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Builder Bullies

First off, let me apologize to all you loyal blog responders to this site. I was on spring break last week and am still plowing through all your posts. Thanks so much for writing in! ... Now back to business:

AP

I’m reporting a story on Lennar today. The sixth largest public homebuilder in the nation sent out an interesting letter to its contractors a few months ago offering them two choices:

(A) Reduce your unpaid invoices as of 1-26-07 by a minimum of X [many have reported up to 20%]…or

(B) Not reduce your unpaid invoices and be excluded from bidding future work for a minimum of 6 months. Those companies who choose to participate in this request and/or can exhibit the best price possible will continue to have every opportunity for future business with Lennar.

We spoke to several contractors, and many call it extortion. A trade group took the letter to the local DA but since Lennar is paying all its bills, there’s really no crime. Lennar says it’s simply the cost of doing business in a down market. After about 3 weeks of calling them, Lennar did offer this statement:

Lennar Statement for CNBC:

When the housing market was strong, both homebuilders and our subcontractors benefited financially from favorable home prices and increased home sales. However, the current housing market has softened, and homebuilders and subcontractors must accept and respond to market conditions.

As the market forces lower home prices on the industry, homebuilders and everyone in the home building supply chain must reduce costs. We are working hard to find efficiencies and cost reductions in running our business and all of our trade partners need to do the same in their businesses.

The overwhelming majority of our subcontractors have agreed to reduce prices for future work. Many have even reduced prices for current or already completed work. We greatly appreciate their willingness to work with us as we face this challenging market, and we will continue to work with them in the future. Some subcontractors have declined to reduce prices on outstanding charges and for future work. They will be paid in full in accordance with their contracts for work already performed. However, our choosing to work with subcontractors who will do the same quality work for lower costs is not being heavy handed as this subcontractor is alleging, it is just the correct response to current market conditions.

Thanks to Lennar for the clarification. Look, sales are down, inventories are up, and how can a company expect to survive without a little help from its loyal employees. So Lennar overbuilt, like the other big builders, got heady with the spike in home prices, rode the market like the bull that it was. Who can fault them for that, right? I mean, it’s not like we’ve seen any other crazy sector bubbles recently that Lennar could have learned from, right? So what if certain CNBC business reporters who cover real estate kept harping on the fact that real estate prices were unsustainable.

And isn’t it just good citizenship to help out big public companies when they’ve got all those prickly shareholders breathing down their necks? I have to say that if GE were in trouble, if there were a sudden drop in light bulb demand, I would certainly offer up 20% from my paycheck to help out. I mean, isn’t that how it’s all supposed to work? The government does it all the time; when Uncle Sam overspends, he just takes a chunk out of our paychecks. So there, it’s the American Way!

I’m thinking some other companies should follow suit. The automobile industry is getting there: they dumped all those employee pensions onto the government and got rid of the workers. Same with the airlines. (At least they had that whole bankruptcy thing to fall back on). Circuit City just laid off a bunch of workers who they deemed to be overcompensated. If only Enron, instead of cooking the books and creating an energy crisis, simply asked their thousands of employees to, “give us back 20% of your paychecks for the last year, so that our top level management can keep living in the style they’re accustomed to,” then they could have avoided the collapse of the company, which would have kept all those employees in their jobs…not to mention also avoiding all that nasty jail time.

This is a great idea. I’m going to call the guy who added the bathroom in my house two years ago and tell him to give me 20% back. I’m sure he’ll oblige; after all, now that my home’s value is depreciating, he owes it to me, right? And if my house isn’t worth as much as it was last year, then my grass certainly isn’t either. I’m going to call that nice kid who cut my grass last week. He’s going to need to give me 5 bucks back out of that $20, that is, if he ever wants to mow on my block again.



Ethical Questions
Lennar’s current position of “requesting” a 20% reduction in supplier invoices raises so many ethical questions I don’t know where to begin. First, lets just say that I’m sure that Lennar would be very happy to “rebate” 20% of the sales price to all their customers for 2006 who bought homes at inflated and “mortgage manipulated” prices.

But on to a more positive solution. Had Lennar used reverse auctions (Iasta, Ariba, ProcureI, etc.) to enter into contractual positions in the beginning they would not have found themselves in an uncompetitive position. And had suppliers not created an environment of greed by defaulting on previously agreed to contracts there would not be this atmosphere of distrust. Yes, business is down, yes, we all have to be competitive and yes, a lot of people made millions from 2001 through 2006, but the market has changed. So now homebuilders are left with legacy policies and procedures from the boom and are unable to compete. They need to look at themselves for not preparing for a downturn. Why blame the other guy? It takes two to make a contract. - William S.

Grand Jury Investigation?
In response to your comment about Lennar Corporation, I believe the only way to get to the real truth in this matter, is to open a “Grand Jury “ Investigation and subpoena all branches of administrative staff to appear before said Grand Jury along with all subcontractors , their employees, and all procurement, accounting staff et al.

This should be a Federal Grand Jury as Lennar does business intrastate and falls within Federal Law. There are many questions that have to be answered , just as Beazer Homes has to, so, should the entire NYSE Builders have to be dealt with similar investigations

The final results of this Grand Jury could be quite revealing and project the dirty side of the NYSE builders in all aspects of their business plan.

In closing: Are the upper management branch be willing to return to the shareholders the greedy compensation that they received during this hot air housing market. - Anonymous

Questions? Comments? RealtyCheck@cnbc.com

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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