For Robert H. Schottenstein, home isn’t just where the heart is. It’s also where the profits are.
Last year, more than 10,000 building permits were issued in Columbus, representing about 25 percent of all building activity in the state of Ohio. That’s good news for Schottenstein’s company, M/I Schottenstein Homes, because Ohio represents about 40 percent of its business.
Founded in 1976, M/I is the 19th largest homebuilder in the nation and has notched more than 50,000 homes in its tool belt. According to Standard & Poor’s, 50 percent of Columbus home closings were M/I homes. Last year’s revenue approached $1 billion from 4,140 home closings at an average price of $238,000. Schottenstein, the company’s president, attributes the firm’s success to a two-sided business philosophy.
"We care more about the product we build and our customers than any other builder," he says. "And, we are very profit-driven."
The company recorded net income of $15.9 million in the fourth quarter of 2002 and $66.6 million for the year. These record levels represent an 8 percent and 21 percent increase respectively over 2001.
His philosophy sounds simple, but Schottenstein says he and his management staff listened to their customers during the development of several expensive programs designed to enhance the buyer’s experience.
"We have an extraordinary number of second- and third-time home buyers," Schottenstein says. "And 95 percent of our customers would recommend us to a friend or family member."
Examples of these buyer-friendly programs are the company’s design center and M/I Financial, a wholly owned subsidiary and mortgage lender which finances more than 90 percent of customers’ loans.
"M/I Financial is located across the hall from the design center," Schottenstein says. "After the buyer signs the contract, he can apply for a loan and visit the design center."
Schottenstein says that using M/I Financial offers the buyer a competitive rate — the company’s Web site refers to the rates as "below market" — the ability to finance and close entirely through M/I and the convenience of doing it all in one location.
According to Standard & Poor’s, these loans are eventually sold — a common practice in the mortgage industry — with the exception of a small servicing portfolio.
Schottenstein says one of M/I’s most unique offerings is its Personal Construction Supervisor. Each customer is assigned a single contact person to monitor the construction process and ensure timely delivery and high quality.
Further, M/I encourages buyers to visit the construction site as often as they want, and the company’s array of inspections outnumbers those required by city codes.
M/I’s efforts to operate conservatively — such as limiting the number of spec homes it builds — fuel is ability to maximize revenue and profits.
Schottenstein says the company won’t compromise when it comes to profit margins on the houses it sells.
"Other builders are volume driven," he says. "We want to sell houses, but not unless the margin is right."
According to Standard & Poor’s, M/I has overall homebuilding gross margins of 24 percent and operating margins of 11 percent.
Schottenstein says M/I’s homes are not the cheapest on the market, and stresses that prices are not negotiable.
"All square footage is not created equal," he says. "All of our buyers pay the same prices. But our customers know we’ll be there tomorrow if a problem occurs."
Because of the number of homes it builds, M/I has a tremendous amount of purchasing power. Says Schottenstein: "We have relationships with many of the best suppliers in the United States. And we don’t employ construction specialists like framers and electricians, we use subcontractors."
Using subcontractors rather than keeping specialists on staff is less expensive, and Schottenstein says the company takes care of its subcontractors by giving them plenty of work.
Sites are supervised by M/I’s project managers, who are members of the company’s staff of about 1,000 people. Sales associates account for about 20 percent of the work force, and construction workers make up 20 percent to 25 percent of the staff. The remainder are in marketing, design and land development.
An important part of M/I’s business model is how it distributes its business across a variety of price points.
"Our goal is to sell 30 to 40 percent of our homes to first-time home buyers, another 30 to 40 percent to move-up buyers and the balance to the luxury buyer," says Schottenstein.
These targets mirror the potential market, which Schottenstein calls a pyramid.
"There are a lot more first-time and move-up buyers than luxury buyers," he says. "And it’s a lot harder to sell a second home when the buyer hasn’t purchased the first from you."
