As we get ready to gear up for the spring real estate market, it is time for builders and developers to be aware of different marketing plans to see who they really are geared to.
When I first started selling real estate 16 years ago, builders could just acquire lots as needed by optioning lots 30 – 60 days out and they had plenty to choose from. Supply and demand were pretty well in balance.
As the real estate market continued to heat up, builders started optioning lots in bulk and got discounted prices if they took 5-10 lots in a subdivision. The competition for the marketing rights for the builder/developer market share got more aggressive too. Agents/agencies started offering to discount or waive their commissions for the developers in order to receive exclusive marketing rights for the entire developments. It is pretty easy to do the math to realize there is more income potential to list a house and the lot instead of just the lot! Demand continued to strengthen and the agencies that had control of the projects had instant market share.
Instead of optioning 1-5 lots in advance, builders started taking 20 – 100 since they were afraid if they didn’t have inventory of lots, they couldn’t build! This drove pricing up drastically because no matter how many lots were brought on, that didn’t seem to be enough. Again, the developers smiled and rushed to bring on more lots.
Since demand exceeded supply, sales were better than anyone expected and developers were extremely profitable and were praising their agents for their success and rewarded them with even more inventory. Subdivisions went from 20 lots in a phase to 100+ lots per phase. Two developers had simultaneous projects in Ada County that were roughly a square mile each!
Some of the builders saw the margins on their lot inventory exceed what they expected to make on the sale of the homes! Some of these builders became competitors to the developers by reselling the developed lots as out of state developers came in and brought on more lots and even national builders. For the first time in about 10 years, the supply started outpacing the demand.
The pendulum was shifting back again. Prices stabilized and started to fall. The sense of urgency to acquire lots came to an abrupt halt. Developers with unrealistic expectations of absorption rates started to under perform. Some realized that their “dream team” of onsite marketing agents might have just been a result of the market. As builders started watching their inventories grow, they quit buying additional lots and started to let their options expire creating even more downward pressure.
Bankers were waking up to the slowing market and their investors were getting nervous cutting back on new “spec” loans so even if a builder wanted to build more, they may not be able to get financing to go forward. Many were spoiled with 100% financing on spec homes due to favorable appraisals and now that was being cut back to about 80% financing. All of a sudden a new light was shed on the negative side of “closed subdivisions” and agents/agencies were being held accountable and were under the microscope.
Developers needed to close lots and started mandating an open door policy to let any agency that had a builder bring them into their community for both pre-solds and spec homes! The days of paying a “marketing fee” to bring your own builder into a community is finally going back into hibernation.
Many of the developers I have talked to are realizing the benefits of hiring a knowledgeable new construction agent with an aggressive marketing plan (and budget). I personally welcome going back to the time tested model of paying a real estate fee to “market” their lots and their community. If another agent has a builder that wants to bring them in, they should be encouraged to do so and they should be entitled to the fee they negotiate with the builder without having to share it with the company that is supposedly marketing the community. I always resented having to pay those since not once did any of that money I had to contribute to on onsite marketing team ever go to market me or my builder on a pre-sold!
Most attorneys will tell you that it is nearly impossible to serve more than one master. So if you are a builder or a developer, look at your marketing plan for 2008 and ask yourself: “Does this marketing plan (if there is one) serve the developer, the builder or is it possibly self serving for the Realtor?