This month is Building Safety Month, as recognized by the International Code Council (ICC).
Market comps = money
Disciplined market comparables are key to predicting sales pace, setting prices, and developing market savvy tactics and strategies that can improve your net income.
We live in the most disrupted, distorted, and confused housing recovery in decades. It is critical that builders and developers use a market comparables methodology that will generate accurate and timely answers to the questions of product, pricing, and pace for a given community and submarket.
I have been a firm proponent of disciplined market comps since the start of my career with Toll Brothers. Since 1991, I have improved and perfected the market comps methodology and have been helping clients improve their performance across many submarkets. I admonish all readers to secure a peaceful environment that will allow you to process and absorb the words that follow. This article may prove to be very lucrative if you have the discipline and will to lead this effort.
If all builders were aware of their market comparables environment at the level I recommend, there is a very good chance that much of the over-building that occurred during the housing boom could have been avoided.
Relying on others to tell you the state of your specific market is a recipe for disaster. It is with sincere regret that I was unable to broadcast this message to the industry at large in 2004, as we could have collectively averted or reduced the cataclysmic over-building that followed. Admittedly, a full-on spigot of worthless credit encouraged by a reckless political economy is a hard environment to protect against, no matter your skill-set. This was a lesson learned for me.
This article provides a foundational framework for you to propel your organization forward in a thoughtful, analytical way with the hope that it will lead you to improved sales, better product development, and ultimately margins in the months and years to come.
Though many builders claim to have a thorough market comp process, my experience is that on a scale of one to 10, most are at about three or four — below average. It’s a lack of priority and concern by leadership that allow this process to languish in most firms. Market comps should provide energy, data, knowledge, and confidence to you and your team. When done well, market comps will align, energize, and excite your sales team and all members of your organization. So what exactly am I talking about? Let’s get to it.
approach to market comps
First, you have to come prepared as a manager to lead and demand excellence from your sales and marketing team, team leaders, project managers, and leaders directly involved in the decision-making regarding product specification, sales price, and pace per month. Second, you must hold them accountable for the data and resulting decisions. Finally, you must accept that you may need leadership and guidance from outside the firm if you are running too lean to make this process happen in a timely fashion. In most instances, from start to finish, this process can be completed with actionable results in six to eight weeks.
The result you are striving for is a sustainable, energizing confidence that your product, price, and pace can be achieved as projected. It is imperative that all parties involved in negotiations are confident enough to push back when others (brokers, buyers, sales team, etc.) are compressing your margins with no grounds or data to support their demands. Having confidence in the fact that you set your product, price, and pace correctly will propel your results to great heights.
If you need outside assistance, remember that the value of any additional advice is the acceleration of the learning curve, accuracy in getting the job done right the first time, and the extra leadership required to push a new initiative from start to completion. In most instances, an excellent consultant can give you a 10-to-1 return on investment.
Once you have committed to this task, it is important to understand the market mechanisms that should be red flags for you. These events must propel you to act quickly. In my experience, your red flags should include: a new competitor in your sub-market area; you are opening a new community; you are considering a new product line; the selling season in your market is just starting; and you want to confirm your market position relative to others. If for any reason sales seem off and your gut says something is wrong, get your team out there doing primary research in the market; this is an all-hands-on-deck condition. In addition, consider having your team shopped by a secret shopper. Many of my clients live with the nervous condition of not knowing what is causing a change. Once they proactively take on this challenge, their uneasiness can be abated and turned into actionable items. Proactive management is more fun and lucrative than feeling as if you are a victim in your marketplace.
anatomy of a great comp
Typically, I use a multi-step process to develop the foundation for a great market comp methodology. Here are the key steps I take with clients to get a handle on the market:
1. Determine the team and schedule of the process.
2. Do a competitive overview using all available data (i.e Local providers, Metro Study, Myers, chamber of commerce, etc.).
3. Review exact locations and trends of activity using Internet data.
4. Search resale home data and home pages of competitors.
5. Determine with data the best and hottest selling communities and homes in the marketplace.
6. Understand best-selling models and products and VISIT them.
7. Review and understand the design center and option process.
8. Analyze the data collected and provide it in a useful, readable format (BCG sells a market comp package that provides more than 10 templates to collect data that has been in use and refined since 1998).
9. Develop a product, price, and pace that fits your operational strategy.
The MOST important aspects of this process are the actual site visits—you must have boots on the ground. You must have the analysis of data and the group analysis of the data, and then the resulting consensus of the actual management action that needs to be taken. Remember this drives the product, the sell price, and the pace you expect. In most cases, some coaching is required to show how the sweet spot can be found by managing and analyzing data. Some builders are extremely adept at this, but many remain challenged because of the demand on their management time.
The management team and leadership must take the market comp meeting very seriously and be well rested to think creatively for a day of asking questions and being analytical. This is a great time to really understand the work ethic and skills of your team. It is important that a large market area map is available so that geographic proximity, roads, amenities, and other important characteristics can be understood and discussed. A white board or flipchart is a must, and you must have someone facilitate the discussion and engage everyone. Typically, the facilitator is a senior executive or a consultant. Make sure someone is accountable and held to perform all action items; timeliness matters. If you want great results you must implement changes and be sure to get feedback from the team. Some examples of changes that are derived from such an effort include: signage changes, price changes up or down, product redesign, option offerings change, lighting changes, interior decorating changes, product specifications change up or down, the changing of the sales team to better match the buyer profile, and many more.
All of these are ongoing decisions that are made in an ad hoc or reactionary way, typically. But proactive, orderly management makes money and is more efficient for your team. A great market comp process will propel your team to align and work collectively to get great results, and this market comp does not allow silos to form in your organization.
The highest return for fitness is how hard you can push yourself; market comps are no different. Once you have collected, analyzed, and compiled results, your middle management team must present it to the senior management team. Now we are ready for fireworks! This is the missing element of most firms. You must take all this hard work and set aside time to discuss each community and product line at all levels, and you must crunch the date into a useable format and calculate the best pricing accordingly.
The coming months will provide fertile ground for the builders and developers who are skilled with this type of methodology. If you are not skilled, most likely you will suffer the consequences of poorly positioned product, lower margins then you should secure, and a general lack of confidence in your pricing. Keep in mind, as a builder, your first priority is to understand your position in the marketplace. You must be confident to negoitiate, and this methodology gives you that confidence. You must be adaptable, but you must adapt as your primary research and secondary data advise. The understanding and analysis of the data that is available is critical for your continued and improving success in the most disrupted, distorted, and confused housing recovery since I began my housing career in 1986.
Do not be clueless about your local submarket and do not rely on others to tell you what is going on in your marketplace. Your team MUST be the source of primary research, and then you can merge data from the market research companies such as John Burns, Myers LLC, and Metro Study, to name a few. The professional builder understands that the political economy is layered like an onion: global, national, regional, city, sub-markets, and then your community followed by the product you put on the lot. If you do not have the data to tell which type of interior hardware you should have in your homes, including style and finish—then you have failed the Tarabulski Test of Professionalism in regard to market comps. I love the saying, “Sometimes we get what we deserve, even though at the time we were clueless about the train coming right at us.”
Ultimately the builder has to KNOW his market and keep track of how it ebbs and flows. You must be able to drill from 30,000 feet through all the layers of the onion down to the brushed nickel levered door handle. I beseech all members of the building community to teach the next generation about market comps and understand that none of us should rely on the chief economist of any organization, the Fed Chair, or others to get a complete and accurate read of the market. You must have boots on the ground, and you must adjust as needed to improve margins and prosper in all market conditions. Do market comps well, and we will all be better off individually and collectively. Weave the market comp process into the essence of your organization’s best practices. Now get to it.
Noelle Tarabulski is CEO of Builder Consulting Group, Inc., a consulting firm based in Lakewood, Colo. She can be reached at [email protected] or 303.215.9100x21.