argue while we’re in the room, but we’re going to leave with a united voice of how we’re going to do this, and if we’re going to do it or not, and what we’re going to do.

Host: Would you say, in general, you’re a pretty big fan of face-time, Bob, inside of a company and in a consulting sense?

Bob: Yeah, I think it’s important. I say almost every day in my consulting business, I wish when I was building, I had the technology that we have like this back then. What a godsend it would have been. It would have kept a lot of miles off my truck. Yes, I do agree with that.

It’s time that you spend together is invaluable. To watch somebody’s body language, if nothing else, while they’re telling you what their issues and problems are, is interesting.

Host: That’s a really keen observation. Going back a little bit here, would you agree that stronger builders are often able to gain market share in varying market conditions? That that’s an opportunity for them to expand their local market share?

Bob: Yes, I think that, in general, is true. What I tell my builders, the worst situation you’ll find yourself in, if you know what you’re doing, is maintaining market share in the downturn.

In a down market, I like to maintain market share. In a going‑up market, I like to maintain market share. At the top, obviously, the best of the best can grow. You have to be prepared for it. You have to prepare for the upturn.

I like to look at the market cycle as a circle, and say the bottom is the trough down here. This is what I hope is a year. Oftentimes, it was 18 months. Then this is six, to nine, to 12 months going up. Then up here, I hope to last two to three years. That’s the goal. Then another year, at most, going down before you hit the trough. Then you can rebound back up.

When the market’s in the bottom, and if you’re doing well, and especially financially doing well, you’re doing OK. You don’t have cash flow issues. Everybody’s getting paid. No banks are coming knocking. Then when the market’s at the bottom, you can do things like buy land at a discount.

One thing there’s never more of is land. When you can get it, the big hedge funds, that’s how they make all the money. They’re salivating right now. They’re waiting for the market to crash a little bit so they can come in and swoop up all the land, land bank it, and make a ton of money the next time it’s at the top.

You like the cycles. You want to grow when at the top, but you have to plan for it at the bottom so that you can grow at the top. Otherwise, you’ve got demand, but you have no capacity to fulfill that demand. You can also grow on the downhill cycle, still.

A lot of the non‑professional builders will become remodelers all of a sudden. They’ll abandon the market because they’re panicking. Find what you’re really good at and what you have a passion for, and stick with it during the good times and the bad times. If you’re good enough at it, you’ll do just fine.

Host: That actually leads me to a little different question for you, Bob. Product mix is an interesting topic. I’d be curious to know what you recommend for your builders in that regard.

Bob: Fewer than more. That’s probably the simple way to say it. Find out what you’re good at. I’ve heard of builders who say, “I have a 50 percent market share in my little market.” How do you get a 50 percent market share? In other words, you’re building 50 percent of the new homes that are being built in your market. How do you do that?

“Well. I have entry‑level houses. I have move‑up houses. I have luxury houses. I even do custom houses.” I said, “Man, I’d hate to be you and have to get up every day and face that. That sounds [like] way too much hard work for me, and [confusing].” Those are different markets. Every one of those has a little bit of a different twist to it.

In my case, I was an entry‑level, first time move‑up builder. I knew what my customer was. I was in Ohio. He was a Heartlander. What kind of home did he like? Plain vanilla. My secondary market was a wannabe winner. He liked to drive a car that looked like a Mercedes, but he couldn’t afford a Mercedes.

Those were the only two things I had to concentrate on. I had to learn how to satisfy them. I learned how to build what they wanted to live in. I had to learn how to make money building what they wanted. That was satisfying.

If you’ve been building those 25 plans for a while, then tell me what your top 10 plans are out of the 25, and what percentage of your business they contribute. Most of the time, the 10 plans out of 25 will contribute 75 percent of your business.

Host: That makes sense. Are there specific market segments or product types that at this point in your career, you are more in favor of than others?

Bob: I don’t know what all the answers are, but we got to figure it out. Talking about what you do at Epcon, that’s another great niche. There are some people who this [is] just a perfect opportunity to…Somebody’s already taken some of the hard work out of it that you might have to go out and find other people to help you do it.

Might take you 10 years to develop on your own. You can get in there and have it done. As an accountant who loves efficiency, I’ve always really been a fan of your systems. I built in Ohio, [Epcon is] from Ohio.

I was seeing Epcon developments back in the old fourplexes back in the late ’80s, early ’90s, all over the place in Canton, North Canton, Ohio, and other places in Akron and every place else we ended up building.

Host: What are you seeing among your clients who build active adult product versus custom homes versus entry level, in terms of their sales over the last six months as interest rates have gone up?

Bob: We’re not going to see the impact of the active adult as much. I would say the typical Baby Boomer like myself today is probably 50 percent cash yields if they want to be.

It’s like me. Our offices are in Orlando, but I live in South Carolina, thanks to the virtual ability. I bought a house here in South Carolina last year. The first gut reaction was, well, pay cash for the house. Then, I realized in July of last year, I could get 2.7 percent.

I said, “Man, if [you’re] going to give away money, I’ll take it.” I put a loan on it, but I could have cashed it. There’s a lot of people in that kind of a situation. We’re retired or retiring, or in my case, semi‑retired. I only work 6 hours a day, 7 hours a day, and not 10, 12 anymore.

There’s a lot of people who can cash those deals. It’s not as bad. Even if you don’t cash in 100 percent, there’s not going to be appraisal issues with the sales prices going up, or the mortgages are going to be easy, etc.

That part of the market has been one thing that’s been a little unique. Then, the hardest part of the market is the entry level. There, the affordability, what percentage of your income can you dedicate to housing?

Host: Yeah, that’s absolutely right. Great advice, Bob. Very good advice.

What would you say to the lone ranger builder listening to this interview about how they can benefit from working with an industry consultant with decades of experience, or being part of a Builder 20 club, or working with a company like Epcon where they’re not on their own anymore. They’re actually being part of a group to collaborate and learn together?

Bob: I always tell to them, “You have to have a mentor.” Or two or three. I had consultants that I used. I used universities. A lot of the professors at universities had been…They helped two ways. They were maybe professors. They have been builders. They worked for builders. They have a world of experience in a lot of cases.

Host: It sounds like your advice would be to have those people in your professional life that know more than you do, that you can learn from and even that you could learn from each other.

Bob: You need to be in there with like builders. You don’t want to be the most successful builder in the room and the most sophisticated builder in the room. You don’t want to be at the other extreme. You ideally want to be in the middle. You can learn something and you can impart something to somebody.

If you have to be at one extreme or the other, be at the low end. Be the smallest house in the neighborhood. Be the builder that’s less sophisticated, got the most to learn, be in there with a bunch of guys that can teach it. That’s a great way to do it.

Host: Very good. Great advice. That’s wonderful, Bob. One more question that I have for you today is I understand that we have several of our Epcon Franchise Builders working with you. I would be curious to know what you observe in them working with the Epcon business from your perspective.

One builder’s in North Carolina. One is in Tennessee, and in both cases, Epcon has allowed them to grow their business faster than they would have otherwise.

I think Epcon gives them a layer of professionalism that they wouldn’t always bring to a new project immediately and would probably take time to develop, but it comes with what is offered in your franchising program. Those are two things that come to mind right away, but definitely the growth part of it.

If somebody’s done all the hard work and, really, what you do [is] the hard work. You have plans. You’ve got a layout of the…You can tell them the market research that they would have spent months doing. You can tell them what they need, what they look for. It’s like any good franchise of any kind.

I remember one time years ago, my one son thought he wanted to be a frozen yogurt mogul. We went out to California and looked at one of the more interesting frozen yogurts. They told us all kinds of interesting things about where the location of one of these should be and totally contrary to what I thought would be. You guys have done that work because [of] the history.

What’s the benefit of having a franchise or having a consultant? It’s their level of experience, what have they already experienced, and probably made mistakes in doing, so they’ve learned the hard way.

Host: Very well said. Thank you, Bob. It’s been an absolute pleasure speaking with you today. Thank you so much for taking the time with us, and I look forward to speaking with you again in the future.

Bob: You’re very welcome.