Small and independent homebuilders are being forced to adapt as national tract developers increasingly buy out entire subdivision filings
Dwayne Gafford has gotten creative to compete with larger builders by partnering with other builders and cutting a deal with the developer of Twin Lakes Estates in Central to buy out all the subdivision lots in phases. Photography by Collin Richie
Just after Hurricane Katrina, national tract builder D.R. Horton started moving into local subdivisions where smaller builders were working and buying up the second and third filings all at once, recalls Central-based homebuilder Dwayne Gafford.
“That created a lot of animosity among the builders and developers,” he says. “We felt like we weren’t treated fairly in many cases.”
There’s only so much land available in the Capital Region’s prime locations, especially in East Baton Rouge Parish. When volume builders like D.R. Horton and DSLD Homes buy up large swaths, that leaves even less for the little guys, who often must adapt to survive.
“When the tract builders have gone into different subdivisions and bought up lots the original developers had left, it has kind of taken the market away from the independent builders.” —Linda Evans, executive vice president, Capital Region Builders Association
The combination of a sluggish housing market and a scarcity of lots drove a number of independent builders out of business from 2008 to 2012, Gafford says. On one hand, he doesn’t blame developers for wanting to sell off an entire project in one deal. But he says it would have been nice to see a bit more loyalty toward local builders who suffered through the Great Recession with the local developers.
Gafford Builders, which once built at the same entry-level price point that the big guys tend to specialize in, started going after a different market niche by loading up on amenities and charging a little more per square foot. Others found their niche by being more flexible than the tract builders.
Gafford and some of his fellow local builders even found a way to beat a volume builder at its own game by joining forces. Gafford and a few other builders approached Jim Clark, who was developing Twin Lakes Estates in Central.
“They came to me and said that they had been getting squeezed out by the big tract builders,” Clark recalls.
Clark says he had an offer from D.R. Horton to buy the entire subdivision. He was hesitant about selling to a tract builder, so when the group of local builders committed to buy his lots over time, he decided to go with the locals. So far they have purchased the entire first filing of 49 lots and most of the second filing.
Clark likes the idea of working with the smaller builders and helping them stay in business, and he has been happy with their work. He also likes being able to exercise quality control, noting he personally approves the house plans. The homes cost between $300,000 and $400,000. At that price point, buyers prefer a more customized home than what the tract builders tend to specialize in, he adds.
Lynda Evans, executive vice president with the Capital Region Builders Association, says she hasn’t heard about many other independent builders working together in the same way. But she says their idea makes a lot of sense. Having trouble finding lots has probably been the top complaint Evans has heard from builders over the past few years, she says.
“There’s just not a whole lot of buildable land left in East Baton Rouge Parish,” Evans says. “When the tract builders have gone into different subdivisions and bought up lots the original developers had left, it has kind of taken the market away from the independent builders.”
Bardwell Homes is not a tract builder. But Scott Bardwell, who is a developer and a builder, has secured a 68-lot filing in University Club and bought 26 lots from D.R. Horton in Long Farm, and he’s developing his own 43-lot filing in Magnolia Square.
He says he saw the trend of builders taking on large numbers of lots at once and adjusted accordingly.
“I do see it. It just isn’t affecting me that much right now,” he says. “I’m taking advantage of it myself.”
As a developer, he often sold lots to independent builders. He started building when the recession chased many of his builders away, he says. Sometimes, independent builders want to do their own thing, rather than fit into the broader vision for the development, Bardwell says. Others may get into the neighborhood, fail to “play by the rules” and “get booted out.”
Bardwell Homes basically does business in one of three ways: Build and develop the project themselves, sell lots to other builders and build alongside the others—which Bardwell is doing in Magnolia Square—or buy lots in bulk.
“That’s an evolution,” Bardwell says. “In the good old days, you’d just go develop lots, have eight builders sign up and buy a couple lots each, and that’s what they’re all used to.”
Robert Dietz, chief economist for the National Association of Home Builders, says association members are facing three significant headwinds: tight lending, a shortage of labor and a scarcity of lots.
The number of loans made to small and regional builders for acquisition of lots, development and construction—most of which come from community banks—grew by about 18% in the first quarter of this year compared to last year, Dietz says. But it’s still down compared to pre-recession levels. Publicly traded national companies like D.R. Horton have more ways to raise capital than local builders and developers.
The home construction industry lost about 1.5 million employees in the recession. About 600,000 have come back, but the labor market remains tight, he says.
Dietz says 64% of builders who participated in the most recent NAHB/Wells Fargo Housing Market Index survey said the supply of lots in their markets was either “low” or “very low,” which is the highest percentage recorded since NAHB began collecting the information in 1997. So the Capital Region is hardly alone in that regard.
It should be noted that it isn’t just the smallest builders that are frustrated. Builders that started more than 100 homes in 2015 were the most likely to describe the lot supply as low.