MY ADVICE FOR HOMEBUILDERS AND RESIDENTIAL DEVELOPERS – DON’T PUT BEANS IN YOUR NOSE!

My grandmother was a very interesting woman.  Widowed at an early age, she supported herself by working and supplemented her social security by continuing to work well into her late 70s.  She lived independently until she passed on somewhere in her late 80s –  no one in the family is certain of her exact age as she used to continually shave the number.

She was an excellent cook and prepared and served many of the holiday meals including the best lemon meringue pie I have ever had.  When I was older I had to hand grate the lemons and left with many a bleeding knuckle or finger.  But unfortunately her recipes did not survive her passing as when giving out a recipe she would leave out vital ingredients – my mother believes that this was intentional.   

Nana taught me to play canasta and was always cautioning me to play conservatively and never to be greedy by waiting to lay down a meld until I could pick up the pile as the downside was getting caught holding a big hand.  She was fond of using adages and wise sayings that she claimed had been passed down for generations, many of which had outrageous and dire consequences for inappropriate action.  In later years I learned that she had made most of these up in her head on the spot as she believed that proper child rearing justified outright lies if they proved her point. But regardless of her honesty, I believe that she was concerned only with my well being as her intent was to prevent me from coming to harm.  For the most part it seems to have worked as I have survived to this point in time by following her advice and that provided by my parents and teachers.

beains in your nose

There are two especially memorable items of advice that Nana gave me.  The first was “Don’t put beans in your nose”.  To this day I have remembered and followed that advice although, to be honest, I do not believe that I would ever have considered inserting beans or any other food substance into my nasal passages if she had not cautioned me against it. The second was “Always put on clean underwear, God forbid you are in an accident”.  Thankfully I have never needed that advice but it has stayed with me.  And I have come to realize that everything we need to know for successful homebuilding and success in life overall we should have learned as small children.

Here are a few examples of my grandmother’s wisdom that I believe are especially apropos for the homebuilding and residential development industries, with translations included:

Don’t put beans in your nose (similar to “Don’t put your finger in the electrical outlet”).  Translation – don’t do anything stupid; think before we act.

Many builders purchased land or homesites in remote locations and paid higher prices than ever before based on the erroneous assumptions that the buying frenzy would continue, even for these less desirable locations, and that the rapidly rising home prices would continue and cover the overpayment on the land.  It was obvious to anyone who took the time to examine the market that we were outbuilding demand in almost every marketplace and that prices could not continue to rise at or even near the increases that we had recently seen.  “Location” has always been and will continue to be a prime determinant of value and bad ground is bad ground, even in good markets.

We did not think before we acted, assuming that the universal law of “what goes up must come down” simply did not apply to the homebuilding industry.

If everyone else was jumping off a bridge would you?  Translation – do not recklessly follow others. 

I believe that this was one of the major causes of the problems that the homebuilding industry faced over the last several years.  In our primary-use single family communities we built the same houses as our competition so that the only difference between us was price or, hopefully, an exceptional sales team.  When price is the only difference, low price always wins. Failing to create a USP gives us nothing to sell and we must rely on the strength of the market to give us our fair share of sales.  When the market contracts, so will our sales.

When home sales slowed someone came up with the brilliant idea that eliminating the downpayment requirement would increase the potential market and many builders, not wishing to be left on the sidelines of the new sales frenzy, quickly joined the game and thus the “sub-prime” fiasco was born.  It was obvious from the start if you gave the concept any true thought or analysis that sooner or later many of these newly created “extra” buyers were unqualified for homeownership and would be unable to make the payments, especially if the rates increased or if the economy slowed down. 

The excessive building of condominiums in South Florida, Las Vegas, Atlanta and many other markets is yet another example.  There was obviously insufficient demand from the primary markets to support the oncoming oversupply yet we continued to build assuming that “investors” and speculators would gobble them up.  After all, some of the biggest and most successful developers were bringing new projects on line and they must know what they are doing so let’s grab our piece of the pie. When the demand disappeared, when investors found alternative opportunities, when the pricing bubble burst and the speculators fled, there was no one left to purchase except at discounts of 50% or more in many cases, far below cost.

We ignored my grandmother’s advice and like lemmings followed others over the cliff.  It has taken three years of pain and suffering to begin to get the single family market back into balance and the condominium oversupply will still take several more years to correct.

Always put on clean underwear.  Translation – be prepared for any eventuality.

This was ignored in every aspect of the homebuilding industry.  We built the same old subdivisions and houses that we had built for years and ignored the fact that change is always present in every aspect of our lives.  And when the markets did change, we were unable to change with it.  The subdivisions that we had developed were not designed for flexibility.  We did not have extra density available to compensate for decreased housing values.  The village sections were too large and gave the appearance of being abandoned when business slowed.  And we failed to intelligently phase our communities so that carrying the improvement costs severely impacted our bottom line.

We did not have new product ready to go and we lost months or even years in redesigning to suit the need of the buyer segments that were still viable.  We had insufficient budgetary reserves to cover the increased costs of marketing that were now necessary. And we had not created relationships with the brokers mistakenly believing that we were saving money and when we turned to the brokers in our time of need they had no loyalty to us and had better things to sell (short sales and foreclosures).

We simply were unprepared for any eventuality and we paid the price. If we had put on the clean underwear, we would have prepared alternative pro-formas with “best case”, “mid case” and “worst case” scenarios.  We would then have hopefully avoided those developments that only yielded the targeted profit under the best case scenario.  And for the developments that we did pursue, we would have insured that we had designed the flexibility and provided the budgetary contingency to allow us to make necessary changes as market conditions required.  Perhaps we would have left some money on the table in the boom but we would still have that table today.

Do your homework.  Translation – do your homework.

In the boom times we were certain we knew what would work – just continue to do what we had been doing.  Not only did we fail to examine the market and the competition before we started new developments, and thereby realize that the demand side was shortly going to change dramatically, but we compounded the error by ignoring the need to update our strategies on a regular ongoing basis and thereby did not see the changes even when they did occur until it was too late to adjust.  We had no current strategy to chart an intelligent course of action; all we could do was adjust our tactics which cannot work without a valid underlying strategy.

In the homebuilding and residential development business we need to be prepared for any eventuality and that is impossible without an intelligent and current strategy, shared with and invested in by all team members.  Change is indigenous to our industry yet we are constantly fighting the battle against inertia.  Doing our homework allows us to be prepared for these changes and create intelligent action plans to take advantage of the new opportunities that change creates.  

Play nice with others.  Translation – build competent, professional, long-term teams of employees and trade partners and invest in those relationships. 

If we had any hope of staying in business through the downturn and being fully prepared to take advantage of the recovery we would have recognized the need to treat our employees with respect, invest in their excellence, and fully utilize their talents. We would not have fired the sales managers and trained sales professionals when sales slowed and then not had their talents when we needed them the most.  Instead we would have increased our budgets for additional sales training.  And now we would not be faced with the need to hire and train new people and incur the additional costs and loss of sales until they became professional.

We also would have worked with our homebuilding trade partners to intelligently redesign our homes and communities to meet the market needs, reduce costs and perhaps even secure their involvement as investors and/or venture partners in our operation to get us through the challenging times such as now when AD&C loans are virtually unavailable.

Team building is a necessary commitment that requires a long-term viewpoint, an investment and a strategy.  It is perhaps the most an intelligent investment we can make in our own future.

Never stand on a soft 17.  This one should not require translation unless you are unfamiliar with basic blackjack strategy (http://en.wikipedia.org/wiki/Blackjack).

BlackjackMy grandmother used to gamble, albeit for very small stakes.  But she always knew the odds, never took undue risks and never exceeded her pre-set limits on losses.  Moreover, when she hit her target goal of winning she got up and left the table a winner.

Perhaps it was greed, perhaps it was ego, but it seems that many of us in the business stood pat on their soft 17 believing they were unbeatable and allowed the dealer to draw the cards that beat them. Builders and developers failed to take the necessary steps when they should have to preserve and protect their personal assets, their “winnings” from the good times.  Instead of leaving the table when they were a winner, they doubled up their bets ignoring the odds that sooner or later will always come into balance, and lost big time.  But that’s just my opinion.

Please visit our company’s website to learn more about our background, qualifications and services to the homebuilding industry at www.levitanassociates.net. And please consider following us on Twitter at http://twitter.com/DanielLevitan.

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  1. Pingback: Do your Grandparents Know Best? « Toronto 416er

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