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Texas is different in many ways. For one thing, it has a vibrant, job-growing economy and a housing market that’s a lot healthier than those of most other states. However, Texas has some idiosyncrasies, too. For one, production home building in the Lone Star State is not limited to the recognized commuting range surrounding cities and towns, making on-your-lot construction a successful business model for some builders.

For as long as there’s been production building, Texas has had on-your-lot builders — specialists in meeting the needs of people who want to live in the boondocks where they can’t see their neighbors. It’s a cultural thing, a vestige of the pioneer spirit. And some of the builders in this market segment — such as Tilson Home Corp. — are setting benchmarks for quality systems and efficient processes that allow them to control costs, deal with custom changes, and still make money, even though production is spread across hundreds of miles.

For more than a half century, the vast majority of the homes built in this niche were just a step above a double-wide. “A lot of Texans just like the wide open spaces,” says Tilson Home Corp. president Eddie Martin, 53, now one of the top practitioners of on-your-lot building in Texas. “They’re school teachers in rural school districts, highway patrol officers, sheriff’s deputies, car mechanics. … They’re not antisocial; they just want room to relax, do their own thing, and look at the land.”

Martin says a lot of his customers are move-ups from mobile homes: “In many cases, they’re living in a mobile home on the site when they sign a contract with us to build a permanent home,” he says. But Martin is quick to point out that even though Tilson now closes more than 400 houses a year, mostly in rural locations scattered across the eastern half of Texas, the on-your-lot niche was once even more popular than it is today. “Back in the 1940s and ’50s,” he says, “there was one builder doing over 10,000 homes a year on scattered lots, and he had a lot of competition!”

The expansion of subdivision building cut into those ranks, and the oil crash of the late 1980s wiped out most of the rest. Tilson survived because of the conservative financial policies of one of the founding brothers, Jack Tilson, who left the company in 1983, and chairman Jack Alarid, 79, whose family is now the sole owner. “Low overhead, no leverage, and a flat organization are part of it,” Martin says, “but if you don’t understand the logistics of building out in the country, it’s easy to lose a lot of money fast. Our supers drive between 200 and 300 miles a day, and they take their trades with them to remote sites, rather than hiring locally. We’d never control costs if we tried to use trades unfamiliar with our homes and our quality control methods.”

Plus, this is a different kind of customer, Martin asserts. “The guy who makes a million dollars a year and buys a million-dollar home is a tough customer, but in many ways, the guy who makes $20,000 a year and buys a $150,000 house has even more at risk. And this guy owns the job site. He’s always around, often more than the super. You can’t ask him to leave, so you’d better make him happy,” Martin warns.

A lawyer and a CPA, Martin took over as Tilson president from Alarid in 1991, when Tilson had 20 employees building just over 100 houses a year. It now has 110 employees and closed 415 houses in 2009, for revenue of $80 million. In 2010, Martin expects closings to stay about the same, but revenues may rise a little as the average sale price continues to climb. 

Computerized Pricing Is Key to Success

Tilson’s sales staff and builders (supers) maintain offices in 10 model home parks, each located on a major thoroughfare at the extreme edge of a big metro market. For example, on these pages you see the model homes now operating in Boerne, Texas, in the Hill Country 30 miles northwest of San Antonio. In many ways, this is similar to how manufactured homes are sold to passersby.

A number of prominent production builders have recently entered the on-your-lot niche, attracted by what seem to be attractive margins and the absence of land risk. (This is the ultimate land-light business model.) What they soon learn is that the little mistakes subdivision builders get away with will kill you when job sites are scattered across 150 miles of prairie.

“If you order the wrong windows or the vendor delivers the wrong cabinets, it could be a 100-mile round trip to switch them out,” Martin says. “Systems and processes, and partnering relationships with vendors, have to be very tight to avoid those kinds of errors. Every little mistake costs a lot more because of the distances involved. And those kinds of errors will sabotage relations with the customers. If they don’t trust you, or [they do] have an issue, they don’t close, and you don’t get paid.”

For this reason, tight computer systems and controls are critical. They are the key to both making the sale and controlling job costs. “Be-backs are not as easy for us,” says Tilson marketing director F. Gary Lewis, who formerly headed NAHB’s builder quality programs in Washington, D.C. “We want buyers to be able to walk out of our sales office with a solid contract price in one visit, and many do. That becomes difficult if there are issues with the lot or the buyer wants to do a lot of customizing. Still, a solid price at contract is a must. We don’t want to add charges after the contract is signed. Buyers think you’re nickel-and-diming them.”

But the upfront price has to be the right price, or Tilson’s margin is compromised by the time closing happens. It would be easier if Tilson built the same houses over and over. But the firm has had to meet market demand for custom changes, and it is constantly adding new plans and even whole series of designs to keep up with changing consumer demand. The houses shown here illustrate the biggest design change Tilson has ever made. 

Tilson Moves Up in Price and Quality Perception

Only a few years ago, Tilson’s average sale was $150,000, solidly in the middle of the pricing spectrum when you consider that it doesn’t include any land or development cost. But last year’s average closing price was just under $193,000, and the upward movement is continuing this year.

This is the result of two changes:

1) Tilson abandoned its long-held commitment to modeling only standard finishes and trim. “As we added some higher-priced homes to our line, we learned that having options like granite counters and wood floors is not enough. You have to show people that you can build at that level of fit and finish. If they don’t see it in the models, they don’t believe you can do it,” Martin says.

2) Tilson’s research revealed a whole new segment of luxury home buyers now entering the on-your-lot market. They are affluent pre-retirement and retirement-aged buyers from Houston, Dallas, and other big Texas cities, who want a second home in the Texas Hill Country or a retirement destination. Unsure of the quality of custom builders in these remote locations, they are looking at on-your-lot builders such as Tilson. “We needed homes of 3500 square feet and more, priced above $500,000, to meet that demand,” says Martin. “Now we have them, and models like the Marquis in Boerne prove we can build to that level of fit and finish.”

As sales in the higher price points increase, Tilson’s average home price has been climbing each year.

Shown here are the 4457-square-foot Marquis, which sells as modeled for $638,773 (without lot) in the Texas Hill Country near Boerne. This model is aimed at the new luxury market segment. Also shown is the 2500-square-foot Frio, which sells for $202,000 as modeled, which is more representative of what mainstream Tilson buyers are purchasing. Both show that Texas buyers of on-your-lot, production-built homes are living high on the hog in a home on the range.

Bill Lurz has been reporting on every aspect of the home-building industry since 1970. A former editor-in-chief of Canadian Building and senior editor of Professional Builder, Bill is currently editor-in-chief of AvidBuilder.com. He can be reached at bill.lurz@avidbuilder.com.