Stephen Hann: NAHB Custom Home Builder of the Year

Texan Stephen Hann is NAHB's new Custom Builder of the Year, shown here on the dance floor of an 18,630 square-foot home he built at Sweetwater Estates in suburban Sugarland, southwest of Houston. It was designed by architect Mark Bufalini with interior design by his wife, Mickey Bufalini. Stephen Hann bills his Houston company, Hann Builders, as a design/build firm even though he doesn't have an in-house design department. It's part of his strategy to find custom clients before their dreams of a new home are even in focus. After consulting with the clients, Hann assembles a team from the many outside design professionals with whom he works — including architects, building designers and interior designers — to realize the dream without blowing the budget.

"We want to create an enjoyable and exciting home building experience," he says. "Huge benefits accrue from having a design/build team working together from the very beginning. When clients go through the design process before engaging a builder, they often get to working drawings only to discover that the budget they thought was X is now 2X — and the builder gets to break the news to them. When clients have to compromise, all they see is what we're forcing them to give up."

In addition to creating better client relations and smoother design and construction processes, Hann's approach has another, subtler benefit to his business — one that broadens his market and enhances his word-of-mouth reputation as a top practitioner in the custom building profession. His firm is known for its ability to build just about anything. The multi-million-dollar estates in his portfolio stretch across a broad swath of suburban Houston and run the gamut from stately historic architecture to striking — even bizarre — contemporary homes.

"We're true custom builders," he says. "We don't have an architectural style or specialty. By building homes in any number of different styles, from French country to contemporary to Tuscan, we enhance our reputation as consultants, able to focus on the details — so our clients don't have to worry about anything."

And now, one more benefit: The breadth of management skills and building expertise Hann has assembled in his firm, and the portfolio of outstanding custom homes he's built in divergent architectural styles — along with a stellar record of achievements and community service within the Greater Houston Home Builders Association and National Association of Home Builders — led him to the highest award a custom builder can achieve on the national stage. Stephen Hann is NAHB's new Custom Home Builder of the Year, an award sponsored by the association's Custom Builder Committee and presented late last year at NAHB's Custom Builder Symposium in Naples, Fla.

This 8,400 square-foot home in The Woodlands, northwest of Houston, was built by Hann Builders on spec as a showcase home. It sprang from the pen of building designer Patrick Berrios. Climbing The Ladder

Hann cut his teeth in custom building as operations manager from 1988 to 1993 for Pat Carmichael and Robert Dame in their landmark Houston design/build firm, Carmichael & Dame. "I probably built 70 houses for Pat and Robert," Hann says now, "and only a couple of them were designed outside our firm, because Robert Dame is such an incredible designer. But when I started my own firm, I wanted the ability to match the client with the right designer, someone skilled in the architectural style the client wanted.

"Over the years, I've worked with about 60 different designers in the Houston market, but I tend to migrate back to a handful, including Robert Dame."

When Hann left Carmichael & Dame to start his own firm in 1993, one of his first moves was to take the remodeling jobs C&D wouldn't touch. "I had a long list of people who were in the market for remodeling work. That helped me get off the ground," Hann reveals. "Remodeling is still 10 percent of my business. We do 10 to 12 jobs a year for $1.2 million to $2 million in revenue." (Hann Builders finished 2007 with $12 million in total revenues, $1.2 million from remodeling.)

From 1993 to 1997, Hann ran his custom building business out of his home, doing $2 million to $3 million a year in revenue. "I'd build during the day and do the accounting and estimating at night," he says. Then, in 1997, he got into one of NAHB's Builder 20 clubs and learned about firms operating at a higher rate of production. It was a revelation, but also nearly his undoing.

"I saw that I could grow the business and improve my quality of life at the same time," he says now. "It's hard to have much of a life when you're working 70 hours a week. At that time, I had only one employee. I'd go from a surge in construction to a slump because when I was building houses, I wasn't out there marketing to future clients."

Located on a 1.25-acre lot, the Berrios design wraps around a pool at the back to maximize views of a Gary Player-designed golf course. In 1997, he decided to build an organization and grow his company. At the same time, he began building in a southwestern Houston area master-planned community called Waters of Avalon. "It took 18 months to seed that operation, but when it hit critical mass, we really took off," he says.

His homes in Avalon were priced from $750,000 to $1.5 million, and Hann was soon rocking at a rate of $5 million to $7 million in annual revenue, just from that one master-planned community. "My volume went from $2 million a year to $10 million in just 18 months," he says, "but I was able to manage it all and actually drop my cost of goods sold by a couple of points. I hired the right people and got good trades."

The next step was to try to replicate the success at Avalon in other master-planned communities. Historically, Houston has not had zoning, one reason it has become the world capital of master-planned communities. High-end custom home buyers migrate to them, and that type of community tightly controls what can be built where. It's one way to protect a housing investment. Getting established in several master-planned communities can be the route to success for a custom builder. There's just one little catch. Master-planned community developers usually require every builder, including the custom firms, to buy lots and build one or two spec homes a year as the price of admission to the community.

Danger Zone

Hann hit his peak in production between late 2003 and the end of 2005. "Part of the story I can tell for other custom builders is the danger of getting over-leveraged by building too many specs," Hann says today. "I've probably made every mistake you can make in this business, and that's the worst one. We tried to build in too many master-planned communities. That got me into too many specs. By 2005, I had eight spec homes on the market, and one of them was a $2.7 million

A massive island with cooktop highlights the kitchen of The Woodlands showcase home, which is designed to allow very large parties. showcase home in The Woodlands — at the same time six other Woodlands builders were doing the same thing. All of us got our heads handed to us; I carried that house for 22 months."

At the peak of his runaway growth in 2005, Hann had 17 employees. Today he's cut back to seven. He still builds in The Woodlands (a massive master-planned community more than an hour's drive north of his headquarters in the southwest suburb of Stafford, Texas), and also in a couple of nearby, southwest Houston master-planned communities. But he also builds outside the master-planned communities in the "Memorial Corridor" that runs east to west, near I-10, in a band that contains the famous Galleria shopping and entertainment district.

"That corridor has a series of 'old money' communities like River Oaks, Tanglewood, Piney Point, Bunker Hill and Hunters Creek. It provides good balance for us between The Woodlands to the far north and our natural base in Sugarland and the southwest MPCs," Hann says. He's able to use the same trade base for much of this work, although he admits some of them work only on his northwest homes, others only in the southwest. "The remodeling work is scattered," he says. "We don't do much of that in The Woodlands. It's mostly new homes up there."

At the peak of his growth, Hann tried to limit specs to 20 percent of his homes, but even that was too much when they didn't sell fast enough. "Carrying so many specs was beyond my financial capacity," he says. He's also learned to push the bubble with avant-garde designs only on homes under contract.

"Specs are a necessary evil if we are going to be involved with the MPCs," he says, "but when I do a spec today, I spend a lot of time with the area Realtors to get a feel for the middle of the market. What should the price be? What design style?

"I used to take my specs to the cutting edge in design. Not anymore. That narrows the market. We do our memorable homes now under contract and build more vanilla product as specs. The spectacular homes build our referral business via word-of-mouth from friends and relatives of clients. That's our best marketing, although the spec showcase home at The Woodlands was visited by 28,000 people in the month it was open to the public."

Building designer Patrick Berrios and interior designer Jeannie Garland make extensive use of arches and columns in The Woodlands showcase home, a Texan Italian villa. Comfortable Contracts

Hann has also learned to adjust his contracts with clients to provide more comfort for both sides in the relationship. "I've done contracts every way you can imagine," he says. "When I started, 90 percent of them were cost-plus, which is the norm for custom builders in this market. But I found I was spending too much of my time educating buyers on how that works. ... So today, most of my contracts are fixed-price, plus allowances."

On the fixed-price jobs, Hann asks the client to sign a professional services agreement (PSA) with an upfront retainer. "We'll get a $5,000 PSA so we can get started with a preliminary design," he says. "We can get very close on our estimating from that." The variances will be in the clients' allowance items, which are all associated with their materials, product and finish selections, Hann says. Once selections are complete, he collects additional fees to move forward with the design. "There's a series of go/no go decisions for the client to make as we move through the process, so we don't design something that blows the budget on the house."

In most cases, Hann says, design is complete within three to four months. "When the architectural design is complete, I price everything because we are within a month of going to contract," he says. "Up until then, it's just a series of budgets we're tweaking as we go along."

Hann is comfortable with fixed-price contracts because his market has fairly stable costs, and he's been able to lock in prices for materials and products up to six months ahead of delivery. "When we went through our tough times, with very tight cash flows, we learned who would work with us to overcome those problems. I'm a better businessman now, for having come through that experience."

Go, Team

Hann places his highest priority on facilitating the smooth function of each home's design/build team: he's the coach. He puts the team together to meet the needs of the client and he takes the lead role in consulting with the client and communicating the client's desires to the other team members. Hann wants the interior designer to be part of that team from the earliest design stages.

"There's a lot of interior architecture in the multi-million-dollar homes we build," he says. "Every member of the design team looks at the box a little differently. The building designer or architect is looking at proportion, massing, volume and the relationship of spaces. The interior designer is looking at built-ins, ceiling treatments, the flow of the floor plan and placement of columns, arches and furniture. A change of one foot in the dimensions of a room can make a big difference in how furniture can be arranged. Different designers are tuned to those things at different levels."

Hann factors all of those elements — and the personalities of the individuals — into his decisions when putting the team together. The critical thing is to have a complete team of synergistic talents before proceeding with the design. "When we have a team in place up front, we can work out our relationships pretty fast, so there's less concern about stepping on somebody's toes."

This conservative French Provincial design, by Houston architect Reagan Miller, features interior design by Marjorie Slovak. Brash Buyers

In some ways, Hann's clients are like those of most custom builders, all across the country. For instance, baby boomers are still an important segment. And most buyers are over the age of 40 and are successful professionals or business owners. Most have children. "Middle school kids and up. And as the boomers age, empty nesters are becoming a bigger segment for us. Our buyers are affluent and well-traveled, with sophisticated tastes," he concludes.

Where Hann's Houston buyers separate themselves from those in many areas of the U.S. is that most are Texans, and it shows in what they build. "Our market is a lot more flamboyant than others I've visited around the country," Hann admits. What he doesn't say is that Texans who build multi-million-dollar custom homes often seem to have the attitude, "If you got it, flaunt it." Many are certainly competitive with their neighbors; if the house they build is not the biggest on the block, it's likely to be better in some other way. Even if the home's design is architecturally conservative, the owner may dictate that it be the most conservative in the community.

That creates stimulating work for a custom builder but also creates challenges that builders in more conservative markets never face. An example is a home in the master-planned community of Sweetwater Estates in southwestern suburban Sugarland. It has 18,630 square feet of air-conditioned space. (Hann cannot divulge its value.) The exterior is Mediterranean style only because the clients had to tone down their contemporary desires to meet the architectural controls of the master-planned community. Inside, nothing is toned down.

"The entry foyer is 45 feet high," Hann notes, "and the house has 42 wide-screen televisions, a 1,500 square-foot home theater and its own disco with a dance floor. The master bedroom is designed to look like an earthquake hit it," Hann says. The ceiling has two different pitches, with a gap in the middle made to look like it shifted when the earth moved. Cabinets are also designed to look as if they shifted, and faux cracks adorn the walls. The designers "just made this stuff up," Hann laughs. "When they showed it to me, I asked them where to go to fill the orders, and they said they had no idea." But Hann got it built. "The Internet is a wonderful thing," he says.

The French Provincial design in The Woodlands is highlighted by wide, spacious halls and arched doorways that lend a formal feel to the inside of the home. In addition to the word-of-mouth notoriety work like this engenders, Hann now spends time fine-tuning a highly effective marketing program. In the master-planned communities, where developers sell custom lots directly to the public, he's able to track the ownership of every lot and market directly to those owners with customized mailings. "For example, Carlton Woods in The Woodlands has 454 lots," Hann says. "We have every lot on a spreadsheet that we update constantly. We communicate every month with every owner we identify as still in the market for a builder."

Hann sends letters and newsletters just to stay in front of those owners. Away from the master-planned communities, he has to use more of a shotgun approach with direct mail targeted to affluent zip codes. But with his high profile in Houston, Hann is now in the enviable position of being able to choose his clientele. "We're being a lot more selective today than in past years," he admits. "Before, I was doing homes in too many price ranges. Now, I'm looking at every deal in the context of our total business. I'm looking for clientele that appreciate what we bring to the table."

Hann notes that he has no spec homes at all now. "I'm committed to do a showcase home next October," he says, "but I've already got it under contract. The client gets the advantage of all the discounts I get on products and furnishings that will be displayed in the home. I'll pass all those along to him. My benefit, in return, is all the exposure I'll get without having to worry about carrying the house until it sells."

Hann has cut way back on the master-planned communities where he will build to keep spec starts under control, noting that if the Houston market had taken the same dive in 2006 as many in California and Florida did, "I'd be part of the body count." He's now keeping a close eye on all the macro-economic factors that impact his market. "After all," he says, "there's no guarantee that the housing crash won't eventually hit here as well."