Imagine the best course in corporate survival. The teachers, which would be best for that course, believe it or not, are the homebuilders in the country. During the past five years, the housing market has decreased significantly, both in units and in prices, on a scale that is almost unimaginable in any other industry.
In 2005, the top ten house builders in the country, which includes Lennar, DR Horton, Toll Brother and Pulte, said that their total sales amounted to $ 99 billion. However, last year, the revenues of these companies have decreased to only $ 23 billion, a whopping 77 percent decline. In 2009, the ten biggest home building companies had to endure losses that amounted to $ 5 billion, translating to a $ 15 billion decline from the $ 10 billion they got in profits from the boom in 2005.
Any big player that is able to endure a collapse that is highly devastating, and is able to rise and emerge from it when the market is able to rebound can be considered as a “best practices” model. Amazingly, every one of the top ten homebuilders was able to survive the housing crisis, and most of them in fact boast of financial strength that would enable them to grow steadily, as the economic recovery pace hastens. In fact, the ability of the homebuilders to sustain themselves is in high contrast with the reckless ways of the Wall Street biggies.
There are lessons to learn from the homebuilders and their outstanding resiliency amid the economic slowdown. Marty Connor, Toll Brothers CFO, provided details on how the company was able to successfully come out of the economic ashes stronger.
Keep maturities long and avoid debts. You have to be able to build a strong balance sheet for you to be able to survive downturns, which are in fact inevitable.
Limit risky investment on land. Toll opted to go for optioning lands rather than on buying them so that the investment is not too risky.
Once the market gets better, get cash. When home buyers suddenly disappear, it is best to simply harvest cash that are under contract without having to contract new ones or purchasing more parcels.
Manage costs in the way you would a small business. Pare costs quickly and deeply. Be creative in maximizing your resources.
Keep forecasts at a conservative pace. Toll did not assume that the value of every house that they construct will not rise. This ensures that they will profit from any project, and will be able to minimize loss.
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