Wall St Journal.com, July 2008
“The Custom McMansion”
By J UNE FLE TCHE R
Buyers wanting one-of-a-kind custom homes without the typical high prices are finding bargains in a surprising place: with mass-market home
builders.
A number of big home builders are now getting into the custom-home game -- an area that was once almost entirely the province of boutique builders.
Companies such as John Laing Homes, Toll Brothers Inc. and K. Hovnanian Homes are all venturing into a field that takes more time, patience and
hand-holding than production building.
The reason is simple: Custom-home building is more profitable for builders. And -- in this tough market -- it also carries less risk: Builders avoid the
carrying costs of land, taxes and other monthly expenses that can come with speculative building. Because custom building caters to the upper end of
the market, it's doing better than production building right now, says Steve Melman, an economist with the National Association of Home Builders.
Although home building of all types is stagnating, he says that the custom share of the market tends to go up during down times, while production
building peaks during boom times. In 2007, the custom share of the market was 24%. In 2005, during the peak of the boom, the custom share was
19%.
The big attraction for home buyers is the price: Consumers usually pay less when they buy a home from a big builder than they do from a small one.
Big builders benefit from economies of scale in buying materials and have developed efficient systems for negotiating with and scheduling contractors.
So even though they charge more per square foot for a custom home than they do for a mass-produced one, big builders can usually undercut the
price of their smaller competitors.
Custom homes come in two forms, though both are built on an owner's lot rather than a builder's. True custom homes are built to an owner's
specifications; so-called "semicustom" homes evolve from a builder's predrawn plans. Though big builders have long built "semi-custom" homes on
their own lots, most only recently began to seek out customers who want to build on lots they already own.
Big builders that have moved into producing true custom homes have had to adopt a new mindset -- being open to the sort of flights of fancy and
frequent changes that smaller builders take for granted. Craig Delahooke, director of custom development for Laing's luxury division, says there are
"no limitations" to what customers can do in their designs, as long as they're allowed by the local homeowner's association or design review
committee. Among the ideas clients have asked for: a glass-walled pool with underwater music system and a 3,300-square-foot pool house with its
own subterranean wine cellar. (John Laing Homes is a division of Emaar Properties PJSC in Dubai.)
Some home buyers are finding that going with a big builder gives them more reliability. When Robin and Dan Locke decided to build a 9,000-squarefoot, one-of-a-kind home on the 2½-acre lot they own in Temecula, Calif., they first hired a small design-build company. While working with the small
firm, the couple spent about $100,000 in design, drafting and engineering fees. After a year, the Lockes decided that the plans were subpar and the
house unbuildable. "I felt burned," says Mrs. Locke.
They fired the company and turned to Laing because it had a long track record. So far, they're pleased with Laing's progress on their $6 million home,
which will have a quilting room, conservatory and three-hole golf course. Mrs. Locke was surprised that so far, the big firm has paid more attention to
details like getting proper permits than the small builder she originally used
For Chuck and Cindy Morgan, time was as important as money when it came time to choose between a small custom builder and K. Hovnanian
Homes, a division of Hovnanian Enterprises Inc. in Red Bank, N.J. Because Cindy's mother, who is ill, would be living with them, the couple needed a
home that would be handicapped-friendly -- but would also be completed quickly. Hovnanian was able to finish the 2,600-square-foot home with
stacked-stone walls in Weirton, W.Va., in six months. "A local builder would have taken a year," says Mr. Morgan, an engineering technician.
Cost was the main reason that Terry and Pam Hannock decided to use Toll Brothers to build a house on the lakefront lot they bought in Bluffton, S.C.,
three years ago. The custom builders they had interviewed asked for between $170 and $200 per square foot; Toll came in at $137. Although they had
to pick from a set array of floor plans, they were able to tweak one of the models -- a 3,300-square-foot stucco house -- by adding an office over the
three-car garage, expanding the size of some closets, extending the patio, and putting in a pool and spa.
Most big builders that are rolling out "build on your own lot" programs are proceeding cautiously, introducing them only in select markets. For instance,
Toll Brothers' new program announced in April -- which builds semicustom homes on buyers' land -- is available only in the Hilton Head Island, S.C.,
area. Regional president Doug Yearley says that area was picked because people tend to buy lots there as investments, intending to build vacation or
retirement homes at a later date.
K. Hovnanian's build-on-your-own-lot program is only in a few Midwestern markets. Buyers can choose from the company's prepriced plans at around
$70 a square foot -- less than half the cost of some custom-designed homes in that market. Or they can bring their own plans that have been drawn by
an architect. "We decide if it's wise to build it," says Bruce Grosse, president of the company's Canton, Ohio, division.
Not every big builder, of course, is going into custom building. But all are trying to reduce the amount of expensive land on their books, and that means
more custom homes may soon appear in what were once tract communities. While it isn't planning to build any custom homes of its own, Dallas-based
Centex Corp., the nation's third-biggest builder, announced in March that it would offer 30 lots to custom builders at Sullivan Ranch, a 600-home
community in Mount Dora, Fla. It's the first time the company has ever set aside lots in one of its communities for this purpose.
Small custom builders are responding to the new competition. Some are joining together in co-op buying groups to get better pricing on materials. One
such group, Custom Builders, USA, based in Washington, D.C., has expanded to 15 markets and 425 members this year from nine markets and 250
members last year. Brian Pavlick, chief operating officer, says the group's mass buying power can shave between 4% and 8% off the hard costs of
building a home. "It's allowed me to stay competitive with the big guys," says Chip Gruver, president of Gruver-Cooley Corp., a Leesburg, Va., custom,
builder.
Dave Eldred considered a few big builders' semicustom homes when he began thinking about building a new home last year, but dismissed them as
"starter castles." Instead, he recently hired Gruver-Cooley to create a true custom, 6,000-square-foot Mission-style home on an acre lot in Fairfax, Va.,
with six bedrooms, four-and-a-half baths, stained glass windows, and antique parquet floors that he and his wife, Karen, picked up at a Paris flea
market. For all that, he's paying $250 a square foot -- a bit more than a semicustom home would cost. But that's not the main concern for Mr. Eldred, a
mergers-and-acquisitions consultant. "We want what we want," he says, "and you can't put a price on that."