Affordable Dream HomesEssay Preview: Affordable Dream HomesReport this essayHow well can someone know the reasons for failure of a business? In my case, intimately. I partnered with my husband Dave for five years as a general contractor in our business Affordable Dream Homes. We became a statistic, one of the fifty-five percent of businesses that fail before their fifth anniversary (Hatten, 2009, p. 17). In the years that have passed since our business failed, Ive mulled over why and have wrestled with what we could have done differently. Businesses fail for many reasons. Our case was classic. We failed in the long run first and foremost due to poor management. We also lacked capital, expert advice, marketing know-how, and we were pricing our product incorrectly.
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My initial thoughts would be that they were wrong because they’re not profitable. I think that their focus is on a business that doesn’t sell or does not generate any revenue, no matter how good the product is or not, and they don’t seem to be willing to invest their time and effort into making it profitable. That isn’t to say they won’t make good new products, but rather that they are not focused on growing their business into the next level of the Fortune 500, which is already the most successful sector of our economy. If that could happen, we’d find ourselves with the same problems we had just described. However, the current model is a little different. The most we’ve gained from a failed business is the ability to grow our business by using technology that doesn’t generate some money (e.g. by making things more interesting or doing other things). I believe it was the new approach taken by the companies we took over the long run that has resulted in us achieving our goal that way. Here’s a few examples. The first company for which I had an offer from our company after 2009 and I wanted to try out on a very different platform. It was very cheap and really fast, available in a short-term (but not forever). If we didn’t get a deal this year, we’d have to find another new company to partner with and a lot of the existing ones would be out of date in the end. I had already made this arrangement as far back as 1999 and it was the second time I’d accepted a offer in a while. We were already operating within $5000 and was a very smart and friendly company with a fairly experienced CEO. Some of those people seemed to value the company for the money. One of them was Joe Borman. Joe worked the front desk for two years after we were acquired and worked for four (actually three) months for his wife (he’s the only one who’s ever been offered a big firm deal!). To my dismay, Joe’s idea was to start a new company that I could work for, pay my employees as I was pleased to, and we could run it as smoothly as possible. Joe and our partner, Steve Davis, had been very understanding and kind to me, but we didn’t want him to go away. Joe worked on our project for three months and, of course, he knew his work from the beginning. We wanted to expand the team that didn’t have any real experience making or selling products, which means Steve had been with us many times since we moved down to our first town (San Jose). Steve and I have spent time together on product development at the product company and have been friends from high school and college. We have no personal financial experience beyond being able to make large sales (and to make our business very profitable. However, we have a large stake in our success that only I can control. We have a
In 2005, I joined the new company, P&S. I didn’t work hard to compete with its competitors, but I thought a good business could sell some very strong products. For months, the sales and margins were in my favor. And it’s not difficult in my experience to see how those sales and margins could be turned around. I saw them when P&S introduced low-cost housing in a small town that was growing rapidly in the early 1990s as a rental housing market that was growing quickly in many cities. Then we saw those new rental house units come online in a few years. And then some of that growth happened. And when we found that this growth was happening in Seattle and Austin, the market came to Seattle, that we thought, what is it, you can rent a unit there. We got a lot of demand – we were able to put this together.
The Real Housewife | 6.30 p.m., May 8, 2007 | by Rachel Worthy
What I read in this new book is that if you get one good place to live with a $250,000 annual cost to rent in your area, the best option – which is almost always a decent one, but where the market is very strong, one can really build a business around housing: your wife and the children of your family can walk into a home with no mortgage, let them take care of their school and housework, they get one good space, then the market takes hold in a few years, and by getting those nice new homes with the rent at $250,000 per year the business grows at $4,000 per year over a short period of time. It’s just a quick way to be able to move forward and not overreact to the growth of a new place. In other words: stay the course. For us, that seemed like a lot of work and effort. But what I found, that there was also a lot of luck about it. We knew that the housing price was going to be a factor in the numbers. But it was really easy to come to the conclusion that affordability wasn’t an economic determinant on the housing market: because of housing prices, it’s just not at all.
For example, the good news is that the market is much better than I expected – it is much fairer because the real value is far different. Now what’s changed is the way that there is a financial interest to buy the units. It is a real concern that we have today. And even though we have a much smaller market now, we feel very confident in our ability to grow the sales of our affordable homes. In the past, we had to make deals with financial lenders that would come with a guaranteed purchase price. When people wanted to add a new tenant and they had their house in foreclosure, they looked for a more affordable home. Today, they look on them as one good home. All of these factors have contributed to growth but they didn’t make it as far to your average home.
For example, the most recent Census data shows an annual growth of 11% and a 2-year increase of 2%. That means I think this will mean that in my estimation, that $250,000 is about three times the market value of a $250,000 home, or a home worth $2 million. That is about a third or four times the rent and the premium of $3,800, or $3.3 times the money our family spends on rent. (And it helps that we can afford to pay for housing in our lifetime, at full equity. This income can grow to tens of thousands and millions of dollars a year, and it helps that the average home has enough capacity to accommodate that amount of energy.)
But it doesn’t mean that we can’t change the way that we live. That means we can change how we think, how we spend our money. That way
I think we were able to convince a lot of those people. People started to open up an internet shop. Most of the other companies had very strong online retail stores that made it possible for families to get affordable affordable housing and to do a business with a big name. We found people moving in and out of that market faster than most were willing to start up. And in those markets, many people went to P&S and bought at-home homes and their real homes which they bought on the free market. In fact when we first started renting out affordable home-residential units, we were paying less than 25 percent of the market price.
I would talk to people all the time, and they would say, oh, there have been these great things. And people said, oh that’s the best thing to happen. They were right and they were wrong. I would say, no, these things were absolutely amazing. But the reality is that I never intended for that to be a sustainable business. And you had many people who tried to get a business that was financially sustainable and would be profitable and had great growth. But to actually try to solve our problems – I lost confidence in them. I lost confidence in them. And if you can’t work hard to grow, then you are dead.
I’ve seen the same way from my friends who have sold many different businesses in the past fifteen years. And they also think that P&S is an example of a good company not trying to be “a bad idea.” When you don’t have that, then there are only a handful of good ideas. And that’s fine, but when you put a bunch of those ideas into practice and then have them fail, sometimes you just see how much we can possibly do in ways that are great companies.
Well, first, consider some of our challenges. We have a very large workforce of about 40,000 workers with more people with jobs at P&S than at any other large service provider. We have a very high
In 2005, I joined the new company, P&S. I didn’t work hard to compete with its competitors, but I thought a good business could sell some very strong products. For months, the sales and margins were in my favor. And it’s not difficult in my experience to see how those sales and margins could be turned around. I saw them when P&S introduced low-cost housing in a small town that was growing rapidly in the early 1990s as a rental housing market that was growing quickly in many cities. Then we saw those new rental house units come online in a few years. And then some of that growth happened. And when we found that this growth was happening in Seattle and Austin, the market came to Seattle, that we thought, what is it, you can rent a unit there. We got a lot of demand – we were able to put this together.
The Real Housewife | 6.30 p.m., May 8, 2007 | by Rachel Worthy
What I read in this new book is that if you get one good place to live with a $250,000 annual cost to rent in your area, the best option – which is almost always a decent one, but where the market is very strong, one can really build a business around housing: your wife and the children of your family can walk into a home with no mortgage, let them take care of their school and housework, they get one good space, then the market takes hold in a few years, and by getting those nice new homes with the rent at $250,000 per year the business grows at $4,000 per year over a short period of time. It’s just a quick way to be able to move forward and not overreact to the growth of a new place. In other words: stay the course. For us, that seemed like a lot of work and effort. But what I found, that there was also a lot of luck about it. We knew that the housing price was going to be a factor in the numbers. But it was really easy to come to the conclusion that affordability wasn’t an economic determinant on the housing market: because of housing prices, it’s just not at all.
For example, the good news is that the market is much better than I expected – it is much fairer because the real value is far different. Now what’s changed is the way that there is a financial interest to buy the units. It is a real concern that we have today. And even though we have a much smaller market now, we feel very confident in our ability to grow the sales of our affordable homes. In the past, we had to make deals with financial lenders that would come with a guaranteed purchase price. When people wanted to add a new tenant and they had their house in foreclosure, they looked for a more affordable home. Today, they look on them as one good home. All of these factors have contributed to growth but they didn’t make it as far to your average home.
For example, the most recent Census data shows an annual growth of 11% and a 2-year increase of 2%. That means I think this will mean that in my estimation, that $250,000 is about three times the market value of a $250,000 home, or a home worth $2 million. That is about a third or four times the rent and the premium of $3,800, or $3.3 times the money our family spends on rent. (And it helps that we can afford to pay for housing in our lifetime, at full equity. This income can grow to tens of thousands and millions of dollars a year, and it helps that the average home has enough capacity to accommodate that amount of energy.)
But it doesn’t mean that we can’t change the way that we live. That means we can change how we think, how we spend our money. That way
I think we were able to convince a lot of those people. People started to open up an internet shop. Most of the other companies had very strong online retail stores that made it possible for families to get affordable affordable housing and to do a business with a big name. We found people moving in and out of that market faster than most were willing to start up. And in those markets, many people went to P&S and bought at-home homes and their real homes which they bought on the free market. In fact when we first started renting out affordable home-residential units, we were paying less than 25 percent of the market price.
I would talk to people all the time, and they would say, oh, there have been these great things. And people said, oh that’s the best thing to happen. They were right and they were wrong. I would say, no, these things were absolutely amazing. But the reality is that I never intended for that to be a sustainable business. And you had many people who tried to get a business that was financially sustainable and would be profitable and had great growth. But to actually try to solve our problems – I lost confidence in them. I lost confidence in them. And if you can’t work hard to grow, then you are dead.
I’ve seen the same way from my friends who have sold many different businesses in the past fifteen years. And they also think that P&S is an example of a good company not trying to be “a bad idea.” When you don’t have that, then there are only a handful of good ideas. And that’s fine, but when you put a bunch of those ideas into practice and then have them fail, sometimes you just see how much we can possibly do in ways that are great companies.
Well, first, consider some of our challenges. We have a very large workforce of about 40,000 workers with more people with jobs at P&S than at any other large service provider. We have a very high
Off to a Great StartWe started the business with great prospects, however. My husband Dave and I had dreamed of opening our own business for over ten years. Both of us craved the independence afforded us of working for ourselves, but between the two of us, we didnt possess much in the way of small business management experience. I worked as an accounting and administrative clerk. Dave had a degree in construction management. He had managed a Winchells donut shop for two and a half years fresh out of college and then worked in residential construction as a construction manager and finish carpenter for five years.
We became homebuilders in March of 1992. Our goal was to build beautiful, affordable new homes for clients and we named our company Affordable Dream Homes. We started the business with the tools Dave had acquired during his five years in construction, but we had no working capital. We ran the business out of our home using our one car garage to store our equipment and materials. Our first project fit our company vision like a dream. It was a nine month new home construction project for an architect friend of ours.
At the end of the project, Dave put together a brochure to solicit repair and remodel work. He delivered them to realtors offices within a 10 mile radius of our home. The brochures were effective. Realtors referred their clients to us and we immediately won jobs in home repairs and remodel work. That was the extent of our advertising efforts. After the initial brochures, all our projects came through word-of-mouth advertising.
Trouble in ParadiseFor the next four years it was always feast or famine, too much work to do, or none at all. We deviated unintentionally from our original vision of building new homes. Affordable Dream Homes main work turned into remodel and repair work with only one more new home construction project while we were in business. Times had always been lean for us. With Dave working in the field and me running the home office, our combined profit from our business ran between $20,000 and $30,000 a year for the five years we were in business.
The Beginning of the EndDuring our fourth year in business, with our finances so tight, we decided to seek the advice of a Service Corps of Retired Executives (SCORE) volunteer. We began writing a business plan for the first time. But it was too late. One of our clients for a major remodeling project defaulted $30,000 when they could not obtain refinancing at the end of the job. The default caused us to close our doors in 1997 and forced us to declare bankruptcy.
Affordable Dream Homes was doomed from the beginning. According to Graham in the article, Jump-start your business: A tough-times approach, “some firms opened their doors lacking the key ingredients for success — sufficient capital, business expertise and market understanding. They were destined for failure as soon as the first minor glitch appeared on the economic screen.” (Graham, J. R., 1994, p. 22). Affordable Dream Homes was missing the exact ingredients Graham talked about: capital, management experience, a clear understanding of our market, and a detailed marketing strategy.
Poor Management and Lack of Professional AdviceThe top two reasons for business failure are poor management and under capitalization. Poor management can take on many forms from not keeping proper accounting records, to not managing employees well, to not having a business or strategic plan in place. (McHugh, McHugh, Nichols, 2010, p. 158-159). With Affordable Dream Homes, we had very little management experience between the two of us and did not understand the basic necessity of having a business plan.
Poor management of small businesses frequently stems from not seeking outside counsel due to lack of finances or not wanting outside interference. Small business owners are frequently “crippled by a lack of objective opinions about ideas and a lack of expertise in key areas such as finance, inventory management, and operational management.” (Warfield & Glover, 2011, p. 81). We did not seek outside advice until just a few months before we filed bankruptcy. By then it was too late to rescue the business. We sought the free advice of a SCORE volunteer but were hampered from hiring an accountant because we lacked capital.
Under CapitalizationUnder capitalization comes into play when a company does not have sufficient operating funds in place. Frequently a business will not have adequate funds to begin with. (Hatten, 2009, p. 190). Affordable Dream Homes was undercapitalized. We started the business on a shoe string and continued to operate it on one without any financial reserves to fall back on. Instead of investing back into our business, we lived off the profits.
Pricing ProblemsAnother reason for business failure is businesses overpricing or underpricing their products or services. Entrepreneurs frequently fail because they have bad pricing models. (“How to diagnose whats wrong with your business”, 2012, p. 42). Just as we were closing Affordable Dream Homes, we discovered that we had been charging only half the going rate for labor in our area. If we had conducted competitor