SWIMMING UPSTREAM

On an Alaskan cruise a couple of years ago my wife and I happened to arrive at the time that the salmon were returning to spawn in the Copper River, a 300 mile stretch of pristine glacier-fed waters riddled by hundreds of rapids that twist through the Wrangell and Chugach mountains.  Driven by genetic compulsion, salmon return to their place of birth to renew the circle of life although their swim upstream is incomprehensibly difficult and tiresome and inevitably leads to their death. 

I have found that there are several similarities between many of us in the homebuilding industry and the salmon.  Although apparently driven by inertia instead of genetics, I have seen countless homebuilders and developers in the past few years returning to what they last did, the same locations, the same home designs and the same prices. While that action may have proven marginally successful in the past, since 2005 this “swim” upstream against the unforgiving currents of functionally altered market and economic conditions usually has led and will continue to lead to the same inevitable conclusion – the demise of the operation.

During the boom years of the last decade, ground was purchased and residential development was started in almost every local market on numerous parcels that were overpriced and located in remote, if not obviously undesirable, locations.  Most of these properties should not have been purchased for residential development and certainly should not have been developed as the market boom was obviously coming to an end.  Many of these properties will remain unsuitable for residential usage for several years, at least, and all will require substantial adjustments to be “marked to market value”.

Yet some homebuilders and developers refuse to accept reality.  I examined one such property for a client three years ago, a defunct community for which I had determined a present value approaching zero!  The bank’s book value on the property was “substantial” and as they did not wish to recognize a loss they refused my client’s purchase offer (he really loved the area) of several million dollars.   Lo and behold, the following year they found a buyer at twice the price that my client had offered.  I was not at all surprised last week when I visited the newly repositioned community to find that after fifteen months of an aggressive sales campaign they had sold only two homes as with their high land cost they were forced to price at the same levels that had not worked before.

One community that I have been following for the past three years had suffered from both a remote location and seriously overpriced housing product.  They changed their sales and marketing team eighteen months ago and were able to sell 85% of their standing inventory after substantial price reductions and negotiation.  I was somewhat amazed on my visit two weeks ago to find a flyer in their sales office for their new phase currently under construction offering the same exact homes at the original pricing.  As the area’s housing market had not yet visibly improved, I wondered how this homebuilder could expect a different result than had been obtained previously.  Would not the same homes in the same location at the same price in the same market conditions logically create the exact same unsatisfactory result?    

It is not just the homebuilders and developers that followed this path and continue to do so today as many of the marketing and sales teams were and are tending to also swim against the strong currents of different buyer needs and motivation while using the same techniques that worked six or seven years ago.  The result on the sales floor continues to be equally unsuccessful.  I shopped a new community this week but only after spending over one hour searching on the Internet trying to locate it as their web visibility approaches zero.  They had a decent web site but as far as I could determine they failed to understand the concept of SEO.  I could not locate any incoming links – no click-throughs, no banner ads, no social media presence.  I finally had to call the friend who had told me about the community to get the name of the development before I could find it on the web.  If that was not bad enough, within five minutes of my entering the office the sales representative explained that “with the excellent pricing available at this time, a home in her community would be an excellent investment”. The feeling of déjà vu was so powerful that for a moment I suffered vertigo.

Starting in 2004, I and several of my colleagues had predicted the coming housing “correction” as it was obvious that the homebuilding industry was overbuilding.  While I admit that I did not foresee the full severity of the downturn, I did suggest that it was an appropriate time for homebuilders and developers to disentangle themselves from excessive or marginal land holdings and to pursue a strategy of asset preservation and “adjustment”.  Perhaps it was difficult to heed that advice as the market continued strong into 2005 and it may have been challenging for builders and developers to take action that would appear to leave money on the table.  But it is now 2011, arguably the start of a nationwide housing recovery, and I find that many of the homebuilders and developers that are still in the business are, in many ways, still where they were in 2004, both mentally and physically, and are unprepared for success.

There is no magic trick required to create successful residential development and homebuilding operations in any market conditions.  They key to achieving success is intelligent strategy based on through research and understanding of the components of the housing market supply and demand.  “Hope” is not a strategy!  Having failed to change in 2004, 2005 and, perhaps, even until today, in the current conditions of our industry it is essential to recognize the fundamental changes in the economy, the market and the buyers that have transpired over the past few years and to adapt all operations accordingly.

So here are four simple suggestions for success in 2011 and beyond”:

1.   Reexamine every under-performing operation with a strategic marketing audit utilizing a “zero based” budget.  Forget what you might have invested and create an ongoing strategy to maximize profitable absorption from this point forward.  Consider new product at new, lower price points or even a total repositioning by creating a brand new community on the same property. 

     In some cases it may prove more profitable to close down the operation, at least temporarily. If you have guaranteed debt on the property and the lender will not negotiate, give the homes away, if necessary, but get out as quickly as possible so that you can concentrate your efforts and your operation on more beneficial undertakings.

 2.   Reexamine your homes to make certain that they are appropriate for the viable markets of today.  The most successful homebuilders operating in 2011 have brought all new home designs to the market in the past eighteen months and they have cost-optimized these houses to provide the value and the price that the markets demand.

     When pursuing new product designs, conduct a thorough examination of the competition to see what is selling now and look at the 1960s and 1970s homes that were selling to the first time buyers as that market is coming back strong but update those designs intelligently for the 21st century.

3.   Become a professional housing “marketer”.  Today it is all about e-marketing and that requires a truly great web site complete with web analytics and web concierge, strong, ongoing SEO and continuous presence in all of the social media outlets, concentrating the available marketing dollars where they will do the most good.  This is as essential for the small homebuilders and developers as it is for the “big boys” and requires professional implementation.

     Bad e-marketing is worse than no e-marketing at all as prospective purchasers will immediately remove you from their “consideration set” and not even come out to visit if you fail to meet their minimum level of visibility, quality and proficiency on the web.

     Broker cooperation is essential for success.  The Realtor© community controls many of the prospects and they will continue to have the “hot” properties for the next few years with foreclosures and short sales.  If we are not attracting the brokers and their clients then we are losing sales.  An intelligently and creatively crafted and professionally implemented broker outreach effort and cooperation program is a “must”.

4.   Make certain that you have the best and most professional sales team possible.  Now is the time to again budget for and provide sales management, sales training and competent sales supervision.  The competition has changed, the markets have changed, the financing has changed, the buyers have changed and the job requirements for selling new homes have changed yet many of our sales teams have not made the necessary adaptations and improvements. 

     A recent consumer survey by Fannie Mae found that qualitative reasons, such as  having the ability to customize their new home to their own tastes or to send the kids to a better school — have overtaken financial considerations as the primary motivators for homeownership.  We need to be selling the non-financial benefits of homeownership, especially with the changes in financing requirements, and be ready and able to close the sale in the face of continuing competition from used home short sales and foreclosures.

     New home sales professionals must be adept at e-marketing, providing regular blogs and managing social media postings, as well as responding quickly and appropriately to the e-communication that our marketing requires.  

Instead of continuing to follow the salmon and swim upstream to our ultimate demise, now is the time for the homebuilding and development industries to swim with the currents and take full advantage of the returning housing markets.  But that’s just my opinion.

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