Having missed a concert by The Bee Gees several years ago, we realized that we had made an error in judgment as Maurice Gibb passed away shortly thereafter and we will never have that opportunity again so for the past few years we have made an effort to see performances by as many of the older performers and groups as possible and last night my wife and I went to see Eric Burdon and The Animals in concert. In my opinion the performance was “OK” but certainly not stellar. Burdon, while still having a voice, appears to now believe that high volume, often consisting of screaming, is an appropriate substitute for a song’s melody.
We had an exceptionally delightful evening a few weeks ago seeing Roger Daltrey perform the Who’s “Tommy” in concert. The show was phenomenal and if it comes to your town I would strongly encourage you to go. Daltrey and his band were amazing, playing the entire rock opera non-stop for over one hour. The show builds to a crescendo with the finale, titled above, moving the entire sold-out audience of six thousand plus to their feet for a standing ovation. I admit to being a fan of the original album, the opera, the movie and even the pinball game that followed (Pinball Wizard).
I believe that the plot line of “Tommy” is realistic, especially for today, and the message is certainly relevant in this age where fame is short-lived and heroes and idols are often shown to have feet of clay or, when they speak the truth instead of what people wish to hear, they are quickly removed from their pedestals.
The song from Tommy used as the title of this blog is also specifically relevant to the homebuilding industry and to me, personally. To overcome buyer reticence, inertia and fear, homebuilders today more than ever before need to provide an emotionally meaningful and personally relevant message to each customer so they not only see and hear but also “feel” the compelling message to purchase. And just as in the song, I am usually retained to provide an “opinion” and the “story” although I seldom expect my clients to follow me up a mountain and I do not expect that if they follow my advice they will see the “glory”, just successful residential developments and homebuilding operations.
Six years ago I was retained to research a housing market and create a strategy for a major mixed-use residential development. The client accepted my report and agreed with the conclusions as did the sales and marketing team but the client stated that they could not afford to sell the smallest homesites at the value I had indicated was appropriate for the market as their anticipated costs for site improvements resulted in a finished homesite cost that was above the recommended pricing.
A long discussion ensued in which I attempted to explain and “sell” the rationale of my strategy, summarized as follows:
The recommended homesite values were a residual of the indicated home value;
- The market, not cost, dictates home values;
- The local marketplace was currently extremely price sensitive;
- Without the indicated homesite value for the most affordable product line it would be impossible for the builders to achieve the necessary price points for the entry-level homes for which there was strongest indicated demand;
- The entry-level homes were essential to generate initial sales within the community, create the necessary critical mass of occupied homes to generate a perception of success for the community and provide an internal dynamic within the marketplace which would support the sales of the higher priced homes ongoing;
- On a community-wide basis for all the product lines, the recommended homesite values would still generate an overall profit for the community that was well within the guidelines for anticipated profit for residential development;
- Even with the client’s estimated site improvements, a proper allocation of underlying land values would still yield a profit for the entry level homesites;
- Without the targeted entry level home pricing, the community would not achieve success and therefore should not be developed.
Ignoring my advice, the client proceeded to develop the property and was able to sell the first section of 150 homesites to a local builder. As the prices for these homesites were 25% higher than targeted in the strategy, the resulting homes were priced $50,000 above the market and, as anticipated, met with far less than stellar success. In fact, the homebuilder was forced to offer substantial discounts to sell any of the homes and subsequently went out of business, the developer ended up buying back half of the homesites, no building or sales activity has occurred within the last year and the community has achieved the less than enviable reputation within the marketplace as a failure.
Admittedly both the national and local economy and the local market housing conditions have deteriorated substantially over the past several years but another community located just a few miles away and subject to the same market and economic conditions followed their original strategy recommendations and has been able to meet or exceed projected sales and pro-forma profitability every year for the seven years they have been open.
Last week I returned to this market to fine-tune a strategy for a new homebuilder who has entered into an agreement with the developer to build out the remainder of the first phase – the repurchased homesites. As there is neither any critical mass of occupied homes within the community nor any perception of success, the marketing for the community must now start anew in the face of a less than optimal market and the costs will be substantially higher. Although the developer still has not reduced the homesite prices to what the market indicates is necessary, they agreed to a joint venture arrangement where the “base” homesite price is lowered by one-third and the balance of the homesite cost is taken as an equity share of the profit from the home after the builder is guaranteed a 5% profit above cost. In my humble opinion, the developer is somewhat delusional if they are expecting the joint venture profit share to be realized but at least they are taking action to get the community moving which is a positive step.
Just like in Tommy, the “message” for this development was not what was desired and was summarily ignored. In this case the result was disastrous and the impact will be long-term. One has to wonder why the strategy in this case was confirmed as valid yet ignored and the client assumed that the desired result could still be achieved.
Residential development and homebuilding today is far more challenging than ever before – witness the many national and regional builders, industry leaders ten years ago, that are no longer in business. Even some of the survivors to this point in time continue to generate substantial losses and have futures that are extremely cloudy. Success today and in the foreseeable future requires well-crafted strategies based on real world factors, shared with all team members and vetted by the entire team as we need to utilize all of the brain power and experience available, not simply ignore those whose opinions may vary from our own. But that’s just my opinion.
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