Mature, commodities focused businesses do not attract attention but their business models can be ripe with innovative ideas prudently implemented over a long time horizon.
It’s hard to believe that some quiet giants have stock that trade for more than Amazon. They pride themselves on producing profits from an asset light, profit focused business model in high barrier to entry industries. Companies like this are so good at knowing what their customers desire that they could be branded as a marketing company that happens to deliver a service.
NVR, Inc ($NVR) is the most profitable homebuilder in the USA. They have had the highest Earnings Per Share growth rate in the homebuilding industry for the past 10 years.
We dove into their books and even took a tour of one of their newest communities to get an idea of what sets them apart from their competitors.
This is what we found:
NVR, Inc Has a Clever Business Model
NVR, Inc owns Ryan Homes and NVHomes. They cater to the first time homebuyer in 14 states across the east coast and MidWest. NVR was originally just like its competitors. They bought large swaths of land at a discount with the intention to sell them with completed properties to recoup their investment.
The problem arose when the economy slowed down and they were stuck with unproductive land on their balance sheet.
Ultimately – like most homebuilders – they filed for bankruptcy. But NVR decided to try a different route for round two. This time around, instead of holding the land until lots were sold to homeowners, they placed options on developed land. This allows them to hold the land for the shortest amount of the time possible because they don’t buy the land (execute their option) until they’ve sold it to a homeowner. In the event that the economy turns down or they need to abandon the project, NVR is only out their option fee.
This reduces NVR’s downside risk on every project.
Many builders have mortgage divisions to capitalize on the additional revenue from initiating new loans for their homebuyers. Vertical integration can strategically cut costs. Again, NVR decided to focus on the highest profit potential actions. NVR processes the mortgages to deliver a centralized buying experience but does not hold the mortgages on their books. Instead, they receive the loan origination fees and sell off the paper assets after closing.
It’s not entirely clear how the actual closing logistics are handled, but based on public job board listings, sales persons paid on commission and NVR may execute their own title transactions.
This clever integration of an asset light business model with adjacent industries delivers strong wins to their bottom line.
They productized their services and buyer decision points.
A good business is more than cost cutting, it also involves delivering superior products with consistent customer service. NVR understands their first time homebuyer customer well and have customized their offerings to be attractive to that demographic.
The Ryan Homes website advertises their BuiltSmart program which highlights their energy efficient building practices. LED lights, a NEST thermostat and wifi garage door come standard on the homes. Future homeowners can enjoy the energy savings and comfort from these home technologies without ever having to research or install them on their own.
Interior finish selections were expertly packaged. Ryan Homes offers a base design package and 2 upgrade options. The upgraded packages consist of light and dark color offerings as well as higher quality flooring and countertops.
Design is where a new homeowner could get overwhelmed with choice which leads to analysis paralysis. Instead, NVR chooses to limit buyer selection so they are essentially ordering their home from a menu of options to streamline the process.
They have intimate customer knowledge
A first time homebuyer is likely short on funds, excited about building a home but timid about navigating the process. NVR knows this and tailored their customer service to ease every tension point.
The wifi thermostat and garage door openers are inexpensive (less than $300 at a local big box store) upgrades that have a high perceived value. The cost is overshadowed by the ease and convenient lifestyle the homeowner is purchasing.
The financing process is also streamlined. NVR/Ryan proclaimed a one-stop shopping experience for the homebuyer. The sales representative gave financing options on the spot at various downpayment levels. They even offer a very affordable $1000 deposit requirement to reserve your lot.
A potential buyer can view, select and finance a new home build in an afternoons for the cost of a high end TV.
This homebuilder is playing a different game than their competitors. They are focused on profitability, cost efficiency, remaining asset light and creating a one stop stopping experience for their customer base. By offering thoughtful yet inexpensive upgrades that improve quality of life, they have essentially become the Costco of home building having served over 450k homeowners to date.
*At the time of this writing the author does not own shares of $NVR. This analysis is the opinion of the author and does not constitute financial or legal advice.