By my count, there are over 150 ways to improve a home builder’s profit. This is just one.

I hate to have to talk about this, but it needs to be addressed. Lower than expected margins can be a tip off that someone is stealing from the builder.

Stealing is not rooted in home building – it is rooted in human nature – but given the nature of the business, there are a lot more opportunities in home construction to break the eighth commandment than in most businesses.

Stealing takes many different forms - fraudulent statements, asset misappropriation, kickbacks, corruption - and it is done by many different parts of the organization – accounting, the field, purchasing, and executives. And it is serious. Some forensic accountants estimate fraud, in 30% to 50% of business failures, was a contributing factor, if not the primary factor.

Let me tell you a little story.

Accountant Sue Jitsu* was in a good groove: her part-time job as a bookkeeper at a medium regional builder was very rewarding; her three well-adjusted children, Blue, Boo, and Coo were doing well; and her second husband, John, is as obedient and good natured as a golden retriever, if not the sharpest knife in the drawer. But life wasn't always so easy for Sue. Years ago, her handsome first husband turned out to be a con artist. He died in prison, leaving her penniless to raise three kids on her own. The daughter of a successful lawyer, Sue had to go out and get a regular job. She was painfully aware of all the ways fortune had shined on her boss, a second generation home builder, who enjoyed all the material benefits of a successful business, but was tasteless and uncouth.

She thought that was unfair considering all she had suffered. Although she hid it well, over the years her resentment towards him grew and grew until one day she did something about it. Sue remarried, but her second husband (who brought his own two young daughters to that marriage) was pretty good at everything but making money. Still Sue managed to do pretty well with 5 kids until one day it all fell apart.

Sue worked for a medium sized regional builder that created a lot of different LLC’s for their land positions. It is not particularly unusual for land-development businesses to have many different accounts because there are typically different partners in each. Some builders also use them for tax and estate planning purposes, as well as asset protection. But having all those separate entities increases the accounting complexity and opens up the parent company to fraud (the original sin missing from the seven sins because it did not exist until the invention of double entry book keeping).

Over a period of a decade or more they must have had twenty to forty different legal entities and millions of dollars flowing in and flowing out of them. Sue created her own legal entity and basically siphoned a little out of each transaction. If she moved $100,000 into an account she would release $110,000 and put $10,000 into her own account. If they moved a $1, 000, 0000 she might take $100,000 and put it in her little nest egg. The builder had absolute trust in her, after all she was a soccer mom.

Over the course of over ten years or so Sue was able to salt away well over three million dollars. She used the money for boats, vacation homes, and college education accounts for the five kids. Her husband wasn’t involved and in fact did not even know about it. Sue told him the money came from a family inheritance and an insurance settlement from her first husband.

Once Sue’s fraud became uncovered in a random audit, she faced some serious jail time. With three million dollars missing we are talking some serious felony territory here.

The builder felt badly since she was a mom and would have let her go, but the judge felt the amount was enough she had to serve some jail time. All the assets she owned were repossessed and sold and the builder recovered about half his money. It turned out to be quite a big financial disaster.

Sue made the best of her prison experience by becoming a personal life coach specializing in trauma, healing, and limiting beliefs (mmmm, yes perhaps you see a little humor from Noelle here).

Some builders will try to avoid the Sue Jitsu’s of the world by asking new hires to sign an acknowledgement form that lists examples of things they would like them to avoid because they might be perceived as conflicts of interest. Other signs Sue might not be true to you include:

• Attempts to sign checks when owner not available, even though not authorized.
• Sensitivity about pass codes and locked drawers.
• Key documents are suddenly lost.

The moral is we are all stretched at times and overlook weaknesses in our businesses. Most of us look for the good in people. I have been around enough that I just look for the truth and solve the problems. It is this phase of the building cycle that things like this most frequently happen. That is my story, and I am sticking to it.

Professional Builder had an article by Bill Lurz which does a great job of covering the topic. It is called Stop, Thief! Check it out.

Home builders and developers are the backbone of this country. They work hard, take risks, and create more wealth for society than any other sector of the economy. If you are a home builder and concerned about your results - you can do better! If you want to find out more, call me at 303.525.4944 or email me at noellet@buildertools.com and LinkedIn is a great place to find out more about my credentials, background, and references.

My first three questions when you call are usually:

1) How many units do you sell per year?

2) What is your average sale price range?

3) What is your projected net income for the current year?

https://www.linkedin.com/in/noelle-tarabulski/