Emerging builders find opportunities in housing market crash

From the ashes of the Las Vegas housing market crash have risen a number of small, private homebuilders who scooped up leftovers from financially distressed national builders and turned them into profitable opportunities.

Eric Stafford and John Prlina literally started Discovery Homes in February out of the garage of a model home in the guard-gated Cascade subdivision of Mountain's Edge, the nation's top-selling master-planned community, in the southwest Las Vegas Valley.

Backed by about $7 million from private investors, they purchased 57 finished residential lots in Cascade from Phillips Homes through the Federal Deposit Insurance Corp. Phillips had acquired the lots through bankruptcy proceedings for Kimball Hill Homes.

They also picked up 40 smaller lots in Breckenridge, in the same subdivision at Mountain's Edge, from Irvine, Calif.-based SunCal Cos., which had purchased 1,100 lots last year from Kimball Hill for $20 million.

About 80 people showed up for Cascade's opening event and foot traffic through the models has exceeded 100 on weekends, Stafford said. The builder sold four homes during one weekend and has six under construction.

"We're doing pretty good. We're going to see a good year," said Stafford, who began his homebuilding career as a framer and worked 12 years for Rhodes Homes. "We're hoping to grow pretty quickly and pretty efficiently."

Discovery's goal is to sell about 20 homes this year, 75 next year and 150 in the company's third year, he said.

Relatively speaking, new-home construction has dwindled to almost nothing in Las Vegas, housing analyst Dennis Smith of Home Builders Research said. Outside of Providence and Mountain's Edge, only a few hundred homes are under construction.

New-home permits plummeted from a peak of nearly 33,000 in 2004 to 3,850 in 2009, the research firm reported. This year looks slightly better with 2,862 permits pulled through June, led by Richmond American (402), KB Home (284), Harmony Homes (251), DR Horton (242) and Pardee (206).

New-home sales picked up during the first half of the year, partly due to the federal tax credit that expired April 30. After bottoming out at 5,217 in 2009, about half of the previous year's number, sales totaled nearly 3,000 through June, Home Builders Research reported.

Harmony Homes, founded by longtime Las Vegas homebuilder Jim Rhodes, has emerged as the No. 1 private builder in Las Vegas with nearly 100 home closings in 2009 and 264 closings through the first half of this year, or nearly 10 percent market share.

Harmony expects to generate about $80 million in revenue this year and will likely surpass 400 home sales, President Robb Beville said. The builder has 14 active subdivisions with nine more planned, producing about 10 sales contracts a week and a construction backlog of 126 homes, he said.

"We had 51 sales in July, which is pretty good for July," Beville said. "We added Stone Haven at Warm Springs (Road) and Las Vegas Boulevard and it did fantastic."

Harmony acquired about 1,500 distressed lots last year, including Sunrise Highlands in Lake Las Vegas and Vista Cielo in North Las Vegas from Pardee Homes.

"We got some great opportunities through our relationship with Pardee. We jumped on it and we're reaping the rewards right now," said Beville, formerly with Meritage Homes.

Rhodes went through Chapter 11 bankruptcy reorganization in 2009 and has come under fire for proposed developments near Blue Diamond in the Las Vegas Valley and Kingman, Ariz.

"He (Rhodes) was one of the most aggressive builders, along with KB Homes and Richmond American," analyst Smith said. "He bought distressed land and was able to build at a low cost per square foot. He offered low prices because of his land basis."

Harmony is targeting first-time buyers with homes starting in the $90,000s, or $75 a square foot.

Private equity financing is a testament to the company and the people behind it, Harmony marketing director Michelle Woodruff said.

"To me, it's a statement of what the company believes in," she said. "Obviously, we see a bright future. Nobody is going to throw money out the window."

Harmony is seeking $50 million from investment banking firms to acquire land in Arizona, Texas and California, Beville said.

Another up-and-comer is Adaven Homes, which is Nevada spelled backwards, founded by former Pageantry Homes owner Don White and family. The company recorded 26 sales since March in its gated Raven Hill community near Martin Luther King Boulevard and Cheyenne Avenue, with homes starting in the $120,000s.

Pageantry, through no fault of its own, had to let loans and assets go back to the bank, and it was more logical to start a new company with no lender issues, Adaven President Bill Hoover said.

"We had banks that failed on us and left us in the lurch with partially completed houses," Hoover said. "We wanted to start new. This product is something we rethought quite a bit. We made it more efficient and more economical.

"Secondly, we are being more efficient in our operations, using less people and delegating more responsibility to our subcontractor partners."

Hoover said Adaven is taking a more "conservative management approach" in terms of smaller projects and phases, controlling risk and not being as speculative on new starts. The builder has fewer than 10 homes under construction or in standing inventory, he said.

While private builders such as Astoria Homes went into a period of "hibernation," others shed debt and restructured as smaller, leaner operations.

Las Vegas-based StoryBook Homes, founded by Wayne Laska in 2003, went from building 160 homes in 2006 to 63 last year. Laska said he expects to close 90 homes this year.

"The industry is 10 percent of where it was at the peak," Laska said. "We've lost 90 percent of our sales volume. The key to making money at much lower volume is making sure you adjust your overhead. I don't care if you sell one home or 100 homes, you've got to make money."

Desert Wind Homes is making a comeback with 29 homes at Tiara Summit off Decatur Boulevard in the southwest valley, priced from $179,000. Ten of them have closed escrow.

"We've cleaned up. We're tight, very efficient," Desert Wind owner Mick Galatio said. "We've had time to get a good operational handle on things. Fortunately, we worked out agreements with our banks."

Prlina, who handles land acquisition and development for Discovery, said what worked out best for his company was the opportunity to buy ready-to-build residential lots at a "severe discount" from what they had originally cost, even though prices have "swelled up a little now."

The builder is able to offer a 4,031-square-foot home with a three-car garage at Cascade for less than $300,000. Phillips, the previous developer, was selling homes in the low $500,000s.

Stafford said larger, publicly traded builders carry huge overhead and too much staffing, which can generate back-stabbing corporate politics.

"It's just the three of us here (Stafford, Prlina and finance manager Charles Sakura). The efficiency of it ... we go from ratified contract to closing escrow in about 80 days, so the build cycle is very efficient and the flow is very efficient and that's a big key for us," Stafford said.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.