HOMEBUILDERS – LET’S DO WHAT WORKS.

ChicagoSkylineWhen I was in Chicago recently I was reminded how much I truly like that city.  I was born and raised in Chicago and lived there until 1980 when, in the middle of a blizzard, I decided to move the family to Florida for better weather.  But other than the winters, it is a truly great city with amazing natural resources, excellent food, fabulous cultural amenities, and wonderful people with a Midwestern ethic where you can still do business on a handshake.  In fact, I once built a shopping center on land to which I did not have title, just an agreement to purchase after some title problems were corrected. 

There is an urban legend that the “machine” used to visit graveyards, writing down the names from the tombstones to register voters.  I do not know if in fact that was a real occurrence but the local newspaper purportedly did an expose on election irregularities and found over 100 deceased people in one precinct that were still on the voter lists and who had apparently voted in one or more of the recent elections. Although I certainly would never condone illegal or immoral activities, I appreciate creativity, hard work and ingenuity.  And under the senior Mayor Daley, affectionately known to Chicagoans as “da boss”, Chicago was known as the “city that works”.  

And perhaps that is the bottom-line lesson to be learned for the homebuilding industry – let’s do “what works”.  And what works can be determined by examining and analyzing the market.  A thorough evaluation of the demand and supply components (both new and used) combined with an honest assessment of the specific property and the builder and/or developer’s strengths and weakness will produce a very clear roadmap to best-case performance in any market conditions.  The market may not deliver what we wish but it always demands what it wants in a clear and concise voice.   

Several years ago when the homebuilding industry was booming I was retained to perform a market analysis and strategy for a potential condominium development in South Florida.  The site was somewhat hidden and surrounded by older lower-end motels but it was on the Intracoastal and had some potential, especially with its attractive land cost.  The market was highly competitive at that point in time but my research determined that there was an obvious “hole” in the market with a resulting viable opportunity for a mid-priced condominium product targeted to the gay community.  I ran the pro-forma and the “mid-case” scenario, utilizing only a conservative rate of absorption, yielded a 34% net profit.  

Needless to say I enthusiastically presented the report to the client, expecting that I would begin immediately assisting in implementing the program. Instead, the response I received was immediate and negative as the client replied “This does not work at all – I am not going to be known as the “gay developer” and my involvement with the property ended.  

I watched from the sidelines as the client chose to create an ultra-luxury development on the property targeted to the mainstream “straight” market, a target market which I had examined and found to be over-supplied with competition all enjoying superior locations and I had so informed this client but the advice was ignored.  Architects were retained and plans were drawn, costs and bids were obtained.  An aggressive pre-sale marketing program was commenced including an elaborate off-site sales office in a high traffic upscale commercial center.  Extensive print and electronic advertising was placed, fabulous brochures were created, and the leading area “carriage trade” broker was brought in to handle the sales. Eight months later, after having obtained only two reservations for the 66 residences, the sales office closed and the property was put up for sale.  To the best of my knowledge, this individual has left the homebuilding industry. 

sold #5Interestingly, a few months after that a new condominium opened for sale on a site very near this property.  That location was slightly inferior and the product design was nothing special but they targeted the gay community with a mid-priced product and sold out all 58 condos in three months.  They obviously had done their homework and followed the market to success. 

Perhaps that is an extreme example but I find that even today as I examine housing markets around the country I encounter builders doing what “used to work”, wishing that things will return to what they were, instead of doing what works today.  Given a choice between “what I wish” and “what works”, I would pick “what works” every time.  But that’s just my opinion. 

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