This post is going to be a shift from my usual approach of trying to explain what I believe to be the best solution for most home builders on a given topic. Instead, my aim here is to help inform as many different sides of the discussion on this sensitive topic as possible so that each company can arrive at the solution that is best for them. There can be no revenue without sales, but all revenue is not profitable. I will continue to update this guide based on your feedback and on what we are hearing and seeing happen in the industry, so bookmark this link for easy reference in the future. Newer additions will be placed at the bottom of the post to keep things in chronological order.
Last Updated on May 5th, 2021
Some have mentioned that this isn’t all that different from other great markets in recent memory. I’m not sure how accurate that is before 2003 (when I joined the industry), but I can tell you that this is not like 2006. Sure, there were mythical stories about long lines and bidding wars in California, Phoenix, Las Vegas, and other top markets – but the breadth of this market peak is astonishing. Builders in Ohio, Louisiana, Iowa, and Utah are all in the same situation. The supply and demand equation has broken down in nearly every marketplace in North America. At Do You Convert, we work closely with builders operating in over 40 different states in the U.S., and roughly 90% of our builder partners have several communities on some form of wait list or restricted sales plan. 45% are in this scenario for every community they have across the board.
Price increases often seem to fail as a sales limiting tool, and that has led to a plethora of different reactions to gain control and balance cost increases, home site availability, and sales pace. Each approach has the same primary goal – profitable sales. The stories and examples could be endless, but here are just a few we’ve seen firsthand: – “Close all model homes and only start inventory for the next 90 days.” – “We have a 6 week wait time for an appointment due to demand. Prospects are connecting online and offering up to $200 to trade appointment times for something earlier.” – “All sales are paused for 60 days to give production time to catch up.” – “We need to cut expenses across the board AND pause sales in order to try and regain profitability.” – “Every community can sell only 1 home a month until further notice.”
Ironically, this echoes of a completely different time period – the Great Recession (2008-2010) in one important way. Every good sales manager or VP during this time learned the fine art of trying to get any sale possible while also making sure the sales made were profitable. More than once, I heard an owner say some version of the following “I’d rather trim the size of the company to what it needs to be than sell homes for practice or worse – lose money on the deal.” This balancing of sales volume with profitability is about the only way that these two time periods are similar, yet it does mean that once again sales leadership is negotiating with the c-suite to try and find a way for their team to continue selling in the best housing market ever. Top leaders do not shy away from this profit accountability – they continue to personally grow and adapt while guiding their team through the changes.
Instead of thinking your boss has lost their mind when they roll out changes to how homes are sold, I recommend digging deeper if you want to be invited to be part of the decision-making process in the future (hint – you do! This is always better!). Let’s start by considering the risks that must be managed by your boss: – Home site availability – Costs / margins / profitability – Customer experience / product quality – Sales team psychology and compensation – Competition gaining market share Every CEO will give a different priority to each of these items, so I encourage you to have a conversation and ask them to rank this list for you. Understanding this will help you get on the same page, and hopefully avoid any disconnected communication with your teams. You may also need to help them understand the risks in areas they typically are less concerned about, so they have the best information to make a fully informed decision. Here is a brief overview of each.
Home Site Availability:You only get to sell a home site once, and replacing them takes a lot of time and comes with increased costs (ie: the next phase is more expensive). “Gapping” – temporarily running out of home sites – is incredibly stressful for a company because you can’t easily reduce expenses as you have to preserve as much of the “machine” as you can for when home site availability returns, but with some period of time where new sales can’t occur. It can feel a bit like trying to hold your breath while driving through a long tunnel for CFOs or financially conscious ownership. There is light at the end of the tunnel – if you don’t pass out from lack of oxygen first.
Costs / Margins / Profitability: Costs are rising faster than many companies can predict or control. Price increases often are making up for lost ground instead of getting ahead. The longer delay from the time of sale to the start of construction (when many builders can begin locking in material costs) makes controlling this even harder. Labor costs are equally unpredictable as builders lure away crews with bonuses and other incentives not accounted for.
Customer Experience / Product Quality: This is a put up or shut up moment for our industry. Selling without concern for the customer experience or end quality of the product has permanently damaged companies in the past, and will do so again this time. There will be a flood of negative press against the housing industry in the next year or so – don’t let your company be part of that narrative. There has been a LOT written and said about prioritizing the customer experience in home building – we’ll see how it pans out.
Sales Team Psychology & Compensation: If salespeople can’t sell for too long, or have nothing to sell – they are more likely to leave. Remember that salespeople may “feel” less necessary right now (this isn’t true by the way – they are still the primarycontact point of your company with the consumer) but they will be one of your chief concerns in a down market. (Note: this is the chief concern of sales leadership by default – don’t be surprised by the tension caused over this point)
Competition Gaining Market Share: The number one or two builder in any given marketplace often have outsized profitability compared to everyone else on the list. It is for this reason market share is often a concern – plus no one likes “losing” a sale to a competitor. While this is a primary risk in a down market (because market share is how you grow in a down market), it is less of a concern in a peak market. Why? Many home builders have gone out of business chasing market share at the expense of profit. 2008 – 2010 is littered with them. Everyone on the executive team needs to share a common understanding on this key point.
Risks are not the part of the equation that most people are fascinated with, but you need to fully appreciate them to make the best decision about how to move forward. Now that we’ve covered them, let us move on to the many different approaches we’ve seen builders take to navigate ahead. The order of these options is not necessarily an endorsement of one approach over another. In some cases, I will share specific drawbacks of an approach that has been shared with us directly by the builders using that tactic.
Priority List Without Target Dates: Salespeople continue to meet with prospects and help them determine the product that fits their needs and guides them on everything they can do to prepare for purchase. No specific dates for purchase availability are given, and instead, they are told to be ready to respond quickly when they get a call or email. No specific dates (ie: at the first of the month, we will release two homes for sale) means more flexibility for the builder to respond to market conditions as they change or as the capacity of construction ebbs and flows.
Priority List With Target Dates: Similar to the above, but specific dates are given for when releases will be made (ie: two homes released at the start of each month). This essentially functions as an ongoing / rolling Presale Without Fail campaign. One downside of this approach is that without careful management – everything else also begins to be limited. “Why does a sales person need to meet with a new prospect when the next 3 months of sales have already been identified?” is a question I’ve heard asked by leadership before. The reality is that market shifts will continue to occur – and you ideally want some margin in lead / appointment count (maybe not a lot – but some!) to make sure that if changes occur you can still hit your goals.
Reservations (with or without base pricing):Some very innovative builders have taken a page from Tesla who famously took $1k deposits on pre-orders for their cars that might not deliver for 8 months or longer. They have allowed home buyers to reserve home sites (with a refundable deposit) in future sections or communities up to one year in advance of them being developed. The key tactic here in today’s market is that they often are not giving base prices on homes until they are within a window of 60 days prior to start. This method keeps a backlog of highly interested reservations while also preserving margins because base pricing isn’t quoted until a future date when costs are more predictable. It also creates the chance for a smoother flow for the design studio, starts, and closings in the future. In current practice, over 80% of these reservations are turning into firm contracts and presales. While I can imagine a lot of builders will dismiss this option out of hand because of its unique approach, I can’t argue with the results we’re seeing. The big question here is how drastically the “stick rate” of those reservations drops when market conditions adjust.
Price Increases Every X Sales: This well-known process has worked well for builders in normal market conditions, but as I explained previously – it is hard to know what the right increase amount is with the veracity of the current market. Increasing by $10k every two sales doesn’t work if your costs have gone up by $12k or your homes can’t start until Q4 of 2021.
Lottery Release: The return of the lottery is happening across the country. While there are methods to try and make this more of a win-win scenario for the builder and buyers alike, my main concern is still that taking the sales path down a game of chance can make prospects feel like they have lost, and create dissatisfaction that might not serve you well in the long run.
Ebay – Home Builder Edition: We’ve heard reports of some builders choosing to use an auction format for all homes with a minimum bid amount to start. I’ve been told that some “winning” bidders immediately express remorse that they’ve overpaid, and that conversion to sale on these isn’t living up to what had been hoped for. Proceed with caution, but also see our best practices around using this approach below in our May 5th update.
Sell With Escalation Clauses On Costs: If costs rise over a given threshold, then the builder can come back and raise the purchase price on the buyer. This approach works if your buyers are qualified enough to have the ability to absorb these increases and your sales team is proactive and transparent on communication. You can’t slip this in quietly and then call customers two months later and tell them their price has risen by $40k without getting some really bad online reviews. You must keep them informed every step of the way until costs are locked if you go down this path.
Pause Sales Entirely For A Set Amount Of Time: Some are choosing to simply hit the pause button for 30 – 90 days to catch up with their backlog or to wait and see how costs adjust. Others are using this time to start inventory homes that will not be sold until they are beyond drywall when costs are 100% known, and the value of the home is (hopefully) at its peak if market conditions persist. Of course, rolling this out to your sales team will not be easy, and consumers will still expect the ability to speak with someone even though nothing can be sold.
This is a challenging time as builders struggle to balance all the risks of the market with the need to be profitable and protect their future opportunity for growth. I hope this guide serves as a discussion point for teams to consider before knee-jerk reactions are made. In all things, consider both the current market conditions as well as how those decisions will affect your organization when the next market correction comes. Overlapping those two worlds as much as possible with the best strategy is your key to long-term success. Today’s challenges and opportunities will give way to tomorrow’s challenges and opportunities. Stay nimble. Is there something you think should be added or an additional question you’d like to hear our input on? Reach out and connect – I’d love to hear from you!
Update for May 5th, 2021
Just over 60 days after this guide was posted a lot has changed. Roughly 50% of the builders I’ve connected with (who represent over 12.6 million unique users to their websites each month) have selected to not sell inventory homes until framing or drywall is complete. Most have also decided to not sell any pre-sales until commodity and labor prices stabilize (don’t hold your breath – this is not right around the corner). Inventory homes can be permitted and started when possible based on the backlog of sales already made in prior months. Those who capped sales earlier have more capacity than those who sold without limits.
Inventory being built without a customer allows for a smoother customer experience post-sale, quicker build time, and improved margins – but how to sell it? Surprisingly, the majority of builders I’ve spoken with are selecting to sell inventory by allowing offers or bids to come in versus a set price. I will explain the pros and cons of each, but first I want to thoroughly explore some best practices that have bubbled up around running an offer / bid system.
The least chaotic way to proceed with an offer / bid program is to require all those who wish to participate to be pre-qualified by your preferred lender. You do not need to require them to use that lender, but it helps to know that you can trust that the buyer is truly qualified by someone you trust. At DYC we have heard many stories of prospects not disclosing a bankruptcy or other information until after they have won the bid. This is a waste of time and energy for the builder, but also confusing and potentially damaging to the psyche of the other bidders who “lose” only to find out the winner can’t proceed. You really want to select the best offer the first time.
Next up – web form submissions vs written (or digital) signed contracts. Web forms are easy to implement but lack vetting of the information that is sent. If you only allow those parties pre-approved by your lender to use the web form, then this mostly works. You still run a greater risk of the winning bidder not following through with a signed agreement though – because you are adding more steps to the process after the bidding period is over. Anything can – and will – happen. It is highly advised that you consider using written or digital (think DocuSign) contracts and also require some form of hand money as part of the bidding process. This allows the winning contract to be counter-signed and ratified without additional back and forth. If you think this sounds suspiciously similar to how the used home market operates in a multiple offer scenario – you are correct. You can’t just call an agent or broker, or fill out a web form, and say “I’d like to make an offer.” If you do – they will tell you that offers come on “paper.” Using web forms that don’t have significant logic or contract language built-in often increases confusion for both external and internal customers, and that shouldn’t be something we make even worse right now.
The third best practice is to have the bid be on the home site premium, and not the sticks and bricks themselves. This can potentially save on commissions to both internal and external agents (many builders only pay on the base price on pre-sales and on the base price plus options on inventory). It also helps you keep a distinction between what you believe the house to be worth and where it is ultimately bid up to. If a home owner comes back to you in 2022 and complains that the price for their floor plan has come down a bit, you can point to their bid on the home site premium as what drove the price up above where you are now selling. There are more benefits here, but I want to move on to the final recommendation.
Don’t dramatically increase the starting price for a home based on where the last one sold during a bidding war. Doing so puts greediness on display to your prospects. For example, if you offer a Stanford for $400k and the winning bid is $460k do NOT set the starting bid for your next similar floorplan at $460k. Start it at $410k and let the market be the “bad guy” that bids the home up to $460+ again. This might feel too subtle to matter, but it does to today’s buyers. Keep your initial price where you believe the consistent market value is or at the margin you need to hit, but don’t just chase the last highest bid or you’ll be pegged as one of the “builders who only cares about profit, not their customers.” The other upside of this approach is that if you list the next home at $410k and it comes in at $430k you will know before your competition when the market is becoming more balanced.
Now that you know how to run an offer / bid program smoothly on inventory homes – does that mean you should?
(additional thoughts will be added soon)
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