Bonnie Alfriend, MIRM Charles Graham, MIRM Daniel Levitan ... · Bonnie C. Alfriend, MIRM...

International Builders Conference Orlando, FL

January 2006

Minimize Risk – Maximize Profits

From Land Acquisition to Final Home Closing

Bonnie Alfriend, MIRM Charles Graham, MIRM Daniel Levitan, MIRM

Minimize Risks Maximize Profits From Land Acquisition to Final Move-In

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Bonnie C. Alfriend, MIRM [email protected] Bonnie Alfriend is President of Alfriend Sales & Marketing Solutions, a consulting and training firm, serving builders, developers, and sales and marketing executives. As a former homebuilder Bonnie is known for her unique ability to reduce overhead while maximizing profits through effective sales and marketing strategies. She is best selling author of Secrets of The Superstars and New Home Sales Management. Bonnie is the recipient of NAHB/NSMC Trina Ripley, Excellence In Education Award. She is a frequent speaker at National & International Builder Conferences as well as a principle instructor for all IRM courses. She is past president of The Institute of Residential Marketing. She is a lead author on ‘Effective Marketing on a Shoestring Budget’ (EMSB) and ‘Certified New Homes Sales Professional’ (CSP) for NAHB.

Charles G. Graham, AIA, LAI, MIRM [email protected]

As the principal of Newton Graham Consultants, Chuck directs all feasibility and marketing assignments as well as general management consulting in the areas of strategy development, organizational structuring, control systems and financial management. He is past Chairman of the NAHB National Sales and Marketing Council, and past President of The Institute Of Residential Marketing. Chuck is the principal author and a national instructor for the Institute’s required course Marketing Strategies Budgets and Plans. He is the recipient of the National Association of Home Builders ‘Trina Ripley Excellence in Education Award’ and co-author of “From Plan to Profit, published by the Home Builder Press of NAHB. Daniel Levitan, MIRM [email protected]

Daniel Levitan is President of Levitan & Associates, a Florida-based strategic consulting firm serving builders, developers and lenders nationwide. He is acknowledged as one of the country’s preeminent strategists for residential development providing feasibility analysis, valuation determination, community positioning and optimization studies, marketing strategies and 0ongoing implementation assistance for properties throughout the United States, Canada and the Caribbean. Levitan has numerous professional designations and has served as multi-term trustee and President of the Institute of Residential Marketing, Dan has been recognized for excellence by his peers as recipient of Florida Home Builder’s “John P. Hall Award”. The Institute of Residential Marketing’s “Excellence In Education Award” and the National Association of Home Builder’s “Bill Molster Award”.

Minimize Risk – Maximize Profits From Land Acquisition to Final Home Closing

“The Greatest thing in the world is not so much where we are, but in

what direction we are moving.” – Oliver Wendell Holmes In order to balance risk and reward one needs to be keenly award of market conditions and change while being cautiously aggressive to adjust ones business plan to accommodate those changes. Be careful to balance your vision with value. Volume in and of itself does not necessarily generate more profits. Let’s take a look at several areas that can and will put you on the cutting edge to Minimize Risk and Maximize Profitable Revenue in 2006 and beyond.

I. The Market: Challenges and Opportunities II. The Competition: Out think them don’t out spend them III. The Customer: Attitudes and Lifestyle Changes IV. The Company: Strategic Plan of Attack 4 P’s of Marketing – Product, Price, Place and Promotion


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I. The Market: Market Conditions and Future Outlook: What’s really going on in the housing market? Is the residential real estate market growing or shrinking, are consumers confident or miserable, is the home building industry full of fluff or substance, are we positioned for feast or famine? How does one truly know the Big Picture? With the increase interest in housing and real estate investment, unfortunately it is harder to distinguish reliable, accurate information from just hype. In the next few years many housing markets in the U. S. will level off if for no other reason the supply of new homes out number the demand for new homes. The time for serious business planning is NOW. Most economists agree that depending on market driven success for the future will be a big mistake One can never know too much about the marketplace, housing cycles, job formations, and future opportunities. The key to understanding The Market is knowing your Customer, your Competition and your Company. To assist homebuilders in getting it right NAHB continues to provide a multitude of services and resources for the Housing Industry. According to Jerry Howard, NAHB executive vice president and chief executive officer, “we created Housing Facts, Figures and Trends to provide a convenient and accurate resource for members, the media, investors and others.” To access the online site go to www.nahb.org/fft. Some of the major sections include:

Latest NAHB reports Housing Economics Senior Housing Multifamily Housing NAHB Facts and Photos Green Building

Tips To Keep Your Eye on The Market and You In The Game:

♦ Resale Homes: Monitor housing trends in the resale market: Days on market – asking price compared to selling price. Your greatest competitor is not the builder down the road. Resale homes out sell new homes in every market. The resale market determines housing pricing. Consumers will pay more for a new home. However, there is a limit to how much

more they will pay; generally around 15%. Housing trends in resale homes precede new home trends by around 120 days. The pace of absorption in resale homes is good barometer for how business is evolving. In many markets there is an excess of homes for resale – your first indication for a slowing market.

♦ Housing Cycle: Each market differs in the intensity of each stage in the cycle. In a down

cycle watch your supply. A good rule of thumb – keep your housing offerings no more than 90 days of absorption. For example if you are selling 8 homes per month you should have no more than 24 opportunities or choices for potential buyers. Otherwise you are competing with yourself. Grand openings last week in December may not be your wisest choice.

♦ Job Growth: Growth in household formations is driven primarily by increase in new jobs.

Know both the quantity and the quality of jobs entering your submarket. Keep in mind the changing demographics in the job market including work from home opportunities and telecommuting. When jobs start to shrink immediately go to contingency Plan B.

♦ Economic Factors: Certainly rising interest rates is of concern. Rates impact first time

home buyers as well as move up buyers’ dependant upon selling their home to buy up. Multifamily neighborhoods that have been on the increase in recent years will feel the pressure to change their focus to a different target market, such as active adult market where interest rates are not as much a concern. Work with your preferred lenders for creative mortgage plans. Consider buyer assistant financial incentives rather than product incentives.

II. The COMPETITION: Tips To Out Smart Not Out Spend Them

According to NAHB Economist David Seiders the housing market is poised to recede from

peak levels. It appears that absorption levels are beginning to plateau albeit at a healthy pace in many markets. What does this mean for homebuilders? Quite simply; market share will be lost thus driving a fierce need for gaining a better competitive advantage. Fierce competition continues to demand


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more and more market share. In a business with small margins and growing competition the burden is on every builder to develop strategies to increase revenues while cutting cost without jeopardizing quality, image, and integrity of the company. When the going gets tough, the tough shop their competition. Evaluate your competition often to position yourself.

Analyzing your direct competition – their strengths and weaknesses – is an essential part of

positioning your community and product. This analysis should involve both sales professionals and management. In fact every team member needs to be acutely aware of what the competition is offering. Evaluating the competition is one of the most important assignments for the salespeople. Without it there will be missed sales opportunities and lost profits. Competitive analysis should be an on going task of salespeople. Competitive Research

♦ Survey all the active projects that could be considered competition for the buyer profiles you are anticipating for your site.

♦ Ask for two brochures, one to take notes as you walk through the models. The other one to be used for company planning meeting.

♦ Confirm base pricing for each plan and ask about lot premiums. Inquire when the last price increase occurred and how much.

♦ Try to get the options list and pricing for those extras to help you in comparing your community prices for the same items.

♦ Confirm the lot sizes (dimensions and square footage). ♦ Inquire about financial incentives to the buyers and if there are any assessments (homeowner

association dues, bonds, etc.) ♦ Determine the top 2 or 3 options that 80%+ of buyers include. This is a great opportunity to

evaluate your pricing strategy to include those items even with a price increase. ♦ Find out which plans are the best selling and why. ♦ Note the quality of the neighborhood signage program, entry statement, site condition, sales

facility, model complex, and model merchandising. ♦ Conduct a comparison of the standard and optional features for all competing

neighborhoods. ♦ Determine the inventory level of remaining homes and lots at the competition and divide the

combined monthly sales rate of these projects into the number of homes and lots to identify the months of inventory in the market. Be concerned if there is more than two to three years of such inventory.

♦ Evaluate the salesperson and how you were handled during the process. III. The CUSTOMER: It is all about THEM

Stage of life for many Americans have changed drastically with the aging baby boomer population. The power of the Active Adult market has changed the focus of most homebuilders and will continue to do so for years to come. Not only are we living longer today we are living differently. 3.4 million Americans will turn 60 years old in 2006. And they are ……

Aging in place Needing for more storage Needing one level living Needing flex space rather than bedrooms Needing double master suites Needing guest suites Needing home office/ hobby room Needing to be close to services Needing low maintenance Needing convenience and ease of living Some additional facts that will impact not only the way you do business but what you build:

2000 – 41% 1st time home-buyers were single 2000 – lst time in history single person households outnumbered married couples with

children. In next 10 years, one of every nine homebuyers will be an immigrant – 10% of your

marketplace Mass customization – Your product and service must be tailored to the interest and needs of

your targeted customers Entertainment and learning centers need to be focal point to your design. Technology controls: Getting wired for the 21st century is necessary to meet needs. More concerned with appearance from outside in. Will pay more to get what they want. Love the ‘sizzle’.


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IV. The COMPANY: Who Are You?

First and foremost a building company must know who they are, their capabilities, and perhaps most important how they are perceived in the marketplace.

Small builders perform very well against larger competitors. They are better positioned to realize higher returns on assets; earning a larger percentage net profit. Remember with size comes overhead – Vice Presidents do not build or sale homes. The key is to first be realistic about your company, your market, your customers, and your competition. Secondly, have a strategic plan that directs each decision and action to a profitable conclusion.

♦ Brand Your Company: Create your own mission/positioning statement. ♦ Develop unique characteristics that set you apart from other builders ♦ Brand Your Image: Design a world class builder story about your company and homes

that set you apart from your competition. When using words like quality and value made sure you back it up with specific facts and benefits.

♦ Understand that your vision must equal value to the customer.

Evaluate Your Company

List the 3 things that you do better than anyone else. Know your greatest weaknesses as a company. Describe your passions/visions as a home builder. Is your passion/vision in line with changing trends, lifestyles, behaviors

of your buyers? Balance your vision with value – value sells. Make sure everyone on your team know your vision and passion. Has everyone on your entire team made the company mission a part of who they are? Be honest about your future delivery capabilities.


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Know what consumers in your market value about you. Know what they devalue about you. Know what your competitors fear about you. On a scale of 1 – 10 where does customer service/satisfaction fit in your

Business Plan?

Every decision in your company should reflect your vision and mission in a positive manner.

Team: It has been said that a company is only as good as its weakest member. There certainly is a great deal of truth in that statement. Having a world class team will secure your profitability. If you want to be the best – hire the best. Each person on your team has the ability to lose business and revenue for your company. Your entire organization must have a sales and customer driven mindset. This is not the exclusive responsibility of the sales and customer satisfaction departments. Customer Satisfaction Begins with Internal Quality and Satisfaction of Your Team.

4 P’s of Marketing: With more competition for market share it is paramount to evaluate each of the 4 P’s of marketing for every project built by your company. Finding that “sweet spot” and balance with your product, place, price and promotion is key to your success.


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Product Opportunities: Another effective way to minimize risk and maximize return on your investment is to build to your customer’s desires and needs. Keys to Revenue Producing Product Strategies Active Adult Market: Consider changing product design to meet needs of Active Adults. Exterior: Do not neglect your Exteriors. Buyers make a decision to get out of their car based on the exterior appearance. The most cost effective visual amenity to your neighborhood is a world class landscape design. Try taking a couple of dollars from the inside to add drama to the outside of your homes. Interior: Flex rooms are in. Changing demographics and household formations have increased the need for alternative uses of space. You will attract a larger segment of the market with more flexible footprints and alterative plans for room allocations. Denser product: Urban growth and city living brings new opportunities for homebuilders as the suburbs become satiated with product. More challenging sites and innovated designs in condominiums, town home, lofts, and villas, as well as single family homes on smaller lots bring more redevelopment opportunities involving environmental cleanup.

• Include features that matter most to your target market. • Option up inclusions that are not as important to your customers • The #1 Measure of quality in mind of consumers is Kitchen Cabinets.

Upgrading cabinets in model can increase perceived value for your visitors. • ‘Wood Is Good’ – use it as often as you can. • Natural Materials or ‘look a likes’ are favorite choices. • Go ‘Luxury’ in every price point. • Integrate the latest features from your manufactures.

Control Material Waste:

Eliminate Waste and Excess Material Usage Develop scope of work for subcontractors Police diverted materials Watch for excess materials installed Return extra materials for credit immediately Value Engineer Plans Implement material and labor saving techniques Gain control of Construction Slippage


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Partner with other small builders to control your subs and keep them loyal to your needs.

Place or Location This is a great time to explore niche products or needs in your market that have not been met. Small builders have an added advantage of changing more quickly with market shifts. Urban Opportunities: People want to be close to the things they love; work, social, recreation, etc. Rising costs of gasoline, growing singles market, and more demands on ones time are driving many back to city living. Unfortunately, in many areas the average family cannot afford the single-family home on a large lot with a big backyard. Many are making trade-offs. Note: In major metro areas in U.S. married couples with children not longer dominate the suburbs. Tips for Winning Places:

Select a Site That Captures Your Attributes and Your Product Build across from the ‘Big Boys’ Value Index each lot to maximize the price for sun orientation, uniqueness, vistas,

views, & size Do not market the best sites within your location first Regularly create excitement and freshness from the outside. Create Sizzling Budget Sensitive Landscape Design Maximize the appeal of your land plan, streetscape. Make sure your entry creates excitement. Keep sites clear and free of trash Clearly mark all lots – site homes Keep signs clean and visible

Builders with the growth potential to diversify into multiple markets should seek markets with strong growth and appreciation potential with limited risk. In 2006 it is imperative for builders who diversify in multiple markets to direct more monies into markets where job growth is strong and demand continues high and supply low.

Price: Develop a pricing strategy that represents value for the consumer. In a free-market economy, cost doesn’t determine price. Prices are established by market forces-such as the competition and how much consumers are willing to pay. Your costs cannot be passed on to consumers in the form of higher prices unless there is apparent value to your customer in those increases. In good times don’t get greedy. Watch your price accelerations – Consider smaller increases more frequently to create urgency. In tight times don’t discount. Caution should be taken to not get caught up in the frenzy of escalating prices faster than consumers can handle both financially and psychologically. As the market slows inflation of pricing is unlikely to continue. Protect values for those already there – do not discount or give away precious dollars in your base price. If you find yourself overpriced in a declining market consider alternatives to discounting prices. Take a look at your included features and your option features. Add perceived value by including most desired appointments and upgrades or offering financing/closing cost assistance. . Financial Results: Small builders and developers generally prefer a steadily appreciating housing market with predictable revenues and expenses. It certainly is easier to build wealth over an extended period of time and thrive in plentiful housing markets that are not subject to wild swings in values. It is essential for homebuilders to limit their downside risk and maximize profits in all phases of development with each community and project. Promotion: The rising cost of building materials, up 5.9% in September, 2005, has placed added pressure on marketing strategy and budget. No longer can one use a “shotgun” approach to attracting qualified buyers. Costly dollars may have been wasted on advertising that did not convey the uniqueness of the builder’s proposal to consumers who value that proposal. Unfortunately, when the market slows and cost increase the first thing to be reduced is the marketing budget. This is the time that one may need additional dollars to target a specifically defined target market. More importantly we need to track our true source of buyers – not traffic. Cost of traffic is


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interesting but the real test of marketing effectiveness and sales conversion is the cost of each sale.

♦ Become involved in every aspect of the marketing plan even when using an outside firm for sales and marketing.

♦ Reduce the number of merchandized models. ♦ Organize a vibrant Realtor Co-op program ♦ Hold budget sensitive on-site events. ♦ Reduce size of ads – repeat for 3 weeks off for 2 weeks. ♦ Reduce the cost of each buyer with quality salespeople. ♦ Use testimonials from satisfied customers. ♦ Generate an ambitious public relations campaign. ♦ Keep your eye on the overhead. If it does not create a profit leave it out. ♦ Gain Market Dominance in your specialty. ♦ Cut out marketing costs that do not bring results. Just because it worked in the past it may not

be working now. ♦ Consider changing marketing allocations to address the increase of internet use.

Sales:


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Your greatest asset for 2006 may not be your place or product but rather your sales team. This is not the time to go for the lowest bidder.

♦ Beware of the salespeople who made their fame in great times – they may not be able to survive in challenging times.

♦ Hire CSP graduates ♦ Make sure you have the same person/s assigned to each project. ♦ If sales personnel are not working out – cut them swiftly. ♦ Hold sales team accountable and responsible for prospecting for leads and following

through with each and every customer – Use 1/3 rule. ♦ Get involved with sales – visit your sites and spend time with sales people. ♦ Listen to the sales team. ♦ Make them a part of your decisions making.

Cost to bring in one traffic unit X traffic units per sale = Cost of Each Buyer Re-capture Investment by:

Diligent follow up to convert Tap into their network for referrals Generate positive testimonials

Generate sales momentum by creating urgency on site. 1. Physical elements that affect a sense of urgency ♦ Show maximum sense of visual activity ♦ Internal and external signs ♦ WOW entry statement ♦ Positive image from front gate to end ♦ Minimize Available opportunities – no more than a 3 month supply ♦ From grand opening to grand finale celebrate a “happening” each week II. Sales Environment – Model Homes ♦ Keep them fresh and exciting ♦ Watch your sold/available buttons – don’t look like a desperate builder (seller) ♦ Phase in “neighborhoods” ♦ Keep magazines, calendars current ♦ Remember most buyers are return visitors ♦ Narrative selling: Have new stories to share ♦ Show high level of community activities

♦ Feature target your “future model homes” (speculative inventory) ♦ Tie all print campaigns to point of sale ♦ Change accessories, update colors when dated ♦ Display Testimonials from Satisfied Buyers ♦ Gear up a Public Relations Campaign ♦ When you get a sale, ring the bell ♦ Use camera: pictures are priceless ♦ Use all the senses: smell, sight, sound, etc. Change is occurring in our industry from a cooling of home pricing in some markets to slowing of traffic in others. Wise builders are poised to run their business efficiently and effectively while managing cash flow carefully. The housing bubble caught many off guard and the shear rush to acquire land and deliver housing brought about some costly mistakes that can no longer be tolerated. Increased margins can only come with a keen knowledge of strategies and tactics to minimize risk and maximize profits.

Bonnie Alfriend, Charles Graham, Daniel Levitan


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Bonnie Alfriend, MIRM Charles Graham, MIRM Daniel Levitan ... · Bonnie C. Alfriend, MIRM...

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