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Surviving the Housing Market Chill
Builders have made news with deep discounts and incentives to get rid of growing inventories. But what are the options for the average-size production builder who wants to stay competitive? The key to staying afloat — and perhaps coming out on top in your market — is focusing on brand identity.
The once-hot housing market has cooled considerably in the last several months. Builders have made news with deep discounts and incentives to get rid of growing inventories. But what are the options for the average-size production builder who wants to stay competitive? The key to staying afloat — and perhaps coming out on top in your market — is focusing on brand identity and product quality while keeping your sales staff well-trained and able to convey what you want to your buyers about your homes. It's time to get back to the basics.
It's hard to argue against discounting as a method to increase sales of any product — at least in the short term.
"What it's becoming is a buyer's market," says Tara Speaks, MIRM and a sales professional with Venture Homes outside Atlanta. "Sure, builders are going to attract people by discounting. The buyers are going to feel that they are getting a deal."
Discounting has value for housing giants who need to meet Wall Street targets for volume and can afford to pay less attention to profits short-term.
"The public builders are clearly making less money because of the incentives that they are giving," says Richard Elkman, president of Group Two Advertising, a Philadelphia agency that works with builders. "They have that tremendous luxury that the little guy doesn't have. The big guy right now is causing tremendous problems for the other builders."
"A competitor in my area has dropped prices as much as $300,000 on a single home," says Carolyn Villani, MIRM and vice president of sales and marketing for Paramount Homes in Jackson, N.J. "You really can't compete with that. You hope they sell out quickly."
"In many cases, the big builders — whether they be the nationals or regionals — represent maybe 50 percent of the homes sold in many markets," Elkman says. "When they end up running ads like Lennar did — 'Make any reasonable offer,' or when Mercedes and others are saying '$10 million in added incentives,' what happens to a guy who's building 25, 50 homes a year? Their $10 million for this guy would be $200,000. He doesn't have that luxury."
Builders advertise incentives such as free furniture, delayed payments and tax freezes to entice potential home buyers.
But discounting is a balm that even large builders should apply cautiously. It has not always worked out the way builders have expected.
"We had major builders taking $100,000 or $150,000 off," says Bill Herring, a home sales trainer and management consultant in Jacksonville, Fla. "A lot of reports I got were that it wasn't very effective. They didn't sell very many. The public said, 'Whoa, what's wrong with this picture? How far out of whack is this?'"
"If you're discounting too much, it makes you wonder why," Speaks says. "You're sacrificing your [perception of] quality. 'What, nobody wants these homes? What's the reason? Why are you really offering 20,000 off?' It can be perceived as a negative in the consumer's eye."
Builders must be aware of the impact of today's discounts on the equity of yesterday's buyers.
"When you start discounting price, and you've previously sold homes to individuals in the same community, what you've just done is stolen their equity," says S. Robert August, a real-estate sales and marketing consultant in the Denver area. "There's an old adage — take my first born, but don't take my equity!"
"We don't want to devalue a Paramount Home," says Villani. "With some of our competitors, one person could have paid $800,000, and the person next door will pay $500,000 for the identical house. That's very discouraging. We absolutely don't want to do anything like that. We're not going to have as many sales as we'd like to have. But we'll hopefully keep everything going in a manner where we keep our credibility going."
"I know places where they started to do that, and they lost people who were in the mix," says Herring. "'You give me that low price, or I'm going to walk. And they did."
Discounts affect future equity and current appraised value — a problem when buyers try to get a mortgage.
"Once you start devaluing the property, you lose the appraisal benefit," August says. "It takes a long time to recover. You may not be able to close. The home that you were buying at $250,000 is now being offered for $200,000. You needed $225,000 for a mortgage. If you can't get the higher appraisal, you may not be able to get a loan. You've told them before that you were going to take good care of them and be a good steward, and be a participant in the community. But when the market goes south, they don't take care of the customer. They take care of their business."
Large builders can afford to offer deep discounts and incentives, but its not so easy for the small and medium-size builders.
There are ways other than price reductions to boost sales.
"I encourage builders I work with to look at ways where they can add value to the product," says Jack Gallagher, MIRM and area manager with the builder division of American Home Mortgage, "maybe by enhancing the purchase with upgrades and options that the builder doesn't necessarily pay full price for but can still have a margin on it."
"We make more money percentage-wise in the upgrades than we do on the base price of the home," says August. "A builder is fortunate if he can earn 10 percent after everything has been paid. But if you wanted to add a patio and a roof tent on the back of your home, those things you can mark up like crazy."
Financing incentives are a popular way of increasing sales by lowering monthly costs for buyers.
"Back in the day, we called it a buy-down," says Gallagher. "It's when the builder purchases a block of money and guarantees a lower than market interest rate for his home buyer."
"In Atlanta, we've been seeing a lot of financing," Speaks says. "A lot of it has been special interest rates, or no payment for a month, or for a year, or if you buy in this community and use our lender, you won't have to pay closing costs — things of that sort."
Compounding the market problem is home buyers' difficulty in selling an existing home. Industrious builders are finding ways to address this concern.
Herring recalls one builder in his area that has offered to pay the interest on its buyers' loans until their houses sell.
"They get a couple of sales out of it," says Herring. "It's about how you approach it that solves the problem for a specific buyer."
And it is possible for a builder to pass down a lower interest rate to its buyer, and to the buyer of that buyer's home, and so on.
"You take that financial incentive and offer it to that next person in the chain," August says. "There might be two or three buyers in the chain where you can continue to offer a financial incentive. In the case of the builder that owns the mortgage company, they could get two or three new sales."
There are certain things builders ought to be doing whether the market is hot, cold or tepid. One is to focus on their brand — something that often gets lost in the rush to concede on price. Builders who discount may have to work harder to convince buyers that they are quality builders — not just the builder with the best deal.
"Quality comes with a price," says Villani. "Paramount builds a quality home. That is the reputation we have and would like to continue. So you will pay a little more for a Paramount home, but hopefully you will have fewer issues with that Paramount home as far as repairs, and so on."
"Differentiate or die," says Elkman. "The small builder has to try more than ever to find ways to differentiate their home from the larger builder. "If I was being real aggressive, I'd say, 'We don't have to meet the sales demands of Wall Street or of a board of directors. We make our own decisions that affect us. We've worked hard on the design. We live in the community. We're here to answer your questions.'
"All those things build credibility so that when the person makes the final decision between several builders, they will consider that smaller builder. I would attack the bigness."
It's easy to forget about product improvements when sales are sluggish, but that's probably the time they are most needed.
"Continue to do your research and be aware of the product you're building,' August says. "In a downturn, very few companies continue to design new product, pay attention to the research, and do what they can to build the best possible product at the most affordable price. If you continue to design and build the best possible product, you're going to overcome any and all obstacles."
"The salespeople have a responsibility to the developer to let them know what the public is saying, what their needs are," says Villani. "A builder can't live in a bubble and say, 'I'm going to build this kind of house. What's everybody else doing?' It's not what everybody else is doing, because maybe everybody else is on the wrong track. It's what the public is telling you right now."
Many salespeople came into the industry during the housing boom, when making the deal was fairly easy. The now-cool market has left some unprepared.
"We've had two kinds of salespeople over the last few years," says Herring. "We have people who probably knew their craft but they atrophied. There wasn't anything to do. They were just flipping coupons. You don't stay sharp doing that. And then there are people who got in the business who never were salespeople. They surely don't know what to do now, which is why we have the exodus of people leaving the industry."
"For the most part these people haven't been trained," August says. "They've been given a retail store, if you will, and told to go out and mind that store and get as much gold out of it as you can."
During the boom, "Everybody was busy trying to build houses and collect money," says Herring. "I and others I'm sure were screaming, 'You better start training the people and getting the sales managers in the field, because this is all going to turn. We're going to have $10,000 pilots in $100,000 weather and wonder why the plane is going down.'"
Herring says that in cases where sales teams receive some degree of training, many aren't held accountable for proper execution.
"We teach them what we want, but if they don't do it and they have a few sales, we don't do much about it," says Herring. "If you were to pick two of the greatest sales organizations in my lifetime, IBM and Xerox, and look at what they did, you'd see that they had very specific training on how they wanted sales done. Then they monitored you. If you didn't do it right and correct your mistakes, they got rid of you. I know that sounds terrible, but I don't want a surgeon who flunked a course three times. I think this is just as important."
"I hold training classes every week. I personally train my salespeople," says Villani. "It's very important to go back to the basics and really work hard and work smart. I'm out there weekly with them in the field. I go through their prospects with them."
"It's always frustrated me we don't keep the sales managers in the field working," says Herring. "Not because we don't intend to, but suddenly in the day-to-day they get busy doing other things. If we allowed that to happen with a ball team and when the time came to play the coach wasn't there because he was somewhere doing paperwork, would you expect to have a winning team? No. But we do all the time."
"Everyone in this game right now should be preaching that now's the time to buy," Herring says, in that overinflated prices in many places have leveled off and the market has corrected. "We're more concerned about inflation. And they may ding the rates again. So if you really want a home, now's the time to get it."
"It's not a time to get depressed," says Villani. "Or a time to say things aren't good. Things are just fine. It's a matter of readjusting. We, in a sense, have a couple of forks in the road. We all have to take a look at our product and what we're doing."
"I try to be their cheerleader every week," says Villani of her sales team. "I know how hard it is for them to take all that rejection. You have to respect them for the good job they are doing."
"We need to pick these people up," says Herring. "We really need to encourage them and motivate them. Every place I go, people tell me there are people in the models. To me, that is the sign. What are we doing with it?"