From the outside looking in, a home builder is a home builder is a home builder. When you’re on the inside, you know that’s far from the truth.
One of the rules of success in the business, I’ve heard repeatedly, is to know what kind of home builder you are, and be better than anybody else at that. Again, you almost have to be there to understand.
Now, it’s common in the world of new home construction to take pot shots at big public home builders. They manage to quarter by quarter earnings; they prioritize volume and profits over quality; they prioritize quick turns and returns over relationships with trades, land sellers, home buyers and the like. The tyranny of reporting and compliance interferes with sound judgment that comes from vision, a purpose, and a culture.
That’s all a widely held belief, not just among privately held operators, but among a goodly number of public company executives and associates as well. At the same time, everybody knows there are good public companies and ones that aren’t so good, and there are good private companies as well as mediocre ones or worst.
In a Harvard Business Review piece, former United States Secretary of the Treasury and current Harvard professor and president emeritus of the university Larry Summers, looks at new McKinsey research that contrasts the performance of public companies who manage for short term [earnings], vs. those whose strategists manage for the long term.
Summers’ remarks, we think, apply when it comes to comparing good home builders with good home builders, and ones that aren’t with one another, public or private. The “substantial differences in company quality within industries” come clear in home building, whether the organization is publicly traded or privately held. This is a helpful context for looking at the companies Fortune has selected as home building’s “most admired companies” in 2017. Here’s the list:
- Toll Brothers
- D.R. Horton
- CalAtlantic Group
In each case, executive management represent “best-of-breed” when it comes to knowing that a home builder is not a home builder is not a home builder. The distinguishing characteristics that separate one from another come down to the selection of the parcels of real estate and the disproportionate ability of one organization versus all others to generate economic value on those parcels.
In each of the Fortune Fab Five, we see an organization whose DNA is set up to outlie a relatively small set of peers in one skill-set or another. One is a very “long term-ist” when it comes to investing in land, but all five of these organizations put capital to work that expresses a precise, focused, disciplined set of expectations, risks, and opportunities. One is a multi-tasker with real estate deals that run the gamut from retail to multifamily rental to masterplanned single-family subdivision. One knows how to make money from building homes while most of its peers model land appreciation into the profit picture.
Toll Brothers, Lennar, D.R. Horton, CalAtlantic, and NVR are among the best-run companies in home building, mostly because they know exactly who they are and who they want to be as organizations, and then they take no prisoners as they aim to be the very best at that.