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Diamond in the Rough

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  • | 9:51 a.m. April 15, 2011
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Company. Diamond Custom Homes
Industry. Residential construction
Key. Certain high-end markets on the Gulf Coast may be ready for new-home builders.

Michael Diamond has been in the homebuilding business in Florida long enough to know how the cycles run.

He and business partner Jeffery Benham believe now's the time in the construction cycle to launch a custom-home building company targeting affluent buyers. Diamond and Benham acknowledge they might be early in the recovery, but they say they can't afford to wait for certainty. “If we wait, I think we lose,” Diamond says.

Diamond and Benham are president and vice president, respectively, of Diamond Custom Homes. They formed their Naples-based company in November and are building three model homes priced at more than $1 million.

The two entrepreneurs say wealthy homebuyers are more confident as the economic recovery gains traction, and they're buying luxury homes in the Naples area.

Indeed, data from the Naples Area Board of Realtors shows the sale of existing single-family homes in the $1 million to $2 million price range rose 42% in 2010 compared with 2009. Sales in the over-$2 million category rose 27% last year. In total, buyers bought 362 homes in the over-$1 million category in 2010 in the Naples area compared with 267 in 2009, a 36% increase.

Because many builders cut back on speculative building and some went out of business during the downturn, there are few new homes to choose from in the market. “There's no inventory in the market for brand-new homes,” Diamond says.

Diamond and Benham are counting on the retiring Baby Boomers to feed that demand. They reason that 100 of the 10,000 Baby Boomers retiring each month — about 1% — can afford a million-dollar home in Naples. “A good portion will come to Southwest Florida,” Diamond says.

Diamond has two decades of experience in the homebuilding business. He started with US Home Corp. during the last downturn and became the company's regional vice president for sales and marketing in 1995. His last endeavor was helping Landmark Development Group manage the company's distressed assets in the area.

Benham was chief financial officer with Colonnade Development Group. He met Diamond when he joined Landmark and assisted in winding down Landmark's projects locally.

Diamond Custom Homes is building three models priced between $1.1 million and $1.8 million. The company got financing from Finemark National Bank for the model it's building at Quail West in north Naples. The other two models Diamond is building in Grey Oaks in Naples came from the Ronto Group, the firm that recently acquired lots there.

Diamond says private investors looking for better returns are financing luxury model homes. Because lot prices are so undervalued, he estimates investors could make a cumulative return of 50% over two years given current trends.

Despite the growing demand and dwindling supply, Diamond and Benham say their new homes continue to compete with existing homes currently on the market. “The goal is to be priced with resales,” Diamond says. Based on annual sales volume, there's still more than two years' worth of supply of homes listed for more than $1 million in the Naples area, according to the Realtors association.

To control risk, Diamond Custom Homes is targeting buyers in the $1 million to $2 million range. “We don't want to build $5 million specs,” Diamond says.

The entrepreneurs scout for vacant lots in upscale subdivisions in Collier and south Lee counties and waterfront lots with older “teardown” homes in tony areas of Naples such as Port Royal. While a lot used to represent about 30% of the cost of a new home during the boom, Diamond says it's now closer to 5% to 10%.

Besides seeking low lot acquisition costs, Diamond says labor costs have fallen 20% from their highs during the boom. Because of inflation in commodities, material costs haven't dropped materially. “What's changed is labor,” Diamond says.

Diamond and Benham's goals are to sell 12 to 15 homes a year over the next three to five years, generating about $20 million in sales annually. With a total of four employees currently, they keep the enterprise lean by subcontracting most of the work.

Million-dollar market buzz

Naples may be on the leading edge for sales of homes priced at more than $1 million, but there's anecdotal evidence that sales are rising in this segment in other areas of the Gulf Coast.

It's no surprise that Sarasota is seeing the same trend of rising million-dollar home sales because, like Naples, the area caters to wealthy retirees. “Areas that have more visitors during the snowbird season, like Sarasota and Naples, are seeing an increase,” says John Neal, president of John Neal Homes and the custom builder for Neal Communities of Lakewood Ranch.

Affluent buyers who may have hesitated to spend money on a new home during the recession may be more confident, especially after the stock market recovered last year, Neal and others say.

Neal estimates the Sarasota market has just a four-month supply of new homes in the over-$1 million range. “There's definitely a dwindling supply because the homebuilders are gone,” he says.

“There is a diminishing inventory and all the Realtors are talking about it,” says Jim Soda, a Realtor with Keller Williams Lakewood Ranch Sarasota. “We're seeing people coming down who will retire in two to three years and they're buying now.”

For example, Soda says the Lakewood Ranch area now has 14 months of inventory of homes priced more than $1 million, down from 28 months at the end of 2010 and 48 months at the end of January 2010.

Real estate brokers in Hillsborough and Pinellas say sales in the over-$1 million price range have increased markedly in recent months even though the data shows 2010 trailed 2009 sales.

For example, The Pinellas Realtor Organization reported 83 sales of homes priced over $1 million in 2009 and 69 in 2010, a 17% drop. But Sandy Hartman with Keller Williams Gulf Coast Realty in Seminole says there were 48 home sales in that price segment in the last six months, suggesting a healthy rebound. “That's a huge number for that bracket,” she says.

Homes priced more than $1 million experienced a slight drop in Hillsborough County in 2010, but Robert Glaser, CEO of Smith & Associates Real Estate in Tampa says sales are up 7% in the first quarter compared with the same period a year ago.

Tampa buyers in this price range include CEOs of new companies, people in the professional-sports business and buyers who waited out the recession, Glaser says. Most buyers pay cash, but some banks have started making “jumbo” loans.

New-home sales in that $1 million-plus category have been harder to come by, says Marvin Rose, longtime Tampa Bay area market tracker and publisher of Rose Residential Reports. For example, in Hillsborough County, builders sold 148 new homes for more than $1 million each in 2006. In 2010, they sold just two.

Rose says the Tampa market is driven by employment, not wealthy retirees. “The demographics of the market are very different in Tampa,” he says.


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