In 2006, Michael Nelson decided at the worst possible time to borrow $2 million to expand his house design business.
Within months, the housing market came to halt as the country entered the Great Recession.
Nelson’s Design Group LLC of Jonesboro saw its revenue plummet from $4 million in 2006 to $1 million in 2008, where it hovered for the next seven years.
Meanwhile, Nelson said he began in 2009 trying to restructure the $2 million U.S. Small Business Administration loan it took out in 2006, but he wasn’t allowed to restructure unless he first defaulted.
Last month, Nelson Design filed for Chapter 11 bankruptcy reorganization and listed $3.44 million in debts and $890,000 in assets.
“We’ve ridden this wave thinking we can do it on our own longer than we probably should have,” Nelson recently told Arkansas Business.
Nelson said he hopes the improved housing market and a restructured SBA loan will help grow his business.
Nelson said he didn’t know how long his company would be in reorganization.
Since the collapse of the housing market, Nelson Design has shifted its focus from selling its stock house plans directly to homebuilders and now is focusing on the consumers who want to build custom homes.
“Our market has forever changed,” Nelson said. “We’re dealing with 90 percent of our customers are consumers these days; before it was 50 percent builders, 50 percent consumers.”
And he said there are signs that the housing market is finally starting to recover.
“It may take 10 years, but two years ago, I would have said we’re not even seeing an upswing,” he said.
The housing market is “seeing modest improvement,” said David Crowe, the chief economist for the National Association of Home Builders of Washington, D.C.
In 2016, the NAHB projects almost a 20 percent increase in single family construction nationwide over 2015’s numbers, Crowe said.
But he said that’s no reason to celebrate.
“The 20 percent this year, if that’s what we get, is decent,” he said. “But it isn’t like it’s some sort of new wave.”
Opportunity for Growth
Nelson began designing homes in 1985 and formed Nelson Design in 1998 to sell his stock house plans nationwide. Nelson owns 61.1 percent of the company, John Perry of Jonesboro owns 27.8 percent and Kemp Whisenhunt of Little Rock owns the remaining 11.1 percent.
Nelson’s plan was to mass mail a full-color book to builders across the country.
“A publisher actually told us it was done by others in the past and was very successful,” Nelson said.
In 2001, he bought a list of 130,000-140,000 homebuilder names and sent them a design book of his home plans. The average home plan sold for $900.
The strategy worked, and the company grew. Every time Nelson Design mailed a new book, more orders followed.
By 2005, “We said, ‘you know with the housing marking booming like it is, we could drastically take care of market share within our competition nationwide … if we mass-mailed three books a year,” Nelson said.
That would mean mailing about 500,000 books a year. Nelson turned to Arkansas Capital Corp. in Little Rock for help.
ACC suggested Nelson Design apply for a SBA loan. ACC helped Nelson gather all the paperwork and projections, which showed his business had a value of $6.7 million. And based on ACC’s model at the time, Nelson Design was forecast to have revenue of $6 million in 2007 and $7.5 million in 2008.
“And it would have kept going,” he said. “We ran it out for four-five years, and we would have had enough money by 2009 that we would have been completely out of debt and had enough money to continue putting out three books a year.”
Nelson said he was asked in the first meeting with ACC what would cause Nelson Design to fail.
“I said, ‘Well, when interest rates were at their highest in 1980, that’s when stock plans sold the most,’” he said. “’So I don’t know what would ever cause our [business] to fold unless our whole industry folded.’”
Alarm Bells
Only eight months after receiving the $2 million in 2006, Nelson began seeing warning signs.
“In August 2006, that’s when we first heard builders say, ‘Well, Nelson Design Group, we’d love to buy a plan, but the banks have told us that we need to sell one or two houses before we could build another one,” Nelson said. “We heard that in small, sporadic conversations. Then by September, October, we were hearing it left and right.”
By the start of 2007, the housing market was collapsing.
“We felt like the rug was completely yanked out from under us,” Nelson said.
He had 44 employees at the time; by the end of 2008, he had 10.
The housing industry was expected to bottom out in 2009 or 2010 and rebound by 2011. That didn’t happen.
Nelson Design’s revenue in 2010 was $1 million, and then dipped to $815,400 in 2011, according to the company’s bankruptcy filings.
Crowe, with the National Association of Home Builders, said spec home building “fell away completely” by 2009.
New Plan
Nelson Group turned its focus to the custom home buyer instead of the homebuilder.
“Now consumers are the ones buying the home plans,” Nelson said.
Crowe said the custom home market was 22 percent of all new home construction in 2015.
“The custom has done well because the buyers of new homes have drifted toward higher-income people,” he said. “The demand for new homes is coming from a higher-income, better-off household.”
Nelson said Nelson Design makes more money when the home plans are bought directly from the company rather than going through a publisher, which could take between 30-45 percent of the sale.
Nelson Design recently redesigned its website to capture more direct sales.
“Our goal is to be able to sell home plans directly because we keep 100 percent of the money,” Nelson said.
With the SBA loan, he said the company wanted was “get an affordable payment whatever that may be.”
Nelson declined to say what the SBA monthly payment is. As of February, $1.9 million was still owed on the loan, according to Nelson Design’s bankruptcy filing.
Even at the firm’s low point, Nelson said he didn’t consider closing the doors, because his home plans still generate revenue when they are sold.
“Once they are out there and published, they will produce some level of revenue,” Nelson said. “And any movement forward in a positive direction … will help us get through this restructuring a little quicker.”
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