Minimize Risk – Maximize Profits From Land Acquisition to Final ...

International Builders ConferenceOrlando, FLJanuary 2006Minimize Risk – Maximize ProfitsFrom Land Acquisition to Final Home ClosingBonnie Alfriend, MIRMCharles Graham, MIRMDaniel Levitan, MIRMMinimize Risks Maximize Profits From LandAcquisition to Final Move-In1

Bonnie C. Alfriend, MIRMbalfriend@aol.comBonnie Alfriend is President of Alfriend Sales & Marketing Solutions, a consulting and trainingfirm, serving builders, developers, and sales and marketing executives. As a former homebuilderBonnie is known for her unique ability to reduce overhead while maximizing profits through effectivesales and marketing strategies. She is best selling author of Secrets of The Superstars and New HomeSales Management. Bonnie is the recipient of NAHB/NSMC Trina Ripley, Excellence In EducationAward. She is a frequent speaker at National & International Builder Conferences as well as aprinciple instructor for all IRM courses. She is past president of The Institute of ResidentialMarketing. 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, MIRMCgraham6@bellsouth.netAs the principal of Newton Graham Consultants, Chuck directs all feasibility and marketingassignments as well as general management consulting in the areas of strategy development,organizational structuring, control systems and financial management. He is past Chairman of theNAHB National Sales and Marketing Council, and past President of The Institute Of ResidentialMarketing. Chuck is the principal author and a national instructor for the Institute’s required courseMarketing Strategies Budgets and Plans. He is the recipient of the National Association of HomeBuilders ‘Trina Ripley Excellence in Education Award’ and co-author of “From Plan to Profit,published by the Home Builder Press of NAHB.Daniel Levitan, MIRMdlevitan@bellsouth.netDaniel Levitan is President of Levitan & Associates, a Florida-based strategic consulting firmserving builders, developers and lenders nationwide. He is acknowledged as one of the country’spreeminent strategists for residential development providing feasibility analysis, valuationdetermination, community positioning and optimization studies, marketing strategies and 0ongoingimplementation assistance for properties throughout the United States, Canada and the Caribbean.Levitan has numerous professional designations and has served as multi-term trustee and Presidentof the Institute of Residential Marketing, Dan has been recognized for excellence by his peers asrecipient 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 MolsterAward”.Minimize Risks Maximize Profits From LandAcquisition to Final Move-In2

Minimize Risk – Maximize ProfitsFrom Land Acquisition to Final Home Closing“The Greatest thing in the world is not so much where we are, but inwhat direction we are moving.” – Oliver Wendell HolmesIn order to balance risk and reward one needs to be keenly award of market conditionsand change while being cautiously aggressive to adjust ones business plan toaccommodate those changes. Be careful to balance your vision with value. Volume inand 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 toMinimize Risk and Maximize Profitable Revenue in 2006 and beyond.I. The Market: Challenges and OpportunitiesII.The Competition: Out think them don’t out spend themIII. The Customer: Attitudes and Lifestyle ChangesIV. The Company: Strategic Plan of Attack4 P’s of Marketing – Product, Price, Place and PromotionMinimize Risks Maximize Profits From LandAcquisition to Final Move-In3

I. The Market: Market Conditions and Future Outlook:What’s really going on in the housing market? Is the residential real estate marketgrowing or shrinking, are consumers confident or miserable, is the home buildingindustry full of fluff or substance, are we positioned for feast or famine? How does onetruly know the Big Picture? With the increase interest in housing and real estateinvestment, unfortunately it is harder to distinguish reliable, accurate informationfrom just hype.In the next few years many housing markets in the U. S. will level off if for no otherreason the supply of new homes out number the demand for new homes. The time forserious business planning is NOW. Most economists agree that depending on marketdriven success for the future will be a big mistakeOne can never know too much about the marketplace, housing cycles, job formations,and future opportunities. The key to understanding The Market is knowing yourCustomer, your Competition and your Company.To assist homebuilders in getting it right NAHB continues to provide a multitude ofservices and resources for the Housing Industry. According to Jerry Howard, NAHBexecutive vice president and chief executive officer, “we created Housing Facts, Figuresand 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 themajor sections include:Latest NAHB reportsHousing EconomicsSenior HousingMultifamily HousingNAHB Facts and PhotosGreen BuildingTips To Keep Your Eye on The Market and You In The Game:♦ Resale Homes: Monitor housing trends in the resale market: Days on market – askingprice 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 housingpricing. Consumers will pay more for a new home. However, there is a limit to how muchMinimize Risks Maximize Profits From LandAcquisition to Final Move-In4

more they will pay; generally around 15%. Housing trends in resale homes precede new hometrends by around 120 days. The pace of absorption in resale homes is good barometer for howbusiness is evolving. In many markets there is an excess of homes for resale – your firstindication for a slowing market.♦ Housing Cycle: Each market differs in the intensity of each stage in the cycle. In a downcycle watch your supply. A good rule of thumb – keep your housing offerings no more than 90days of absorption. For example if you are selling 8 homes per month you should have nomore than 24 opportunities or choices for potential buyers. Otherwise you are competing withyourself. 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 thechanging demographics in the job market including work from home opportunities andtelecommuting. When jobs start to shrink immediately go to contingency Plan B.♦ Economic Factors: Certainly rising interest rates is of concern. Rates impact first timehome 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 thepressure to change their focus to a different target market, such as active adult market whereinterest rates are not as much a concern. Work with your preferred lenders for creativemortgage plans. Consider buyer assistant financial incentives rather than product incentives.II.The COMPETITION: Tips To Out Smart Not Out Spend ThemAccording to NAHB Economist David Seiders the housing market is poised to recede frompeak levels. It appears that absorption levels are beginning to plateau albeit at a healthy pace in manymarkets. What does this mean for homebuilders? Quite simply; market share will be lost thus drivinga fierce need for gaining a better competitive advantage. Fierce competition continues to demandMinimize Risks Maximize Profits From LandAcquisition to Final Move-In5

Product Opportunities: Another effective way to minimize risk and maximize return on yourinvestment is to build to your customer’s desires and needs.Keys to Revenue Producing Product StrategiesActive 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 theexterior appearance. The most cost effective visual amenity to your neighborhood is a world classlandscape design. Try taking a couple of dollars from the inside to add drama to the outside of yourhomes.Interior: Flex rooms are in. Changing demographics and household formations have increased theneed for alternative uses of space. You will attract a larger segment of the market with more flexiblefootprints and alterative plans for room allocations.Denser product: Urban growth and city living brings new opportunities for homebuilders as thesuburbs become satiated with product. More challenging sites and innovated designs incondominiums, town home, lofts, and villas, as well as single family homes on smaller lots bring moreredevelopment 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 UsageDevelop scope of work for subcontractorsPolice diverted materialsWatch for excess materials installedReturn extra materials for credit immediatelyValue Engineer PlansImplement material and labor saving techniquesGain control of Construction SlippageMinimize Risks Maximize Profits From LandAcquisition to Final Move-In10

Partner with other small builders to control your subs and keep them loyal to your needs.Place or LocationThis is a great time to explore niche products or needs in your market that have not been met. Smallbuilders 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 manyback to city living. Unfortunately, in many areas the average family cannot afford the single-familyhome on a large lot with a big backyard. Many are making trade-offs. Note: In major metro areas inU.S. married couples with children not longer dominate the suburbs.Tips for Winning Places:Select a Site That Captures Your Attributes and Your ProductBuild across from the ‘Big Boys’Value Index each lot to maximize the price for sun orientation, uniqueness, vistas,views, & sizeDo not market the best sites within your location firstRegularly create excitement and freshness from the outside.Create Sizzling Budget Sensitive Landscape DesignMaximize the appeal of your land plan, streetscape.Make sure your entry creates excitement.Keep sites clear and free of trashClearly mark all lots – site homesKeep signs clean and visibleBuilders with the growth potential to diversify into multiple markets should seek markets with stronggrowth and appreciation potential with limited risk. In 2006 it is imperative for builders whodiversify in multiple markets to direct more monies into markets where job growth is strong anddemand continues high and supply low.Minimize Risks Maximize Profits From LandAcquisition to Final Move-In11

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 howmuch consumers are willing to pay. Your costs cannot be passed on to consumers in the form ofhigher 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 increasesmore frequently to create urgency.In tight times don’t discount. Caution should be taken to not get caught up in the frenzy ofescalating prices faster than consumers can handle both financially and psychologically. As themarket slows inflation of pricing is unlikely to continue. Protect values for those already there – donot discount or give away precious dollars in your base price. If you find yourself overpriced in adeclining market consider alternatives to discounting prices. Take a look at your included featuresand your option features. Add perceived value by including most desired appointments and upgradesor offering financing/closing cost assistance..Financial Results: Small builders and developers generally prefer a steadily appreciating housingmarket with predictable revenues and expenses. It certainly is easier to build wealth over an extendedperiod 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 ofdevelopment with each community and project.Promotion: The rising cost of building materials, up 5.9% in September, 2005, hasplaced added pressure on marketing strategy and budget. No longer can one use a“shotgun” approach to attracting qualified buyers. Costly dollars may have beenwasted on advertising that did not convey the uniqueness of the builder’s proposal toconsumers who value that proposal. Unfortunately, when the market slows and costincrease the first thing to be reduced is the marketing budget. This is the time that onemay need additional dollars to target a specifically defined target market. Moreimportantly we need to track our true source of buyers – not traffic. Cost of traffic isMinimize Risks Maximize Profits From LandAcquisition to Final Move-In12

interesting but the real test of marketing effectiveness and sales conversion is the costof each sale.♦ Become involved in every aspect of the marketing plan even when using an outside firm forsales 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 notbe working now.♦ Consider changing marketing allocations to address the increase of internet use.Sales:Minimize Risks Maximize Profits From LandAcquisition to Final Move-In13

Your greatest asset for 2006 may not be your place or product but rather your salesteam. 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 tosurvive 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 followingthrough 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 BuyerRe-capture Investment by:Diligent follow up to convertTap into their network for referralsGenerate positive testimonialsGenerate 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 weekII.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 activitiesMinimize Risks Maximize Profits From LandAcquisition to Final Move-In14

♦ 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 oftraffic in others. Wise builders are poised to run their business efficiently and effectively whilemanaging cash flow carefully. The housing bubble caught many off guard and the shear rush toacquire 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 andmaximize profits.Bonnie Alfriend, Charles Graham, Daniel LevitanMinimize Risks Maximize Profits From LandAcquisition to Final Move-In15