Perfect Timing

Perfect Timing

Homebuilidng by Jean Gruss | Editor/Lee-Collier

Starting a homebuilding company in one of the worst housing downturns may appear foolhardy. But don't bet against Jamie Pirello. He's made a fortune timing the housing market right.

Few people have timed the recent housing market better than Jamie Pirello.

Pirello engineered the sale of First Home Builders of Florida to Hovnanian Enterprise in August 2005 for $350 million. As everyone knows now, that turned out to be the zenith of the residential boom in Southwest Florida. At the time, First Home was the largest homebuilder in Lee County.

Now, Pirello has started another homebuilding company, a counterintuitive move in a market where homebuilders are going bust. But this time, he's hitting an immediate niche by coming to the rescue of homeowners abandoned by builders that failed.

If Pirello's hugely successful First Home deal is anything to go by, it might pay to follow his latest move.

Pirello is managing partner of Vision Homes, a homebuilding company he launched in July 2006. Vision Homes seeks to finish construction of homes for customers of builders who have gone out of business. In Lee County, about a dozen builders already have gone bankrupt and left behind 1,000 homes in various stages of completion.

More builders are likely to fail. "For us it's a great time to start the business," Pirello says.

The rescue builder

The keys to rescuing homebuyers abandoned by their builders are speed and unique designs.

The faster Vision Homes can finish building a home, the quicker the company gets paid. For the customer and lender, speed is essential when interest on a construction loan rises every day. "Nothing good happens with time," Pirello says. Vision can build a home in as fast as four months.

Pirello hired homebuilding veterans Steve Nice and George Freelove to oversee construction operations. Both men followed Pirello from First Home. Nice, Vision's chief operating officer, has 25 years experience running manufacturing for Deluxe Corp. before joining First Home. Freelove, Vision's senior vice president of administration, has a 30-year homebuilding career with regional and national homebuilders. Both men keep a sharp eye for waste: "You have to count every board," Nice says.

More important, Nice and Freelove won't hire any subcontractor who can't keep a fast pace. Now that the housing downturn has taken hold, subcontractors are more willing to adhere to a builder's schedule. Vision Homes works with 30 to 40 subcontractors.

Instead of relying on city or county inspectors, Vision Homes hires private inspectors who show up as soon as they're called. The $1,200 Vision Homes pays private inspectors per home is well worth the price because it doesn't slow construction.

Vision Homes finds buyers through referrals from attorneys, lenders and Realtors. Often, the builders that went out of business built in specific locations and usually built homes in clusters. Once Vision Homes has helped one homeowner, he frequently will tell his neighbor and generate referrals.

Still, Pirello estimates the company can only help about half the prospective customers abandoned by builders. Often through no fault of their own, homeowners don't have the financial wherewithal to hire anyone to finish the job.

Typically, the homeowners abandoned by their builder have purchased a lot, got a construction loan, paid 10% to get their home started before the builder went bust. Generally, this scenario has occurred outside subdivisions and involved "on-your-lot" builders.

Pirello cites the case of a California man who bought four lots in Cape Coral for $90,000 a piece and borrowed a total of $1.2 million to build one home on each lot at the height of the residential boom. The same lots are worth just $25,000 each today. He paid a now-defunct builder $80,000 to get started on the four homes. This customer was one of the easier ones because the builder had not started construction.

The toughest cases are those when builders go bust after they've started construction on homes. Often, there are mechanics' liens on the homes because subcontractors haven't been paid. "A lot of people are owed money," Pirello says.

One of the problems in areas such as Cape Coral is that so many homes for sale today are similar: they're one-story homes that typically measure 1,200 to 1,600 square feet. So Vision Homes builds less common and larger two-story, 2,200-square-foot homes to get higher appraisals that create a bigger financial cushion for the homeowner and the lender alike.

In the case of the California customer, Vision Homes offered to build its "Lincoln" model for $180,000 per house on the California man's lots. That two-story home measures 2,626 square feet and has three bedrooms and a two-car garage. The clincher was that the appraisal, which came in at $340,000 per home, was much higher than homes in the surrounding neighborhood because of the Lincoln's bigger size and design. This is despite lenders' tightening standards. "We've not seen appraisals impacted," Pirello says.

Understandably, lenders are happy because Vision Homes provides an alternative to foreclosure. Lenders don't want to be saddled with half-built homes or now-undervalued lots that they have to write off at big discounts. What's more, Pirello estimates the judicial foreclosure system is backed up by at least a year and a half. "Working with lenders is going to grow and grow," Pirello says.

Vision Homes is now working with about 15 lenders, most of which are extending terms, lowering interest rates and waiving fees. "Progressive lenders work with customers to create value," Pirello says.

Still, it can be difficult to persuade customers to sign on with Vision Homes after they have had a bad experience with a previous builder. The key, Pirello says, is to communicate frequently with the buyers and reassure them that their home is being built on schedule.

One way Vision Homes communicates with its buyers is using the Internet. Armed with a password to the Vision Homes Web site, buyers can view photos of their home as it's being built and they're updated weekly. Each customer is assigned a representative who they can call any time to discuss the construction of their home.

Looking past the downturn

Currently, about 60% of the company's estimated $10 million in revenues come from helping buyers whose builders have failed. Another 30% of the company's business is selling homes to young families that are first-time homebuyers and the remaining 10% comes from sales to retirees buying second homes.

For now, Vision Homes isn't buying land and it's not building speculatively. Unlike so many builders who are writing off land options, Pirello doesn't want to carry any land on Vision Homes' balance sheet. He expects revenues to double to $20 million in 2008.

Pirello estimates that the housing downturn will last another two years. "Long-term, the rescue plan will go away," he says. "I don't think it gets a lot worse from here."

But Vision Homes will eventually acquire lots in subdivisions when prices fall further. Pirello says lot prices must come down another 20% to 30% and he expects that to happen by 2009. "Ultimately, the price has to come down," he says.

By 2010, Pirello estimates Vision Homes will be building 400 to 500 homes, with half of those in subdivisions. He's optimistic because Florida will still continue to attract new residents and the current downturn will give state and local governments time to build roads and schools to catch up with the growth of the last few years.

Many homebuyers are waiting to see how much further prices fall and Pirello wants to be ready when they decide to buy. "I actually think there's pent-up demand," he says.

A visionary sale

Don't you wish you could have sold real estate at the top of the market in 2005 and pocketed all that profit?

Jamie Pirello sold a homebuilding company in Lee County in August 2005, now one of the most overbuilt markets in the country.

As chief financial officer of First Home Builders of Florida in Fort Myers, Pirello orchestrated the sale of the company to New Jersey-based Hovnanian Enterprises for $350 million in cash. At the time, First Home was the largest builder in Lee County. In 2004, it built and sold 1,819 homes and claimed a backlog of 4,350 homes worth $925 million.

Hovnanian was the top bidder at an auction that brought fevered interest from national builders eager to enter one of the nation's hottest growth areas. At the time, Southwest Florida was the country's 12th largest homebuilding market. "Hovnanian was a very motivated buyer," Pirello says. "They like to be the biggest in the markets they operate in."

As everyone knows today, the market turned sharply lower. Since then, Hovnanian wrote off $90 million related to the First Home acquisition. Larry Sorsby, Hovnanian's chief financial officer, recently told investors Fort Myers "is by far the worst housing market that we're in, and I wouldn't be surprised if its not the worst housing market in the country."

Pirello is humble about the deal and says he didn't fully realize the perfect timing. Pat Logue, the founder and general partner of First Home, hired Pirello in January 2004 to prepare the company for a sale. Still, Pirello says he didn't expect the sale would happen so quickly, estimating it would occur instead around 2007 or 2008.

Pirello's track record includes raising $1 billion of debt and equity for several homebuilding and real estate development companies as well as coordinating mergers and acquisitions.

At privately held First Home, Pirello brought formal management systems that mirrored those at publicly traded companies and reduced the company's debt-to-equity ratio to make it an attractive acquisition for a national builder. Meanwhile, Southwest Florida's real estate market boomed. "The profits were unbelievable," Pirello says.

Pirello is reluctant to discuss the specifics of the deal, especially considering how dramatically the real estate market changed in Florida after the acquisition. Hovnanian "did great due diligence on the company, but they didn't on the market," Pirello says. It took just four months to seal the deal.

REVIEW SUMMARY

Industry: Homebuilding

Company: Vision Homes

Key: Speedy construction and unique designs lets one builder pick up where others failed.