Making Market Research Pay

The most effective builders I've known in my more than 20 years working in the home building industry not only invest in research, but also have an in-depth understanding of how to apply that research in each of their markets and submarkets.To gain an edge in today's market, it is essential to establish a sophisticated research program that improves upon rearview-mirror market research.

I recently spoke with two marketing executives at MBK Homes Ltd. and Forecast Homes who shared the ideas behind those companies' successful research programs.

Like most builders, Irvine, Calif.-based MBK uses traditional real estate research, based on comparables, when considering a land acquisition. However, it goes well be-yond conventional research methodology to determine the deal's economic feasibility.

"Traditional real estate research provides only part of the picture," says Tim Kane, vice president of sales and marketing for MBK. "If we looked only at comparables, we would have passed on several land acquisitions that have proven very successful. We take into account many other factors, particularly supply and demand, when considering a land acquisition."

One of MBK's most successful communities, Emerald Square in Gardena, Calif., would not have been built if the company had relied on traditional market analysis. No new homes had been built in the area in about 25 years, so no comparables were available. Although the property was considered too much of a risk by several other builders who regarded the area as low-income, MBK acquired the land based on its economic and demographic research. MBK's analysis of the Gardena market revealed that more than 1 million jobs were within commuting distance of the proposed project, resulting in a pent-up demand for new housing.

"We also found that many people who grew up in the area and left were coming back to settle close to their childhood home," says Kane. "A large number of these people had become professionals and desired a different kind of home than their parents once did. In the past, the largest Gardena homes measured less than 1,500 square feet, and we knew from our research that if larger homes were available, there would be considerable demand for them."

MBK's tactics paid off, as Emerald Square sold out quickly and vastly exceeded the company's original profit projection.

Another MBK success story is High Pointe, a move-up community within Eagle Glen, a master-planned community in Corona, Calif. Standard research showed that most new homes being built in Corona were for first-time buyers. MBK's economic research revealed a pent-up demand for move-up product.

"We found that there were a substantial number of new privately owned businesses in the area with more than 25 employees," Kane says. "We also tracked real estate listings of homes exceeding $500,000 and discovered an acceptable level of sales for those homes. Based on this combined data, we felt that the owners and managers of the area's new businesses would be looking for nice homes and would be willing to pay prices starting in the $500,000s."

High Pointe sold out much earlier than the builder had anticipated, and revenue was significantly higher than the company originally forecast.

Forecast Homes, based in Rancho Cuca-monga, Calif., also combines traditional research methodology with an in-house research department, which does quarterly market analysis to ensure that projects and product are still viable in current market conditions.

"Besides quarterly analysis, we maintain a constant watch on price elasticity and sales patterns within each of our submarkets so we are immediately aware of changing conditions," vice president Mike Dwight says. "This helps us understand in a timely manner which products are selling and which are not, what we are doing that is making us successful in the market and what we should be doing better. We also analyze what our competition is doing on those same levels in order to stay at the top of the market in terms of sales."

One of the most successful communities in Forecast's 31-year history was Big Canyon, developed in 1997 on the west side of Phoenix, a burgeoning market when Forecast entered it.

"We purchased the land based on comparative and competitive market analysis," says Dwight. "Based on our data, we created two separate communities: an entry-level neighborhood with four single-story home plans, and a move-up neighborhood comprised of one single-story floor plan and three two-story models.

"After proceeding with building our models, we set in motion our ongoing research program using in-house data combined with comparative and competitive analysis in order to re-survey the market on a constant basis. After we opened Big Canyon, more competition entered the market and brought about changes in product demand.

"Because the new competing neighborhoods each offered a floor plan similar to the largest two-story plan in our move-up neighborhood, sales velocity on that model had fallen off significantly. We realized a niche was opening for a smaller home in that neighborhood, as that need was not being met in the market. We also reviewed our sales records and discovered that many of our buyers were purchasing our largest single-story home and opting for a sixth bedroom. So we replaced our initial 2,770-square-foot, two-story model with a 2,100-square-foot, single-story residence with a high specification level."

The research program helped the company regain its market-leading position, and Big Canyon again began averaging 10 sales per month, significantly better than the market standard.

With land prices increasing, affordability ratios continuing to decline and the lessening availability of good building sites, it is essential that builders commit to effective research programs that keep them ahead of the curve in a competitive market.

M. Wayne Nelson is president and CEO of Redondo Beach, Calif.-based Nelson & Gilmore, a full-service advertising and public relations agency specializing in corporate and project marketing for the real estate industry.

Wayne Nelson can be reached by e-mail at wnelson@nelsongilmore.com.