KB Home: Rebuilding Trust

The homebuilder is putting the emphasis on quality -- and raising its growth targets

In mid-July, Diana Francis, a disabled retiree in Jacksonville, Fla., had a small fire in her home that caused firemen to knock down her front door. Panicked because she was about to leave on vacation, Francis called Bill Robinson, the local customer service manager for KB Home (KBH ), the company that sold her the house two years earlier. Robinson spent five hours fixing the door, lock, and alarm system at no charge to Francis. "They've done above and beyond," she says.

That's good news for the $5.8 billion Los Angeles-based homebuilder, once known as Kaufman & Broad Home Corp. Satisfied customers haven't always been the norm at KB, which still operates under a 1979 Federal Trade Commission consent decree stemming from inadequate home warranties and poor handling of complaints about shoddy construction.

In the past two years, however, the company has moved forcefully to build a new image, as longtime Chairman and Chief Executive Bruce E. Karatz has instituted a bevy of changes. KB, the fifth-largest U.S. homebuilder, has worked with the National Association of Home Builders to produce training programs for contractors and builders that Karatz says are boosting quality. Karatz has instituted a "Say Yes" program to handle customer complaints faster. And he has taken steps to bring independent voices to the KB board.

Karatz thinks that these changes, along with KB's move into markets beyond the $200,000 starter homes that are its bread and butter, will ensure prosperity. As housing markets boomed, KB's sales climbed at a 17% average annual rate over the past 10 years, while profits grew at a 25% pace. Last year, KB earned $371 million. Its performance was good enough to make it No. 49 on the BusinessWeek 50 list of top-performing companies. And KB is now the largest builder in fast-growing cities such as Las Vegas and San Antonio, where higher interest rates have so far failed to dampen sales. Karatz figures that as KB expands its offerings for affluent empty-nesters, trade-up buyers, and two-income childless couples -- buyers it deems less sensitive to rising interest rates -- it can hit $10 billion in sales by 2007.

But rehabbing the KB name is crucial to meeting those targets. As the construction industry consolidates, with the top 10 homebuilders doubling their share since 1997, consumers are more aware of the reputations of the companies that are left standing. "In every other consumer product, brand does make a difference," Karatz says. "Why not housing?"

CONTRACTORS WHO CARE?

To address quality concerns, Karatz is requiring that all of KB's contractors pass a certification course it helped develop with the NAHB. It includes follow-up site inspections by independent auditors and yearly recertification. Karatz is also asking his local managers to settle customer complaints within 72 hours. (The consent decree mandates resolution in 30 days.) A new KB standard states that "All reasonably legitimate homeowner concerns raised during the first year of ownership should be repaired or resolved to the homeowner's satisfaction. Period."

The payoff: KB says its warranty claims are down 90% from where they were two years ago, while lawsuits and legal expenses have fallen 20% -- even though the company is building 25% more homes. Customer referrals, meanwhile, are way up. The annual J.D. Power & Associates Inc. customer satisfaction survey also shows rising approval of the company by home buyers. "KB is among the most improved in terms of customer satisfaction," asserts Paula Sonkin, senior director of the real estate industries practice at J.D. Power.

Karatz's remodeling has extended to his board as well. Former Housing & Urban Development Secretary Henry G. Cisneros, who has a homebuilding joint venture with KB, has left the board after talking with Karatz. Today 10 of KB's 11 directors are independent, including newcomers like Leslie Moonves, Viacom Inc.'s (VIA ) co-president.

KB still has its detractors. Brian Zaltsberg, an unhappy former KB homeowner, runs kbhomesucks.com, a Web site devoted to KB griping. "I still get complaints every day, from all over the country," he says. And Nancy Seats, national president of the Homeowners Against Deficient Dwellings Inc., a consumer advocacy group based in Eureka, Mo., says of KB: "They talk a good talk, but they don't walk the walk."

It may turn out that building a better reputation takes longer than building a new subdivision. But at least KB seems to recognize that it's bad business to have regulators knocking at the door.

Editor's note: On Sept. 20, KB Homes surprised investors with a 20% jump in third-quarter profits, reporting $2.84 earnings per share, vs. $2.33 a year earlier. The results beat analysts' average estimates by 11 cents. Revenues rose 21%, to $1.75 billion. The homebuilder now sees EPS in fiscal 2004 (ending in November) hitting $11 and in fiscal 2005 $14.

By Christopher Palmeri in Los Angeles

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