Ed Nikles

The owner of Ed Nikles Custom Home Builder, Inc. in Milford, Pa., who over his 45 years in business has survived the housing industry’s many cyclical ups and downs, said builders today “have to pay very close attention to their financials.”

“If builders aren’t maintaining income, or expenses are eating up their income, they have to make those hard decisions, whether it’s layoffs or cutting back in other ways,” he said.

In addition, he said builders need to be accurate when estimating jobs. Winging it, he said, can cause many problems.

For several years now, Nikles has used a computerized estimating system that lets him accurately project costs down to “the last 2 x 4.”

“Knowing your costs going into a project, even with the hard times this year, can save your business,” Nikles said. “We’re still making a profit right now — even though our sales are off. We have been able to maintain our staff so far.”

Setting His Homes Apart

Adding recognizable features to his homes is one of the ways that Nikles has been able to stay ahead of his competition, and his customers are willing to pay more for his homes because they are different, he said.

“Our philosophy has been to do something different from what everybody else is doing," Nikles said. “If you’re doing the same thing that everyone else is doing and competing head-to-head, what separates you other than price?”

To further distinguish himself, Nikles earned the Certified Green Professional designation from The NAHB University of Housing and is promoting his green building program to the fullest extent.

His company has built a small home ― about 1,600 square feet ― that he expects to earn a Gold Certified Home designation under the NAHB Model Green Home Building Guidelines. 

“It’s an Energy Star house that will save the home owner 50% of the energy costs over a typical code-built house,” Nikles said. “We’ve sold a house already off that fact.”

Nikles not only builds green, he teaches local Realtors® how to market and sell his green homes by regularly conducting seminars on green building. Nikles said that he’s received several referrals from these seminars.

Don’t Overlook the Value of Meetings and Conferences

Nikles said that every time he attends an industry event, meeting or conference, he takes away at least one or two things that can help him make his business better.

When members tell him that they don’t get anything out of their builders association, Nikles tells them to take education courses and attend IBS and other conferences.

“If you don’t do those things, then I can understand why you don’t get a large perceived value. Those of us who do get a lot out of it,” he said.

To survive the downturn of the early 1990s, Nikles said he changed his business from home building to remodeling. To learn as much as he could at that time, he attended as many remodelers shows as possible, and by 1997 his remodeling company had hundreds of projects and was profitable.

The information garnered at these seminars and conferences is valuable because it comes from peers who have gone through “the same things you went through,” he said.

“Go to the seminars and take notes, and then pick the top two ideas that strike you,” Nikles said. “If you try and do all the things mentioned, you’ll never get anything done. But if you get the first two done, then you can move on to the rest of the list.”

Nikles is an NAHB Life Director, National State Representative, Life Spike member and former BUILD-PAC trustee. His is also a Life Director and founding member of the Pike County Builders Association in Milford, Pa. [return to top]

When seeking capital for new projects, Tom Stephani, of Stephani Enterprises, Inc. and Custom Construction Concepts, Inc., of Crystal Lake, Ill., said that the first source of funding is the builder’s own equity.

“The second place I go is to look at the landowner, who can use their land as a subordinated position to any bank debt,” said Stephani.

He also encourages builders and developers to seek out friends and family who may be willing to invest in a project as well as trades and subcontractors who could be interested in taking a piece of the action because they need the work. Finally, he said, a community lender who knows the people and project involved can take a minority stake. “You don’t even need an appraisal to make it work.”

Stephani added that the way to structure the project and determine profit-sharing arrangements depends upon what the landowner, trades and friends put into the deal. “Whether structured as a percentage interest or a piece of the project, it all depends on what their local worth is,” he said.

Wider Latitude When Working With Private Investors

Troy Taylor, president of the Algon Group in Atlanta, which provides real estate and financial advisory services, said that builders can have wide latitude when negotiating with private investors.

“If there are 100 deals, there are probably 110 different structures,” said Taylor. “What each of your investors wants will be different. Decide on the economic arrangements and with good legal advice you can figure out how to best document what you have agreed to.”

When approaching an alternate funding source, builders need to provide market research and data that is both comprehensive and easy-to-understand, as well as detailed information about their business.

“Alternative sources won’t just look to the real estate deal,” said Taylor. “They want to know who they are in business with, who the developer is and their track record.”

Presented by NAHB’s Business Management Department, Executive Officers Council and The NAHB University of Housing, participants in “Alternative Funding Sources: Ideas and Perspectives to Keep Your Business on Track” agreed that it is difficult to get new investors to inject capital into an existing project unless the primary lender agrees to restructure its bank debt.

Best Funding Source for Builders Still Their Existing Banks

The best source of funding for builders and developers who are seeking to work out loan problems is with their existing banks, said bankruptcy expert Harley Riedel, director of Sticher Riedel, Blain & Prossner, P.A., of Tampa, Fla.

“It’s going to be tough to get another lender to come in without a restructuring and if existing banks won’t restructure, new money is going to walk,” said Riedel.

This vicious cycle, Taylor said, is causing some firms to begin Chapter 11 proceedings in a bid to force banks to make decisions they don’t want to make.

But Riedel warned that this is a risky maneuver.

“You ought to explore every alternative you can before filing for Chapter 11,” he said. “But that doesn’t mean you should not talk to your lawyer about the possibility in advance. You need to know what your rights are. It’s a potential tool you can use, a tool that large, publicly traded companies have already used.”

Asked by moderator Ron Robichaud, principal of Robichaud Financial Services based in Laconia, N.H., about the possibility of securing funding sources from Wall Street, panelists agreed that it would be a tough sell for most large companies and nearly impossible for small and mid-sized firms.

“Wall Street capital would like bigger projects,” said Stephani. “If you go after Wall Street money, the company must be packaged extremely well. In 99% of the cases, you must hire advisors that have credibility with these institutions. They are getting hundreds and hundreds of opportunities, so they can be extremely selective.”

“The ability for most builders to attract Wall Street money is basically non-existent,” added Taylor. “Institutional investors are getting hundreds of loan packages. If they get 200 packages, they will look at 40, do due diligence on seven and fund one or two.”

Avoid Spousal Guarantees in Secured Loans

In today’s market, with banks having the upper hand, Riedel said that unsecured debt is virtually unavailable for existing projects.

“What you will find when going for new loans today are loans that will be secured,” he said. “Most banks or lenders will require personal guarantees — unless you’ve got a lot of equity.”

A personal guarantee is a contract, and each one contains its own unique terms.

“The most important thing is to try to avoid spousal guarantees,” said Riedel. “Avoid pledging an exempt asset like a homestead.”

Taylor urged builders who embark on new projects to limit their capital exposure, even if it adds to their total costs.

“If you want to build 600 units, build 100 units to see how they sell,” he said. “If you have existing projects and you need more capital, you will have to restructure with your existing banks. The longer you delay, the more difficult it will be to restructure what you currently have.”

In closing, Stephani said it is vital that builders stay in touch with their lenders.

“When you do have issues with a bank, the No. 1 thing is to continue to communicate. Don’t avoid them. Keep them up to speed on where things stand. Otherwise, they will think the worst.” [return to top]

NAHB Public Affairs has created a new consumer brochure, “Opportunity Knocks” which uses facts and figures to reassure hesitant home buyers.

Access and download the brochure here.

The brochure was designed so that HBAs and members could easily post it to Web sites or print out copies for distribution in sales offices or at parade of homes, home shows or other places where potential home buyers may be looking for information. Space has been left on the back of the brochures so that they can be personalized with contact information using stamps or stickers, or added by a graphic designer if they are going to be printed in large quantities.

 For more information, e-mail NAHB Public Affairs, or call 800-368-5242 x8447.

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This year, IBS will feature:

• More than 1,700 exhibitors showcasing their latest products and services
• More than 250 education sessions or programs designed to help members stay current on industry trends and issues

Full Registration

Full registration provides attendees with access to four days of exhibits on one million net square feet of exhibit space, all the educational sessions and new, daily-featured speakers.

Full registration for members is $425. 

Full registration for non-members is $575.

Exhibits-Only Registration

Exhibits-only registration is $100 after and $50 for their spouses.

Exhibits-only registration for non-members is $200 after and $70 for their spouses.

Education Session Tickets

Exhibits-only registered attendees can purchase tickets to individual IBS education sessions. Individual tickets are $50 for members and $70 for non-members. Registrants can purchase packages of four tickets and get one free or seven tickets and get three free.

(Attendees who purchase full registrations do not have to purchases education session tickets or exhibits-only registration.)

To Register

For registration information, click here. For hotel information, click here.

To register online, click here.

For the latest IBS information — including floor plans, renderings and construction photos of The New American Home — visit the 2009 International Builders’ Show Web site at www.buildersshow.com.

Register for IBS Hotel Room Block Rates by Dec. 12

Members who book their Las Vegas hotel reservations through the NAHB hotel block on the International Builders’ Show Web site are guaranteed the lowest block rate available, even if a lower rate becomes available after they have booked their rooms.

Under an agreement NAHB reached with all the hotels involved, if a lower NAHB room block rate becomes available after a member has reserved his room, the member will receive the lower rate at hotel check-out.

Registration for hotel rooms at NAHB hotel block rates ends on Friday, Dec. 12.

To register online, click here.

For more information about the Builders’ Show and to register, visit www.buildersshow.com.

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“Today’s report shows that we are in a crisis situation. If there’s any hope of turning this economy around, Congress and the Administration need to focus on stabilizing housing,” said NAHB Chairman Sandy Dunn, a home builder from Point Pleasant, W.Va.. “Tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back. Beyond the work that is being done to help reduce foreclosures, Congress must immediately incorporate such incentives for qualified buyers in a new economic recovery package.”

“The housing downturn has already cost America three million jobs in construction and related industries, and this downward momentum cannot be stemmed without substantive government intervention,” agreed NAHB’s new Chief Economist, David Crowe. “Congress should consider significant consumer incentives such as expanding the first-time home buyer tax credit and providing a government buy-down of mortgage interest rates for home purchasers. Both policies were successfully combined in the ‘70s to stimulate home buyer demand, and could get housing and the national economy moving again.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

Two out of three of the HMI’s component indexes declined in November. The index gauging current sales conditions fell six points to 8, which was a new record low. Likewise, the index gauging traffic of prospective buyers fell four points to 7 – also a record low. Meanwhile, the index gauging sales expectations in the next six months held firm from the previous month at its record low of 19.

Every region posted declines in builder confidence in November. The Northeast, South and West each registered five-point declines to 11, 11 and 6, respectively, while the Midwest registered a six-point decline to 7.

EDITOR’S NOTE:  The NAHB/Wells Fargo Housing Market Index is strictly the product of NAHB Economics, and is not seen or influenced by any outside party prior to being released to the public. HMI tables can be accessed online at: www.nahb.org/hmi. More information regarding housing statistics is also available at: www.housingeconomics.com.

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“Builders with outstanding loans that are placed under FDIC control are frequently unable to contact a decision maker to deal with routine but time-sensitive matters related to loan draws or extensions,” NAHB President and CEO Jerry Howard said in a Nov. 20 letter to FDIC Chairman Sheila Bair.

“Some builders have encountered what seem to be arbitrary criteria on whether or not loans receive continued funding,” Howard added. “Again, these developments are unnecessarily turning good loans into problem assets that will significantly exacerbate the losses that must be absorbed by the FDIC and the building and banking industries.”

Reports of severe financing problems stemming from FDIC bank takeovers have started proliferating among builders in Texas, a part of the country whose housing markets have been performing notably better than the national average.

One builder, for example, complained that he has been unable to receive a draw on his construction loan for more than four weeks and, as a result, has been unable to finish work on homes that have already been sold. He said that there is a possibility that the FDIC will also require another appraisal of his homes, which would cause more delays and further jeopardize the viability of his project.

In his letter, Howard praised the efforts of the FDIC to limit mortgage foreclosures, but noted that housing production loans are now experiencing the same kind of severe stress afflicting the home mortgage credit sector.

“Home builders are having extreme difficulty in obtaining credit for viable projects, and those with outstanding construction and development loans are experiencing intense pressure as the result of requirements for significant additional equity, denials on loan extensions and demands for immediate payment,” he told Bair. “In many cases, performing loans are rendered nonperforming as a result of these actions.”

Howard asked for an opportunity to meet and work with the FDIC to address “this serious and urgent issue.”

Skies Darkening in the Sunshine State

In a Nov. 24 press conference by the Florida Home Builders Association, builders in the state said that solvent, credit-worthy businesses are being forced “to the brink of disaster” by lending institutions that are making additional capital calls to maintain lines of credit, calling in loans not in default and altogether eliminating credit.

Jay Carlson, the association’s president and a builder in Port Charlotte, said that the state’s housing industry has been “struck hard” by the economic downturn and that things are getting worse.

For the year ending in September, Carlson said, Florida lost more than 75,000 construction jobs and at the end of that period had 54,000 homes in some stage of foreclosure and a 20-month supply of unsold properties. Since then, he noted, there has been further deterioration.

Lending institutions are reappraising the value of underlying assets on construction loans, he said, requiring builders and developers to come up with large amounts of cash to restore loan-to-value ratios. Lenders are taking adverse action on good loans, forcing builders into insolvency. “The current method to recapitalize is exacerbating the problem,” Carlson said.

Earl Snyder, a veteran FHA/VA home builder in Englewood, said that he has run into problems finishing eight homes in various stages of construction ranging from slab to almost finished. Six of the homes have already been sold to buyers with FHA mortgages. Although he was never late on loan payments, after being taken over by the FDIC his bank gave him 60 days to repay a $2.5 million construction loan. Snyder has subsequently sought credit from 15 other lenders, and not one of them would make him a loan.

Snyder said he has building material, employee and subcontractor costs to pay, yet he cannot receive an approved and authorized draw from his loan and is in jeopardy of losing his business because he is being forced  to suddenly pay off his loan before maturity.

A meeting with representatives of the FDIC was not productive. “We are in dire straits,” Snyder said. “We’ve got to do something.”

“The industry is on its knees and asking for help, and in return will help the economy,” said Chuck Fowke, the Florida HBA’s first vice president and a custom builder in the Tampa area. “We want to stop foreclosures on builders’ lines of credit when they are in compliance” with the terms of those loans, he said. [return to top]

Under an agreement NAHB reached with all the hotels involved, if a lower NAHB room block rate becomes available after a member has reserved his room, the member will receive the lower rate at hotel check-out.

Registration for hotel rooms at NAHB hotel block rates ends on Friday, Dec. 12.

To register online, click here.

For more information about the Builders’ Show and to register, visit www.buildersshow.com. [return to top]

“Lenders are not your partners. They are invested in your success only to the extent that their loan is repaid in full,” advised Bill Rothman, Major Builder Group president for IndyMac Federal Bank in Irvine Calif.

Rothman said that builders have several misperceptions about lenders. For example, it is commonly held that lenders don’t want to own real estate, but that isn’t always true when they have other customers who are able to build out the project. And lenders will sue loan guarantors who they believe have assets.

In crafting a successful survival plan, the builder’s priority is to find a way to continue operating under current market conditions while ensuring that the lender gets repayment on the loan in a way that minimizes losses and holds up to regulatory scrutiny, he said.

As a contractor and project manager for the lender, the builder should present a plan that:

• Performs a current project market analysis — determining sub-market conditions, a price point at which the product will sell and a timeframe for settlements
• Quantifies the dollar shortfall
• Quantifies the financial ability to service debt (interest/principal) and builder overhead until the market improves.

The package of information conveyed to the lender at the meeting should include, at a minimum:

• Current financial statements and project sales/settlement reports with monthly absorption numbers
• Detailed cash flows and valuation analyses with assumptions detailing the timing of settlement revenues, updated costs (hard & soft) in the project budget, expected net cash flow and resulting liquidity
• Analysis of borrower and guarantor contingent liabilities
• A current market study that determines the correlation between supply and demand
• A focus on the future and not past accomplishments
• A realistic assessment of expected performance, providing as much detail as possible, including related assumptions

Once a builder has completed the hard work of developing a plan, there are a number of things that can be done to ensure the best circumstances for negotiating with the lender:

• Minimize the number of participants and include a decision maker
• Maintain a positive environment
• Set an agenda that includes all the existing issues that must be discussed
• Reinforce the benefits of loan repayment as detailed in the plan
• Clearly state and continually reinforce the joint benefits addressed in the plan
• Listen to the lender and carefully weigh options prior to responding or committing to an offer
• Be prepared to make fair concessions in return for time and continued funding

The audio seminar was hosted by The NAHB University of Housing and NAHB’s Housing Finance and Housing Policy Department.

The full audio program with many more tips and insights — including potential legal issues and actions — will be available for purchase on the NAHB Web site soon.

For more information on housing finance issues, e-mail John Dimitri at 800-368-5242 x8529.

For more information on NAHB University of Housing audio seminars, e-mail Mary Knowles, x8057 [return to top]