Strategic Residential Marketing

thoughts on the homebuilding industry by Daniel R. Levitan

GET WHAT YOU NEED AND WHAT YOU PAY FOR WHEN YOU RETAIN AN EXPERT WITNESS AND LITIGATION CONSULTANT IN MATTERS RELATING TO HOMEBUILDING AND RESIDENTIAL DEVELOPMENT

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I believe that honesty is an absolute; someone either is or is not honest, there are no degrees of or partial honesty and one cannot be honest in some aspects of life or business and not in others. And I believe that honesty, both personally and in their work product, is the essential requirement for any expert witness and litigation consultant.

The primary concentration of my business is acting as a strategic consultant to the homebuilding and residential development industries. I truly enjoy assisting in the conceptualization, creation and realization of successful new home communities that result in places and homes in which people wish to live. But I am also involved in expert witness and litigation consulting assignment when I find that the need for establishing the “truth” is, to me, both obvious and compelling.

Perhaps I am naïve but when I accept an expert witness or litigation consulting assignment I make certain that the attorneys and clients fully understand that until I complete my due diligence I cannot guarantee that my opinion will support their position. And I assume that other witness and consultants would follow the same process as I believe that it is both dishonest and a disservice to the client to first accept an assignment and then work, taking whatever steps may be necessary, sometimes in opposition to the “truth”, to create an opinion that supports their client’s position.

I certainly will not suggest that the expert is always right as there are always two sides to any dispute and both sides cannot be correct, in either fact or in the eyes of the judge or jury. But when an expert fails to have prepared a credible opinion based upon discernible and verifiable facts utilizing proven and accepted methodology, i.e., the “truth”, the outcome should be foreseeable and obvious.

I recently was retained as a litigation consultant and expert witness for a multi-million dollar trial concerning a proposed residential development. Interestingly, I had some familiarity and previous experiences with the company retained as an expert by the opposing side in the case:

- I first was asked to review one of this company’s reports for a second home community many years ago by a friend and respected competitor who had been brought in to assist with a struggling development. I found that the original strategy had proposed a development based on a target market segment that did not exist in any meaningful numbers in that metro area. Needless to say, the community had suffered seriously and now required substantial and expensive repositioning.

- Subsequently I was asked to review this company’s report for a proposed primary-use major community which was under development. They had recommended a TND community (traditional neighborhood design or “new urbanism”), apparently at least in part as one of the development partners had a fondness for this concept and already had an existing community of this type in the local area. My review of the local marketplace revealed that the two existing TND communities, including the developer’s, were struggling (one of them quite badly) compared to the more common conventional design communities as the local market had simply not responded to this concept. Additionally, my research suggested that the price points that this company had recommended were not achievable in this location in any meaningful numbers.

It appeared to me that this company had failed to perform proper due diligence and therefore lacked the essential understanding of the conditions and geographic preferences of the metro area and, specifically, the local sub-market in which the property was located. My recommendations, accepted rather painfully by the client, were for the redesign and repositioning of the property into a conventional suburban community, keeping only a small TND village center that was already partly under construction. The resulting revised community, when brought to market, was highly successful, substantially exceeded sales absorption and profitability projections and winning several major national awards.

Based on these previous experiences I personally did not hold the work product of this company in the highest regard as I was not certain that “truth” was evident but I was truly not prepared for what I read in their expert opinion in this case as it appeared to me to be pure fantasy.

In the preparation of my opinion I followed the same accepted industry standards for analyzing any proposed development – utilizing due diligence to provide a fact-based platform upon which to create a strategy (development program) that has a reasonable likelihood of achieving success or, in this specific example, to verify that the proposed development would not have been successful.

Proper market research and the analysis thereof will:

- Identify the development potential;
- Define the target market(s) to be served;
- Define the products to be provided;
- Predict market absorption of the product;
- Assess the financial feasibility of developing the product;
- Support the conversion of the product value into revenue (support the sale and marketing of the product);

Proper strategic planning for residential real estate development will assess the current market and competitive situation for the property as well as future new supply possibilities and include two components:

A. Research the site, the market and the players

Research would include three components (and many sub-components thereunder):

I. Site Analysis (i.e. “Location” as all value in real estate is derived from location)

II. Market Analysis

III. Builder/Developer Factors

B. Develop a logical strategy program for the development based on proper analysis of the research.

Once the market research is completed and analyzed, and if the underlying conditions suggest that the proposed development is feasible, a conceptual pro-forma development concept is created that identifies the specific market(s) to be targeted. This conceptual development provides full product definition and details for use by the design professionals (land planners, engineers, landscape architects and architects). The conceptual development concept also includes preliminary cost analysis to verify that the proposed development can be brought to market at the indicated accepted price.

The pro-forma concept is then tested, proven and refined through appropriate consumer research which can include focus groups and consumer panels, personal interviews and email/telephone and mail surveys.

Only after all of these steps have been completed and the concept verified can it be reasonably assumed that any proposed development is viable. A similar process is required for commercial usage or any other real estate development.

When I completed my due diligence for the subject property in this litigation it was apparent that the proposed development was simply not feasible and could not succeed under any possible realistic scenario, having failed in every single factor listed above and in every component thereof, and my expert opinion so stated.

As expected, the other side’s expert opinion came to a different conclusion but that report did not examine or consider any of the factors that I had analyzed (and, in fact, dismissed them all as irrelevant). Instead it constructed a hypothetical demand scenario based upon a series of what I saw as improbable, unfounded and unsubstantiated sequential assumptions – what appeared to me to be nothing more than wishful thinking, albeit crafted in a very creative fashion. I also believe that it further included a number of structural and substantive errors which required the opinion to be revised twice and, even then, still retained several of these errors.

10.23.14 - truthThe facts (“truth”) were seemingly ignored and an opinion created that apparently satisfied the opposing side’s attorneys as it was introduced into evidence as the primary basis supporting their claims for lost profits and exemplary damages. It appeared to me that this company had first accepted this expert witness assignment and then proceeded to cleverly and creatively craft the necessary opinion to support their side’s case, not only ignoring but in direct opposition to the “truth”.

Needless to say, my analysis and rebuttal of this report which I prepared for my side’s counsel was lengthy and detailed and together with my expert opinion it helped to form the basis of their motion for summary judgment.

I am pleased to report that the judge granted the motion for summary judgment and the claims for lost profits and exemplary damages were dismissed in total, effectively ending the case except for a few minor ancillary claims which were subsequently settled. Furthermore, and even more satisfying to me personally, the opposing expert witness and their opinion were struck down under a successful Daubert challenge.

So maybe, just maybe, there is some justice in the world. A work product lacking in truth proved to be worthless and the attorneys and their clients failed to get what they needed and paid for. But that’s just my opinion.

Please visit our company’s website at www.levitanassociates.net to learn more about our background, qualifications and services to the residential development and homebuilding industries and to those involved with litigation arising thereunder.

And to receive regular updates on industry news and opinions please “like” our company page on Facebook which can be found at http://www.facebook.com/pages/Levitan-Associates/127978487221175.

© 2014 – Levitan & Associates, LLC, all rights reserved. This blog and the content herein solely represent the opinions and beliefs of the author, Daniel R. Levitan, and the owner of this web site, Levitan & Associates.

HOMEBUILDERS – WAKE UP AND SMELL REALITY

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Wake-UpI have taken the liberty of modifying the 1980’s adage of “Wake Up and Smell the Roses” which is probably the product of a mixing of metaphors – “Stop and smell the roses” (i.e., appreciate life) and “Wake up and smell the coffee” (i.e., get real).

The smell of roses and even coffee is usually quite enjoyable but what I am smelling lately in the homebuilding industry is something far less pleasant.  And we all need to take a deep breath of that reality and let it sink in so that we fully appreciate the implications if we are to survive and prosper in the future.  And that reality is the possible demise of the smaller, local production homebuilder who may well be forced into a permanent niche as an even smaller custom builder and remodeler. 

When I started in this business the homebuilding industry in this country was totally localized and smaller local builders dominated.  By the 1970s, the larger and more successful local builders expanded regionally and then, both through growth, merger and acquisition, the “nationals” came into being.  In recent times, aided by the downturn of the last decade, these industry giants have grown to the point that within the next couple of years they will account for over 50% of all new single family homes built in the U.S.A. and that is in addition to their overwhelming share of the multi-family for-sale segment. 

My uncle was one of those smaller local builders in the 1950s, 1960s and 1970s operating in the Chicago area and producing 30 to 50 new homes per year on in-fill sites.  He was quite satisfied to continue with that operation as vacant lots were plentiful and construction financing readily available and he made a comfortable living.  

Certainly conditions have changed – improved vacant homesites are scarce or non-existent in most locales and almost all of the choicest sites have been picked up by the nationals. Prices of land suitable for development are rising almost beyond reason and A & D financing often still remains elusive for smaller builders.  Competition is fierce with the “nationals” typically often enjoying price advantages due to economies of scale and national contracts providing cost savings and also from economies of scale in marketing. 

Instead of just rolling over and playing dead, however, I believe that there still substantial opportunities for smaller local builders to prosper in every market if they will make the commitment to properly research and analyze their markets and create a strategy for success!  That strategy will identify realistic opportunities in the market and provide a step by step program for implementation and success.  Read the rest of this entry »

A great sales experience is essential for the homebuilding industry!

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Although I was not raised in the “South”, I am a southern transplant and I do a lot of business here.  As I do not wish to offend, I am therefore cautious not to allow my “Northern” cultural heritage to show through.  I lower the volume of my voice, reduce the pace of my speech and am as courteous as my less than genteel upbringing will allow.  Therefore, my experience at lunch today was quite a surprise.  

Having only a few spare minutes between meetings, I ran down the street to the local bar and ordered a “rare cheeseburger to go, please”.  My server replied that it would be about ten minutes, handed me the check which I paid and I watched CNN while I waited.   When the familiar Styrofoam box appeared, as I am somewhat cautious with takeout, I opened the box to discover that the cheese was missing.  Placing my “Northern” reaction on hold, in my sweetest “Southern” posture I turned to the server and said, “I am so sorry but it appears the cheese has been omitted”.  

My server replied, “If you wanted cheese you should have ordered it!”  And, at that point, I unfortunately returned to form with my Northern cultural heritage and responded:   “If I had wanted lip I would have ordered something close, like a tongue sandwich.  But what I ordered was a rare cheeseburger – the key word here being ‘cheese’.  If you had bothered to listen to my order or taken the time to verify it you would not have made the error.  And then you would not have the occasion to further both insult me and compound your mistake by suggesting that the error was mine.” 

A minor incident, certainly, but unfortunately one that is symptomatic of our society today, even in the South, and shows the lack of courtesy and common sense that often permeates daily lives and sales experiences.  There are several choices for lunch in this city and you can be sure that I will choose more wisely next time – not because the burger was bad, in fact it was very good, but I truly do not need grief, especially from a server.  So that is the last time I will eat there.

And the result is that this business has decreased it’s income, not due to a bad product, not because of high pricing, not because of lack of advertising, not due to lack of competitive strength.  They have lost money solely because of the ignorance of an employee, one responsible for proper interaction with a customer – their sales person.  And in retrospect it was not the original error that caused the problem but rather the failure of this individual to address the problem correctly.  I got my cheese, but I left unhappy. 

The solution to any problem with a customer is simple:  first, apologize; second, accept and confirm responsibility for the problem; and, third, assume personal responsibility to have the problem addressed and, hopefully, corrected as conditions allow by following-through on that corrective process, keeping the customer informed and obtaining the customer’s agreement on the solution and confirmation that the solution was accomplished.  In any business, especially homebuilding, there is absolute truth to the old adage, “if you are not part of the solution you are part of the problem”. 

Housing today is increasingly becoming a commodity.  There is little meaningful difference between the 2,400 square foot, two story, four bedroom two and one-half bath home of homebuilder “A” and the one offered by builder “B”, regardless of what their corporate image campaigns or advertising may suggest.  The design is almost identical, the location is just down the street from the other, the pricing is practically the same, the same features are available, and today almost every builder delivers a quality product.  Read the rest of this entry »