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.