Your business year is either rolling happily into the accounting record books or crashing into the pits of a softening real estate market. In either case, it is time to reflect on what happened in 2007, both good and bad, so you can forecast your 2008 business year.
If your 2007 is going to end in the red, then you need to start with candid, honest reflections of what went wrong or what could have been done differently. Since misery loves company, you may find some solace in knowing you are not alone in dealing with losses. Almost every report on our industry this year has been negative. Most public builders in the country are reporting losses in the tens or hundreds of millions. There were major consolidations and many notable large-scale bankruptcies.
Among the 50 small-volume custom builders I have spoken with this year, only a few are making money. The rest are either happy to break even or are not talking about how much money they are losing. Many builders I speak to do not know how much they will lose this year until their record keeping and tax reporting is done many months from now. Frankly, that is an unacceptable way to run your business. See my column on profitability reporting in the October 2007 issue for some suggestions for staying on top of your financial business reality.
Here are a few thoughts on taking losses. If in fact spec homes are one of the major causes of your anticipated losses, then you really understand the expression, “Your first loss is often your best loss.” Learn from your past; do not punish yourself for something you cannot go back and change. Also, remember that losses can be carried backward to offset income and taxes paid in prior years. You may be eligible for a substantial refund from the IRS.
Secondly, if you need more encouragement to accept a loss by either taking the next lowball offer or by lowering your asking price on a spec that is not selling, take this viewpoint: Accepting the inherent risk in a spec house was part of your original decision to build. A prudent gambler bets only what he can afford to lose. It may be time to cover the downside and move on.
Conversely, you may have had a profitable 2007. I am happy to report that 2007 was one of the best years my company has had recently. We were able to achieve this through a bit of good fortune buoyed by my willingness to take losses on our spec homes but also to sell them at no profit over the past two years. We broke even on $6 million of spec inventory between 2005 and 2007 and did not replace any of the spec homes sold. Our production increased in 2007 due to preselling five large custom homes and adding four new remodel projects. Previously we did not offer renovation services.
Are you planning on having a reflections and forecast organizational meeting with key members of your company? Invite them to sit with you and seek their candid feedback. If you are a one-man band, invite a trusted business associate to an informal review. Consider asking your clients to review your performance so you can evaluate the perception of your company. Give serious thought to entering the renovation and remodeling business. It is statistically the only segment of custom home building that I believe will undoubtedly grow in 2008.
Be responsive to the new market conditions by looking ahead to 2008 and making changes now! Learn from your experience but reinvent your future. What have you learned this year that will help you be profitable in 2008?
Jay Grant is president of Grant Homes (granthomesusa.com), a residential design/build firm in Mendham, N.J. Grant’s business focuses on controlling and developing land for construction of luxury custom and speculation quick-delivery homes. His strict attention to weekly cash flow reporting results in industry-leading profit margins. Grant has given numerous seminars across the country and is available for consulting by sending e-mail to email@example.com. Read his past columns at rdbmagazine.com.