Resale Influences Finished Lot Acquisition Decisions . . . or
(Reason #8 of the top 10 reasons why Builders MUST know resale)
As we continue to share with you the individual elements that make up The top 10 Reasons Why Builders Must Know Resale, it should be clear by now that New Home Marketing Services (NHMS) believes strongly in the power of resale to affect a residential builder’s success in the marketplace. What we do as a company; the products we deliver; the services we offer, and many of the blogs we write are geared towards helping builders appreciate how resale can impact their business. For that reason, we believe it is paramount for builders to know resale.
The list of 10 items we identified as the critical reasons why builders need to know resale comes from years working with builders and brokers. In this blog, we’d like to explore reason #8 – “Resale Influences Finished Lot Acquisition Decisions”.
At first glance, it may be easy to discount the argument based upon the blog title. “I mean, really, how can a finished home that could be 10, 20, or more years old have any impact on a whether a builder purchases a “piece of ground”? Actually, the current mix of housing stock and how much consumers are willing to pay for homes can have a significant influence on how much a builder is willing to pay for a finished lot.
So, let’s break it down. Builders who have good cost controls in place know what each plan type they offer will cost them to build independent of the individual lot costs. They know the homes dimensions, the amount of lumber, concrete, mechanicals, labor, etc. that are required to build each home. Those costs add up to a cost of construction for each home and each elevation offered on that home.
Now, let’s suppose a developer approaches a builder division president or a member of the land department and says, “We have 15 lots we’d like to you to consider picking up in the wonderful community of Happy Town.” And while there will certainly be issues centered around take down requirements, community amenities, and whether the community appropriately presents the builder’s product, one BIG issue is still going to be the cost of each lot. Because at the end of the day, lot cost + cost of construction + desired margin = listing price.
What’s a builder to do? Ultimately, the builder has to be confident that the list price of an anticipated spec home start or a contract to build price out will cover the homes’ cost of construction plus the lot costs and allow the builder to make a profit in line with the perceived value of his or her home. How can a builder better evaluate whether those $35,000 lots in Happy Town are a good deal? One important means to evaluate those lot costs would be to evaluate how the resale market is performing in and around the community of Happy Town.
That then raises the question critical to this blog posting. Why is it important to evaluate the resale market around Happy Town in order to determine whether the lot price of $35,000 is “doable”? It’s important because resale homes and resale prices will INFLUENCE what people will pay for a new home. Because resale listings are 90% or more of the real estate market, consumers and Realtors are intimately more familiar with resale than they are new construction. They will bring that familiarity to the sale and expect you to explain why your new home is “worth” more. That is your value proposition, and that can only be explained by knowing resale.
In addition, the builder must be able to compare the price of resales around him or her with the proposed listing prices of their new homes. Remember, we said that the builder’s list price was a combination of lot costs, costs of construction, and desired margin. If those three items “add” up to a price that the builder believes is impractical given what’s happening in the resale market, then the lot costs are “too much”. At least as it pertains to what the builder originally hoped to accomplish.
Knowing the resale market in this way is a powerful tool in supporting the builder’s negotiations with the developer. Rather than simply saying the developer’s lot prices are too high, the builder can argue from a position based on fact.
The power of resale to affect the builder is significant. Are you leaving this to chance? And if you are trying to do something, is it time consuming and/or difficult? The question to ask yourself is how do you get resale information that is practical and actionable?