In 3 previous posts, we canvassed the rationale for lot premiums and began the methodology for quantifying them. In this edition, we continue the “how.”
Shape premiums
Odd shapes will sometimes limit the home that can be planned and the uses that can be expected on the site. Most buyers will prefer to have more of their square footage in the rear, or even side of the home. This affords more privacy for the occupants. Watch for odd “remainder pieces” that add size but not any use to the owners. These may ultimately require a negative premium. Again, these little triangular pieces, very often at the end of a cul de sac, or adjacent to a civic-type use, could be a problem to irrigate, install and maintain, with absolutely no usability, or even privacy, can be discovered in the on-site analysis.
A trapezoid shape, with more of the square footage at the rear, will usually be preferred. (This is especially important in a feng shui sensitive market. Indeed, the reverse shape, with the front of the lot wider than the rear allows the good chi, wealth and good fortune, to run out of the lot.) Typically, the shapes at the end of cul de sacs are not uniform and the shape will be critical to examine.
Access premiums
Long accesses for flag lots usually indicate a premium condition. Privacy will normally be prized. However, if the access driveway is very tight, close by the side of the neighboring home, the condition becomes a negative. And a negative to the front home that has its privacy affected. If the lot configuration is such that the home is set with a side to the street, the garage is at the furthest point from the street, accessed by a driveway that crosses in front, and within 12 feet, of the living room window, the negatives are obvious. There is a poor front yard, it is of negligible use, and (Both these are real examples that were missed by the brains trust “back at the office.”)
State of title premiums
I have seen examples of the shared driveway owned by a Home Owners Association. If the sewer and water lines are under the driveway, be assured that there will be a delay in any needed repairs. Meetings, quotes, disputes, etc. all will occur before the blockage is resolved. The search for the culprit will seem more important than the resolution of the problem. (Also consider that ALL the owners in the HOA will pay the costs.) If the shared driveway is for a flag-and-front-lot situation, imagine the dispute if there is a sewer blockage. Who caused the blockage? Who should pay for it? Whose favorite contractor should do the work?
An opportunity for major confrontation, this is a matter that must be disclosed. Perhaps it is an example of a change to be made. Perhaps the cost of separate sewer lines is the better solution by eliminating the objection.
Watch for easements affecting each lot in favor of the HOA, the Landscape Maintenance District, the City, County, power company, gas company, etc. If these limit the use to which our buyer can put her property, clearly there is a negative premium.
Cultural issues
In markets where a particular cultural group is the target market, there should be no premium for lots that have the appropriate shape, lot number, etc. The community land should have been planned to maximize those attributes, such that the BASE price should reflect that market. Again, in feng shui (or "vastu" or any similar set of principles) sensitive markets, the negative aspects should be eliminated in the planning, rather than discounted in the pricing. With this base condition, premiums might be added for views, size, usability etc. Additional issues to be evaluated are the shapes of visible hills (e.g. turtle shaped are very auspicious), the shapes of visible architecture (e.g. arrow shaped is usually not preferred), etc. This, in turn, reinforces the need to have the tools above-mentioned to properly evaluate the site views.
And this is best done BEFORE committing to the construction plan!
Many of us have heard that in particular cultures, customs or countries that “all homes must face…” a particular direction. Those who believe that have never considered the illogic of such a statement. Does this mean that there are lots facing the other three directions that are vacant or unsold? Clearly not!
I do advocate cross-cultural training to help all of us in design, marketing, pricing and sales. However, it is insulting to believe that all Asians, for instance, share a common belief system. It is foolish to believe that all customers whose culture originates on the Indian sub-continent will buy their homes with the same motivations. How incredulous would Americans be if someone from Pakistan suggested that we all ride horses, rope cattle and yodel around a campfire?
And, since we most often hear that it is "Asians" whose homes must face XYZ direction, we really need to think. Are all Asian cultures, countries, values and customs the SAME? Nearly 3 Billion people with one set of standards?
Are we therefore prepared to say that all Chicagoans prefer ketchup on their hot dogs???!!
We must think about the specific market for our communities.
A community located, for instance in Hacienda Heights, CA, will appeal strongly to those who follow feng shui. The entire community, auspiciously on “the Dragon’s Back” will have a higher BASE value for these buyers. (Others, frankly, will not typically justify the higher base price, since their cultural values do not coincide.) Premium pricing should only be applied to those items which are different from the community norm. Better numeric addresses are a part of the lot premium analysis. Views over the golf course toward a turtle-shaped mound will attract more value. An absolutely flat yard gets no premium.
If the community clearly does appeal to a specific cultural group, an expert in that culture is a VITAL member of the team and should be part of the site visit to establish lot premiums.
Conclusion
Lot premiums can be a source of additional revenue that may only be crystallized by a thorough analysis at the site. Like all matters in our business, it is a mistake to impart the Seller’s preferences into the analyses. The Buyers will ascribe greater or lesser values according to their motivations. The Seller’s COST in providing a specific lot is completely irrelevant. The Seller’s preferences are totally unimportant.
To best approximate the Buyer’s reaction, it is critical to involve those who best represent the Buyer, i.e. someone like the Buyer, sharing the motivations of the Buyer. It is equally important to include those who daily receive the feedback from Buyers, i.e. the site sales team.
And most importantly, the Seller’s team analyses must all be made in the same location as will be made the purchase decisions by the Buyer: AT THE SITE, not “back at the office.” Those who believe otherwise should consider abandoning a model complex, avoiding a sales office and inviting Buyers to meet “back at the office.” The level of success in that approach should be a lesson to us whenever we try to take the easy route when establishing lot premiums.
Meyers Builder Advisors uses very sophisticated modeling in estimating lot premiums. They apply the models once they have walked the individual homesites. The irony is that some of their clients apply a simple percentage formula. From "back at the office!"
Like so much in homebuilding, lot premium decisions are made best when they are made in the field.
Where we expect buyers to make decisions.
Thursday, August 20, 2009
Establishing Lot Premiums 301
In 2 previous posts, we discussed the rationale for lot premiums and began the methodology for quantifying them. In this edition, we continue the “how.”
Corner lot premiums
Again, similar to adjacent school uses, those who will not even consider a corner will not be persuaded by a lower price. Many will pay extra to be on a corner…more open, often more light, sometimes more privacy since at least one of the adjacent neighbors faces about 90 degrees away from the subject. Usually there is more frontage area as a percentage of the total site.
Corner lots on simple grid streets will still justify a premium. Corner lots on cul de sacs will attract premiums for both issues. There will be less traffic into the cul de sac and buyers will be willing to pay more of a premium than for a home on the corner of two through streets.
Orientation premiums
South and West facing will normally make rear yards more valuable in cooler climates. In the desert Southwest, rear yards facing East and north are cooler and thererfore more useable. Watch for these. Irrespective of your geographic location in the world, about half the rear yards will be the preferred orientation. The site sales team will usually know which orientations are typically preferred. Preferred means they should attract a premium. These may be modest premiums, but they are real. Charge for them.
Adjacent use premiums
The Precise Grading Plan (or Fine Grading Plan or local equivalent) and the project manager will be able to show if there are uses immediately adjacent that will affect specific homesites. (For flag lots, there may be some overlap with the access issue above.) If the home is adjacent to a detention basin, try turning the negative to a positive. Install a hand-carved sign, identify some of the wildlife that will frequent the water, celebrate the butterflies, the deer, the rabbits, etc. Call the basin a permanently protected bio-filtration site. If the site borders a park, a school, a golf course, realize that for SOME these are negatives. Insurmountable to many buyers. Thus, don’t worry about those buyers. Realize that those who buy next to a park will do so to USE the park as an extension of their own home. Those buying beside the school like the kids, the schoolyard view, the excited voices, etc. Price for them…with a premium. The buyers who despise the candy and burger litter, the soccer moms’ traffic in front, the sounds of someone else’s kids yelling...well, these buyers are not candidates in any event.
Usually, adjacent property owned by US Forest Service, for example, will attract a premium value. But think first. Certainly those adjacent to the California wildfires may have been happier if adjacent properties were owned by timber companies, who WOULD have harvested trees, but also would have managed the forests to minimize the damage to neighbors, and themselves. Less politics may have saved lives and property. Think how a potential buyer, in November 2003 would consider a lot immediately adjacent (see above) that is owned by the USFS. Would this be a plus, attracting a lot premium? Or would it introduce major fear in a buyer. Government use is often a premium, but we should ask the questions.
On the negative side, be aware of the site utility issues. If there is an above- ground utility vault, it will be a negative, but seldom a deal killer. Watch for light poles, postal hutches, fire hydrants, water line clean outs, pumping stations, telemetry poles for the pumping stations, power poles, train tracks, chain link fences, present or required. Again watch for immediately adjacent access issues. How is the County going to access the detention basin? Does the adjacent flag lot’s driveway, and hence its traffic, come within 5 feet of my dining room window? Etc.
Topographical premiums
The site-specific topography will be relevant to the lot premium analysis. Also, the topo relative to other homesites in the community will also bear examination. If every home is on a bluff 40 feet above the neighboring homes, the topo is not a premium. But if only some are elevated, the lots with such a wonderful outlook will attract a significant premium. Elevation is normally good. In some heavy snow markets, this will not be true if the driveway becomes a seasonal challenge.
Being at the bottom of a major topo change is normally bad. I once observed purportedly-skilled homebuilders put an enormous premium on a lot that, “back at the office,” showed a very large size of nearly an acre. What they did not factor was that the site had a terrible, steep access, beside one home to the flag lot, onto a very small building pad, with virtually no room to turn around. The building pad was at the bottom of a 60-degree slope where some evidence of minor erosion slides was still in evidence. The bulk of the subject property was unusable, and towered over its "own" home by over 60 feet. “Back at the office” there was no topo showing on the site plan consulted. The relative value of the homesite was very apparent from a block away, but not from 35 miles away at the division office.
Worse, customers who could have been interested lost any sense of confidence in the builder’s pricing strategy because of this avoidable error. And, the very salespeople who were the conductors of the information to prospects were not even polled. They could see this mini-mountain from their office, but were not considered to have anything of value to contribute.
This reminds us that topo may contribute ONLY privacy, but be offset by extra installation / maintenance costs for landscaping, a smaller, less useable flat pad area, and challenging access.
In terms of waterfront, the long-standing debate is whether high-bank is better than low-bank. If you can walk out to the shore, others can walk on the shore right in front of your home. If you are perched well above the water, the privacy (and potentially-greater view) means you need to hike down to get to the water. Local custom and market will determine which merits the higher lot premium.
Gentle slopes are usually preferred, but the depth of the flat rear yard is almost always a lot premium issue.
Next: often forgotten matters in lot premiums.
Corner lot premiums
Again, similar to adjacent school uses, those who will not even consider a corner will not be persuaded by a lower price. Many will pay extra to be on a corner…more open, often more light, sometimes more privacy since at least one of the adjacent neighbors faces about 90 degrees away from the subject. Usually there is more frontage area as a percentage of the total site.
Corner lots on simple grid streets will still justify a premium. Corner lots on cul de sacs will attract premiums for both issues. There will be less traffic into the cul de sac and buyers will be willing to pay more of a premium than for a home on the corner of two through streets.
Orientation premiums
South and West facing will normally make rear yards more valuable in cooler climates. In the desert Southwest, rear yards facing East and north are cooler and thererfore more useable. Watch for these. Irrespective of your geographic location in the world, about half the rear yards will be the preferred orientation. The site sales team will usually know which orientations are typically preferred. Preferred means they should attract a premium. These may be modest premiums, but they are real. Charge for them.
Adjacent use premiums
The Precise Grading Plan (or Fine Grading Plan or local equivalent) and the project manager will be able to show if there are uses immediately adjacent that will affect specific homesites. (For flag lots, there may be some overlap with the access issue above.) If the home is adjacent to a detention basin, try turning the negative to a positive. Install a hand-carved sign, identify some of the wildlife that will frequent the water, celebrate the butterflies, the deer, the rabbits, etc. Call the basin a permanently protected bio-filtration site. If the site borders a park, a school, a golf course, realize that for SOME these are negatives. Insurmountable to many buyers. Thus, don’t worry about those buyers. Realize that those who buy next to a park will do so to USE the park as an extension of their own home. Those buying beside the school like the kids, the schoolyard view, the excited voices, etc. Price for them…with a premium. The buyers who despise the candy and burger litter, the soccer moms’ traffic in front, the sounds of someone else’s kids yelling...well, these buyers are not candidates in any event.
Usually, adjacent property owned by US Forest Service, for example, will attract a premium value. But think first. Certainly those adjacent to the California wildfires may have been happier if adjacent properties were owned by timber companies, who WOULD have harvested trees, but also would have managed the forests to minimize the damage to neighbors, and themselves. Less politics may have saved lives and property. Think how a potential buyer, in November 2003 would consider a lot immediately adjacent (see above) that is owned by the USFS. Would this be a plus, attracting a lot premium? Or would it introduce major fear in a buyer. Government use is often a premium, but we should ask the questions.
On the negative side, be aware of the site utility issues. If there is an above- ground utility vault, it will be a negative, but seldom a deal killer. Watch for light poles, postal hutches, fire hydrants, water line clean outs, pumping stations, telemetry poles for the pumping stations, power poles, train tracks, chain link fences, present or required. Again watch for immediately adjacent access issues. How is the County going to access the detention basin? Does the adjacent flag lot’s driveway, and hence its traffic, come within 5 feet of my dining room window? Etc.
Topographical premiums
The site-specific topography will be relevant to the lot premium analysis. Also, the topo relative to other homesites in the community will also bear examination. If every home is on a bluff 40 feet above the neighboring homes, the topo is not a premium. But if only some are elevated, the lots with such a wonderful outlook will attract a significant premium. Elevation is normally good. In some heavy snow markets, this will not be true if the driveway becomes a seasonal challenge.
Being at the bottom of a major topo change is normally bad. I once observed purportedly-skilled homebuilders put an enormous premium on a lot that, “back at the office,” showed a very large size of nearly an acre. What they did not factor was that the site had a terrible, steep access, beside one home to the flag lot, onto a very small building pad, with virtually no room to turn around. The building pad was at the bottom of a 60-degree slope where some evidence of minor erosion slides was still in evidence. The bulk of the subject property was unusable, and towered over its "own" home by over 60 feet. “Back at the office” there was no topo showing on the site plan consulted. The relative value of the homesite was very apparent from a block away, but not from 35 miles away at the division office.
Worse, customers who could have been interested lost any sense of confidence in the builder’s pricing strategy because of this avoidable error. And, the very salespeople who were the conductors of the information to prospects were not even polled. They could see this mini-mountain from their office, but were not considered to have anything of value to contribute.
This reminds us that topo may contribute ONLY privacy, but be offset by extra installation / maintenance costs for landscaping, a smaller, less useable flat pad area, and challenging access.
In terms of waterfront, the long-standing debate is whether high-bank is better than low-bank. If you can walk out to the shore, others can walk on the shore right in front of your home. If you are perched well above the water, the privacy (and potentially-greater view) means you need to hike down to get to the water. Local custom and market will determine which merits the higher lot premium.
Gentle slopes are usually preferred, but the depth of the flat rear yard is almost always a lot premium issue.
Next: often forgotten matters in lot premiums.
Establishing Lot Premiums 201
Last post we examined the who, what, when, where and why of establishing lot premiums. In this edition, we will review the actual methodology.
How to do the analysis.
Tools
The tools we need on site are the precise grading plan, a site plottage plan, a ladder, a compass, a few helium balloons, red dental floss, a camera, and a reduced typical floor plan of each plan.
If the site is not yet graded, the PGP is vital to establish the site conditions as they will be, once a customer receives a new home. The plottage plan will show which houses (can) go where and the floor plan will show where windows are (likely to be) located. If the view is toward the river, a premium will likely result, but only if the view can be enjoyed. The same views from different windows will attract different premiums. Certainly we understand that a stunning view from the nursery will not be as valuable as one from the family room, owners’ retreat, etc.
However, if headlights from all community traffic will hit the master suite, or the dining room, the location will suffer a negative. Reading the plottage plan in conjunction with the floor plan will allow an intelligent analysis.
The compass will tell us about heat and light issues. In Phoenix or Las Vegas, a North or East facing rear yard will normally be preferred, to escape the late-day heat. In Portland, South and West facing will be preferred to capture the sunlight and warmth. If they are preferred, they get a premium.
The camera will capture neighborhood influences, usually on the periphery of the community. We’ll want to keep them in mind. (Sometimes, we will want to offer to paint a neighbor’s home, or to install some buffer trees, even if they are on others’ property.)
The stepladder, 6 or 8 feet, will allow us to stand on top and predict the views from second story locations. The helium balloons can be located to approximate view blockages from walls and fences not yet built, or even homes that will be constructed. I like using red dental floss to tie the balloons so I can see if the balloon is floating straight up, or if winds push balloons to one side, thus dropping the elevation from where the eventual structure will be. The red color helps increase visibility from the ladder, or even the finished grade, wherever we are standing.
View premiums
This is the most common matter attracting attention in the lot premium discussion. It is something to be handled delicately since we usually cannot guarantee nearby uses that could impact views. We can provide third party information to buyers regarding zoning, civic restrictions, etc. And we must have our sales teams demonstrate the view whenever it is attractive.
To do the best job of view premium analysis, use the ladder, balloons etc. discussed above. Consider WHICH rooms will have a view. Maybe this is a time to specify a particular home / elevation / orientation in order to maximize revenue. Maybe it is time to change another clever decision made “back at the office” or even one made by a land planning consultant who might not be on the same wave length.
Don’t forget the view INTO the subject site. If the location is at the bottom of a hollow, with 2 story homes perched above, any pool or recreation uses on the subject homesite may be restricted due to lack of privacy. That comes at a cost to desirability and a reduction of the lot premium…or even a negative premium.
Again, remember the premiums are WITHIN the community. I once ascribed view premiums to most lots in a community we were building in Marysville WA. So many had a view of Puget Sound, or of Mt. Baker I was ecstatic to add $500,000 in lot premiums. I did this “back at the office.” I forgot the rule that I needed to find the “vanilla” lot, and adjust from it. Only later did I also learn that, in Marysville EVERYONE expects the water view and the view of Mount Baker. That was no PREMIUM. It was a BASE. Those without these views were the unusual ones and they required a negative lot premium.
Size Premiums
Larger lots will usually, but NOT always attract a premium. The issue is what the benefit is of a larger size. Does it give privacy? Does it simply add construction and maintenance costs? Can a pool fit? A tennis court? An extra garage or workshop building (if they are allowed)? Is there extra room for play areas? Can an RV get access (if they are allowed)? Recently, I have noticed a real trend to wanting on-site RV parking. Not long ago, neighbors would be in arms. Now, communities seem to welcome them, so long as they are not shrouded in blue tarps! Again, however, a large size does not necessarily mean that RV’s are allowed, or if the actual access point is wide enough for an RV.
Cul de sac premiums
Homes on cul de sacs will have extra appeal to most buyers. At the very bottom of the cul de sac, the premium will be greatest. There will be less traffic. Kids will be more likely to play in the street in front of their home. Those orange traffic pylons may well be used by the parents. Other neighbors’ kids may well congregate there. While other buyer profiles will also typically out a premium value on the location, the greatest premium will typically come to / from parents of young kids. As the location gets closer to the opening of the cul de sac, the traffic will be more, simply because more of the neighbors will be accessing / egressing their own homes. Premiums will fall relative to the end of the cul de sac. Each location’s premium value will change. Those across the street from each other will be similar to each other.
Next post: evaluating premiums for corner lots, orientation, adjacent uses.
How to do the analysis.
Tools
The tools we need on site are the precise grading plan, a site plottage plan, a ladder, a compass, a few helium balloons, red dental floss, a camera, and a reduced typical floor plan of each plan.
If the site is not yet graded, the PGP is vital to establish the site conditions as they will be, once a customer receives a new home. The plottage plan will show which houses (can) go where and the floor plan will show where windows are (likely to be) located. If the view is toward the river, a premium will likely result, but only if the view can be enjoyed. The same views from different windows will attract different premiums. Certainly we understand that a stunning view from the nursery will not be as valuable as one from the family room, owners’ retreat, etc.
However, if headlights from all community traffic will hit the master suite, or the dining room, the location will suffer a negative. Reading the plottage plan in conjunction with the floor plan will allow an intelligent analysis.
The compass will tell us about heat and light issues. In Phoenix or Las Vegas, a North or East facing rear yard will normally be preferred, to escape the late-day heat. In Portland, South and West facing will be preferred to capture the sunlight and warmth. If they are preferred, they get a premium.
The camera will capture neighborhood influences, usually on the periphery of the community. We’ll want to keep them in mind. (Sometimes, we will want to offer to paint a neighbor’s home, or to install some buffer trees, even if they are on others’ property.)
The stepladder, 6 or 8 feet, will allow us to stand on top and predict the views from second story locations. The helium balloons can be located to approximate view blockages from walls and fences not yet built, or even homes that will be constructed. I like using red dental floss to tie the balloons so I can see if the balloon is floating straight up, or if winds push balloons to one side, thus dropping the elevation from where the eventual structure will be. The red color helps increase visibility from the ladder, or even the finished grade, wherever we are standing.
View premiums
This is the most common matter attracting attention in the lot premium discussion. It is something to be handled delicately since we usually cannot guarantee nearby uses that could impact views. We can provide third party information to buyers regarding zoning, civic restrictions, etc. And we must have our sales teams demonstrate the view whenever it is attractive.
To do the best job of view premium analysis, use the ladder, balloons etc. discussed above. Consider WHICH rooms will have a view. Maybe this is a time to specify a particular home / elevation / orientation in order to maximize revenue. Maybe it is time to change another clever decision made “back at the office” or even one made by a land planning consultant who might not be on the same wave length.
Don’t forget the view INTO the subject site. If the location is at the bottom of a hollow, with 2 story homes perched above, any pool or recreation uses on the subject homesite may be restricted due to lack of privacy. That comes at a cost to desirability and a reduction of the lot premium…or even a negative premium.
Again, remember the premiums are WITHIN the community. I once ascribed view premiums to most lots in a community we were building in Marysville WA. So many had a view of Puget Sound, or of Mt. Baker I was ecstatic to add $500,000 in lot premiums. I did this “back at the office.” I forgot the rule that I needed to find the “vanilla” lot, and adjust from it. Only later did I also learn that, in Marysville EVERYONE expects the water view and the view of Mount Baker. That was no PREMIUM. It was a BASE. Those without these views were the unusual ones and they required a negative lot premium.
Size Premiums
Larger lots will usually, but NOT always attract a premium. The issue is what the benefit is of a larger size. Does it give privacy? Does it simply add construction and maintenance costs? Can a pool fit? A tennis court? An extra garage or workshop building (if they are allowed)? Is there extra room for play areas? Can an RV get access (if they are allowed)? Recently, I have noticed a real trend to wanting on-site RV parking. Not long ago, neighbors would be in arms. Now, communities seem to welcome them, so long as they are not shrouded in blue tarps! Again, however, a large size does not necessarily mean that RV’s are allowed, or if the actual access point is wide enough for an RV.
Cul de sac premiums
Homes on cul de sacs will have extra appeal to most buyers. At the very bottom of the cul de sac, the premium will be greatest. There will be less traffic. Kids will be more likely to play in the street in front of their home. Those orange traffic pylons may well be used by the parents. Other neighbors’ kids may well congregate there. While other buyer profiles will also typically out a premium value on the location, the greatest premium will typically come to / from parents of young kids. As the location gets closer to the opening of the cul de sac, the traffic will be more, simply because more of the neighbors will be accessing / egressing their own homes. Premiums will fall relative to the end of the cul de sac. Each location’s premium value will change. Those across the street from each other will be similar to each other.
Next post: evaluating premiums for corner lots, orientation, adjacent uses.
Establishing Lot Premiums 101
Setting lot premiums is as much art as science.
As a starting point, it comes as a revelation, even for some who thought themselves skilled, what the premium even means.
BASE prices are set based on the entire BASE package, as related to competitors, including used houses. Base prices take into account plenty of information from OUTSIDE the subject community.
Premiums are set only WITHIN the community. They establish weighting between and among the various locations and then adjust from the base price that was established as above.
Not every lot can have a lot premium. Premium over what? If every lot is waterfront, there cannot be a premium for being on the water. While this seems self-evident, I have seen purported experts that believed that there should be a premium for every lot when the development was one with a great location. Our forward planning team, or our land committee has already paid for the excellent location for the entire project and to then add a premium to every location based on this shows no logic in the entire business of lot premiums.
Certainly one can make the case that the ENTIRE community bears a premium value for its location. That means that the BASE prices overall may be better than the competitors who do not enjoy this advantage. But now within the community, there will likely be some locations that have better lots, and better for several reasons, as shown below.
To be successful in this endeavor takes a serious program of analysis. More importantly, it takes specific tools and a team visit to the community.
Who is on the team?
The professionals involved should include the project manager for this site, the superintendent, the director of sales, or sales VP, etc., i.e. whoever is the senior executive that will be releasing prices and accepting sales contracts.
Some operations will include the division president and general superintendent. This becomes valuable when the analysis shows that we are doing things in the field that may be easiest, but are not the most profitable in terms of lot premiums and revenue generally. Decisions made in the field are ALWAYS best.
Include the site sales team or those that have been assigned to the new community, even if they are not yet deployed. This has them take ownership of the entire process and makes them more successful in responding to customer questions about relative prices for the same plan and elevation…where the sole difference is the lot premium. Sometimes the “premium value” is not evident and needs to be SOLD. Who do we expect to do that? The folks “back at the office, who came up with the premiums? If the sales team are coming from a similar or nearby community, they will always have more / better / more current information than others. If we do not have any local knowledge, we can still use the resources of our sales team that will ultimately be tasked with making the sales.
One nationwide builder does not advise the sales team of how the lot premiums were decided. Not only is there no sense of team, there is no sense of buy-in and there is confusion on the sales floor. If our salespeople are a resource, let’s use them. If they are not let’s replace them. But let’s work as a cohesive group to set, then ACCOMPLISH the lot premiums.
What base lot is included in the BASE price?
Find the “average” lot in the community. Then adjust from there. Find the lot that a normal customer would expect to receive for the base price. Note this is NOT the worst lot, the one under the high-tension lines, adjacent to the railway tracks and overlooking 70 year-old shacks. (These homes / lots will be assigned a negative premium, a reduction from the base community price or that home and elevation.) Everyone should agree which is the average, the vanilla lot. Now, we start the adjustment process.
When to do the analysis?
The glib answer is daily, just like our customers. But for best results, a community-wide analysis can be done early, then each phase or release can be an updating exercise, using the latest customer feedback, account for any changes in topo, in regulatory matters, in plottage, etc.
Remember, lot premiums are an adjustment to base prices, and early analyses of them does not preclude price changes due to appreciation, relative demand for a given plan, orientation, elevation, etc.
Don’t be afraid to learn from customer reactions if you have set premiums too high, too low, or on the wrong lots. At a minimum, you can make adjustments as new phases get ready for release. If sales take off TOO quickly, or they seem to be lethargic based on lot premiums, it’s time for a review.
Where to do the analysis?
Foolish are those who set lot premiums “back at the office.” Two-dimensional maps, even supported by a team with prodigious memories are no substitute for walking on the dirt!
Why Bother? Why do the analysis?
The truth is that customers intuitively put different values (THEIR values!) on different locations. We can help them select the location that best suits their needs at the price that distinguishes each site. No one will buy until they get to the one-of-a-kind property. Locational differences help buyers make their decisions and add urgency to the exercise. Premium pricing also allows us to meter out the absorption so that we do not get “cherry-picked” with the worst lots left till last. They are also the differences most easily changed to increase velocity or to shift demand to the locations we most want to sell…without eroding our overall pricing strategy.
Next: HOW to do the analysis.
As a starting point, it comes as a revelation, even for some who thought themselves skilled, what the premium even means.
BASE prices are set based on the entire BASE package, as related to competitors, including used houses. Base prices take into account plenty of information from OUTSIDE the subject community.
Premiums are set only WITHIN the community. They establish weighting between and among the various locations and then adjust from the base price that was established as above.
Not every lot can have a lot premium. Premium over what? If every lot is waterfront, there cannot be a premium for being on the water. While this seems self-evident, I have seen purported experts that believed that there should be a premium for every lot when the development was one with a great location. Our forward planning team, or our land committee has already paid for the excellent location for the entire project and to then add a premium to every location based on this shows no logic in the entire business of lot premiums.
Certainly one can make the case that the ENTIRE community bears a premium value for its location. That means that the BASE prices overall may be better than the competitors who do not enjoy this advantage. But now within the community, there will likely be some locations that have better lots, and better for several reasons, as shown below.
To be successful in this endeavor takes a serious program of analysis. More importantly, it takes specific tools and a team visit to the community.
Who is on the team?
The professionals involved should include the project manager for this site, the superintendent, the director of sales, or sales VP, etc., i.e. whoever is the senior executive that will be releasing prices and accepting sales contracts.
Some operations will include the division president and general superintendent. This becomes valuable when the analysis shows that we are doing things in the field that may be easiest, but are not the most profitable in terms of lot premiums and revenue generally. Decisions made in the field are ALWAYS best.
Include the site sales team or those that have been assigned to the new community, even if they are not yet deployed. This has them take ownership of the entire process and makes them more successful in responding to customer questions about relative prices for the same plan and elevation…where the sole difference is the lot premium. Sometimes the “premium value” is not evident and needs to be SOLD. Who do we expect to do that? The folks “back at the office, who came up with the premiums? If the sales team are coming from a similar or nearby community, they will always have more / better / more current information than others. If we do not have any local knowledge, we can still use the resources of our sales team that will ultimately be tasked with making the sales.
One nationwide builder does not advise the sales team of how the lot premiums were decided. Not only is there no sense of team, there is no sense of buy-in and there is confusion on the sales floor. If our salespeople are a resource, let’s use them. If they are not let’s replace them. But let’s work as a cohesive group to set, then ACCOMPLISH the lot premiums.
What base lot is included in the BASE price?
Find the “average” lot in the community. Then adjust from there. Find the lot that a normal customer would expect to receive for the base price. Note this is NOT the worst lot, the one under the high-tension lines, adjacent to the railway tracks and overlooking 70 year-old shacks. (These homes / lots will be assigned a negative premium, a reduction from the base community price or that home and elevation.) Everyone should agree which is the average, the vanilla lot. Now, we start the adjustment process.
When to do the analysis?
The glib answer is daily, just like our customers. But for best results, a community-wide analysis can be done early, then each phase or release can be an updating exercise, using the latest customer feedback, account for any changes in topo, in regulatory matters, in plottage, etc.
Remember, lot premiums are an adjustment to base prices, and early analyses of them does not preclude price changes due to appreciation, relative demand for a given plan, orientation, elevation, etc.
Don’t be afraid to learn from customer reactions if you have set premiums too high, too low, or on the wrong lots. At a minimum, you can make adjustments as new phases get ready for release. If sales take off TOO quickly, or they seem to be lethargic based on lot premiums, it’s time for a review.
Where to do the analysis?
Foolish are those who set lot premiums “back at the office.” Two-dimensional maps, even supported by a team with prodigious memories are no substitute for walking on the dirt!
Why Bother? Why do the analysis?
The truth is that customers intuitively put different values (THEIR values!) on different locations. We can help them select the location that best suits their needs at the price that distinguishes each site. No one will buy until they get to the one-of-a-kind property. Locational differences help buyers make their decisions and add urgency to the exercise. Premium pricing also allows us to meter out the absorption so that we do not get “cherry-picked” with the worst lots left till last. They are also the differences most easily changed to increase velocity or to shift demand to the locations we most want to sell…without eroding our overall pricing strategy.
Next: HOW to do the analysis.
The Product Seminar
Every sales team will have a standout demonstrator. She is often the one with the most product knowledge.
Consider upgrading the product knowledge of your entire sales team to increase overall performance. Team up the top demonstrator with a site construction expert to organize a product seminar. Usually a superintendent is happy to spend a day with the "suits.” He can assist in coordinating major sub-trades to each make 30-45 minute presentations followed by questions.
Include framing, mechanical / HVAC, insulation, roofing, and your customer service manager on the "faculty." Manufacturers’ reps for flooring, appliances and plumbing fixtures are valuable at this training. Perhaps, also include the utility installers and landscapers.
I’ve found vendors will often provide exhibits, gifts, trinkets, or snacks.
The seminar should be at an active site so the trade partners can point to their components and provide tips and benefit language to the people who sell them. Use a finished home or model as the classroom. Use homes or sites under construction, as your laboratory. Remember, you will need hard hats, suitable clothing and footwear!
I recommend the training take an entire day, spaced by frequent breaks. Your traffic counts will determine which day is least harmful to close sites to prospects. Generally, it’s Friday. Have sandwiches sent in so that the trade-partners can have lunch with those who were previously considered prima donnas.
The confidence building in our salespeople will be obvious.
Immediately after a product seminar, I watched a sale made because the salesperson could tell a prospect that our homes had a safety clip on any widows that a child could reach. This protected against little ones opening a window and climbing out.
This was, in fact, a Code requirement, but was positioned as a benefit to the prospect. “It’s just another example of something that our builder cared enough to include. Have you seen any other new homes that do this?”
Another sales professional had learned her homes’ Richter rating from the framer. Being able to quote this was something her competitors could not do. Every prospect was given “our” Richter rating, followed by a question about what the ratings were at other communities. The sales asset would successfully position against used houses and the other builders whose salesperson had no similar knowledge!
The GE vendor showed how the top of a GE range could be opened with a baby finger and thus be easily cleaned. Probably all appliances can be lifted this easily, but isn’t it a powerful demonstration? The GE representative also encouraged the sales professionals to add more benefit language, pointing out that theirs was a “Pot Scrubber” dishwasher.
Invite representatives from accounts payable, forward planning, and purchasing to attend. You may be surprised at how much your own design center team may learn. What is the downside of inviting a preferred lender?
Be sure to thank all the participants and circulate an appreciation card for sales staff to sign and personalize to everyone who made a presentation. You might even prepare nice certificates of appreciation and have them framed. You may still see them years later on a vendor’s wall! It’s great goodwill at negligible cost.
And, if your salesperson ever needs a favor, a quick turnaround, or some third-party objective advice to a prospect, the trade partner or vendor will almost always oblige.
Consider upgrading the product knowledge of your entire sales team to increase overall performance. Team up the top demonstrator with a site construction expert to organize a product seminar. Usually a superintendent is happy to spend a day with the "suits.” He can assist in coordinating major sub-trades to each make 30-45 minute presentations followed by questions.
Include framing, mechanical / HVAC, insulation, roofing, and your customer service manager on the "faculty." Manufacturers’ reps for flooring, appliances and plumbing fixtures are valuable at this training. Perhaps, also include the utility installers and landscapers.
I’ve found vendors will often provide exhibits, gifts, trinkets, or snacks.
The seminar should be at an active site so the trade partners can point to their components and provide tips and benefit language to the people who sell them. Use a finished home or model as the classroom. Use homes or sites under construction, as your laboratory. Remember, you will need hard hats, suitable clothing and footwear!
I recommend the training take an entire day, spaced by frequent breaks. Your traffic counts will determine which day is least harmful to close sites to prospects. Generally, it’s Friday. Have sandwiches sent in so that the trade-partners can have lunch with those who were previously considered prima donnas.
The confidence building in our salespeople will be obvious.
Immediately after a product seminar, I watched a sale made because the salesperson could tell a prospect that our homes had a safety clip on any widows that a child could reach. This protected against little ones opening a window and climbing out.
This was, in fact, a Code requirement, but was positioned as a benefit to the prospect. “It’s just another example of something that our builder cared enough to include. Have you seen any other new homes that do this?”
Another sales professional had learned her homes’ Richter rating from the framer. Being able to quote this was something her competitors could not do. Every prospect was given “our” Richter rating, followed by a question about what the ratings were at other communities. The sales asset would successfully position against used houses and the other builders whose salesperson had no similar knowledge!
The GE vendor showed how the top of a GE range could be opened with a baby finger and thus be easily cleaned. Probably all appliances can be lifted this easily, but isn’t it a powerful demonstration? The GE representative also encouraged the sales professionals to add more benefit language, pointing out that theirs was a “Pot Scrubber” dishwasher.
Invite representatives from accounts payable, forward planning, and purchasing to attend. You may be surprised at how much your own design center team may learn. What is the downside of inviting a preferred lender?
Be sure to thank all the participants and circulate an appreciation card for sales staff to sign and personalize to everyone who made a presentation. You might even prepare nice certificates of appreciation and have them framed. You may still see them years later on a vendor’s wall! It’s great goodwill at negligible cost.
And, if your salesperson ever needs a favor, a quick turnaround, or some third-party objective advice to a prospect, the trade partner or vendor will almost always oblige.
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