2019 was an interesting year for the business. The overall economy and market did not improve over 2018, and in general pricing in all segments of the housing market in Calgary decreased. These broad market statistics are not indicative of how much prices dropped for the type of deals that I typically buy (land value homes to demolish) and build (semi detached homes). Both of these were down considerably, how much exactly I cannot be certain due to the unique nature of every build and every plot of land in the inner city markets I study. But ‘ouch’ is how I’d describe a year where values go down for finished product and infill land prospects. Competition at the retail end was absolutely ruthless. I have featured many posts over the past few months describing certain eye-catching examples where huge losses are slowly being realized. However, I don’t publish a lot of these stories, and, in the interest of respecting others’ privacy I don’t plan to discuss many of the other deeply personal losses that I’ve observed or counselled others through in 2019. My advice to those wanting to enter the market right now as an aspiring builder is simply not to do it. If you must do this business, then ensure you have some serious competitive advantage over others, if you don’t then I believe the chance of success to be very slim. I have a recipe of how to remain viable in this business, but not an appetizing one. Just to recap how I can continue to operate without ‘losing’ in building today;
low cost of capital - we operate by applying a nominal cost for use of company funds to build. Essentially we do not ‘bill’ an interest rate to the money needed to build. This is a considerable amount of capital deployed in every project. A seven figure sum is needed to buy land and build a semi-d, the staple of infill operations today. I do not want to apply an artificially low cost of capital to my projects but it is a survival mechanism that I have yet to be able to change.
zero cost of management - we operate without salary being paid to any member of the management/executive team which consists of myself and my key partner(s). This can mean working hard for months with no chance to collect a paycheque. Most individuals can’t sustain this, but I have for more years than I’d care to admit.
high risk tolerance - we feel we can adapt and adjust to basically anything the market throws our way or when the government decides to attack either our business, the cost of our materials, or the ability of our customers to buy our product. Unfortunately many builders have come to detest all levels of government with a near religious fervour. Sadly I find myself in that camp with a special dose of scorn for the central bank elites and the liberal cabinet.
Decisiveness in land acquisition and design decisions - we have enough confidence that we are making the right decisions on what to buy, where to buy, and what kind of houses to build. This comes from a lot of first hand experience, not a reliance on the pseudo knowledge of supposed experts, many of whom are poorly educated parasites.
Low cost of operations - legal, insurance, bookkeeping, financials, overhead, staff costs we have are lower than anyone. Literally nobody can touch my business cost, certainly not new competitors.
Intensive site management and careful scheduling and budgeting - I get better at this every year. I see improvements and make improvements regularly. We can and have built houses in half the time as competitors. I look around and see clueless amateurs building all over and I cringe at their management practices, wastefulness and execution. I expect better and am better.
excellent trade network - we start a new project and we don’t need to find any new trades or at very most change one or two. This suggests we have a good crew. This is not a product of searching out trades on Kijiji. We refuse to bring on new people without a recommendation from a trusted associate builder. We don’t hire trades that advertise or solicit work through the regular channels. I get calls all the the time from new contractors and I basically never hire any of them. My trades are often busy enough they do not need or look for new work during a recession. You don’t get this team set up in your first or second project, but you need to have it by the fifth, or tenth or you will be plagued by ineptitude and conflict.
The great equalizer here is I never really expected to see other builders simply dumping product to escape their usurious hard money construction loans at below cost levels of production just to survive. Or maybe they aren’t surviving. I can’t compete against builders selling below their cost, even if my cost and build quality is better, you must live in the reality of the comparable sales locally. The prevalence of this below cost dumping made 2019 a tough year, margins are certainly ‘marginal’. My hope for 2020 and beyond is the worst builders simply remove themselves from creating more unwanted and unloved supply. Anecdotal evidence suggests this is happening. Many marginal builders are throwing in the towel. I guess they cant afford to finance and manage builds for nothing anymore, or worse, throw up a building and it won’t sell other than for a huge loss. Well, if that is true, this is excellent news, the market is working.
But back to the business. The volume of work done was less than 2018, with two buildings finished/sold and two underway and almost complete. The Richmond project turned out wonderfully and sold to nice clients. The Killarney project is a departure in terms of design and returns to the basics of the best quality of work I can do at the best price in a timelessly appealing infill semi-d. I remain pleased with the product and optimistic the direction we are heading is correct. 2019 marks a real change in my focus toward developing more luxurious single detached, larger, custom homes. I continue to see more value in the upper end market of detached infills vs the ruthless commoditization of the typical semi-d build. I see my strengths of management and budgeting and design being better appreciated in a higher end segment. Next year at this time we will know if I am correct. Stay tuned for what could be a fantastic 2020!
The Killarney project as it sits during the last business week of 2019. Still learning, changing, adapting and benefiting tremendously from each project. There is so much to know to be able to successfully build an infill in Calgary. Each year I think I know a little more and then find out I need to get better just to survive.