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Maximizing Home Builder Profit Margin: Homesite Releases and Premiums (Part II)

By Star Report 6 min read

By Nate Amidon, Sales Leader - New Home Star //

Your builder bought a gem piece of land, and you both know the demand is there. Regardless, you’re both anxious to get selling because you want to boost your bottom line as fast as possible. You’ve worked together to set premiums on the best views based from the plot map. From there, your builder tells you to release them ALL and get every sale possible. Looking at this from a builder’s point of view, that may sound reasonable. The reality, however, is that it’s not when you have a goal of maximizing your pace and margins.

To view other parts of the article series, please click on the links below.

In this article, we are going to dive into two aspects of community strategy. First, we will look at homesite release strategies and explore a better approach than the one described above, for you, your builder, your salespeople, and their customers. Second, we are going to look at homesite premiums and discuss why you can’t just set them and forget them unless your goal is to give away money and kill your pace during certain life cycles of your new community.

So, why isn’t it reasonable to have all of the new homesites released? It certainly offers a lot more choice, the logic will go, and the more choice I have, the more sales I’ll get, right? Our experience tells us it’s not, so let’s uncover why!

By releasing too many homesites at a time, you are, in fact, hurting pace and profit. Too many choices in homesites mean less urgency for your customers to purchase. Your teams can maximize pace with sound management tactics to help them create urgency. Try thinking about it from your customer’s perspective for a minute. If you walk into a community that has 100 homesites available and you only see that two have sold, you most likely would conclude that it’s smart to wait and see if the community will be a success because there is simply nothing about the community that is compelling you to take action. However, if you walk into another community and they only have 12 homesites available at pre-construction pricing, another two sold and only have two of the premium site you prefer at the current pricing, you might feel more compelled to get serious about your decision. We entirely agree that there should be a good mix of A, B, and C sites available to offer, but that doesn’t mean you need more than 12-15 sites available at any one time.

The other side of this is the capacity of a sales associate to sell the value of any single site. I’ve been in this industry for 15 years, but if you give me 50 sites available, there’s just no way I can know them intimately and thoroughly enough to maximize the value. By releasing too many sites, you aren’t doing your sales team any favors because they can’t be the experts that their customers demand them to be. In turn, this will hurt their credibility and overall conversion abilities. Let’s say we’re given 12-15 sites at a time. With this amount, I can know the dimensions by heart, know what fits and what doesn’t, know the exact distance to your amenities, the sun exposure each gets, and can differentiate each one based on the smallest details.

Limiting your release to 12-15 sites in a phase has additional benefits. It controls the construction locations of the community, which will lower customer complaints about noise and debris after they move in and delivers more efficiencies to the construction teams by keeping the homes under construction in pods. It also gives you an opportunity to create pricing strategies that elevate with each new phase release. This is a must because a customer’s willingness to pay will increase in a community that’s more established, so it’s reasonable to capture this value throughout the life of the community.

So now that we have our release strategy down to 12-15 sites, we can still set premiums at the beginning and then be done right? Sure – but a superior Sales Manager won’t do that. Premiums are as much a sales strategy as they are a margin enhancer. Let’s say I set my best three lots in my first phase of 12 lots at $25,000. I release the community and two out of those three sell first. We’re feeling good, right?! We made $25,000 more on those lots! Your margins look good out of the gates and in the short term, you’re feeling really good. If your Sales Manager doesn’t immediately raise that last premium up significantly, you are about to hurt your sales pace. Premiums are meant to ensure that the customers purchase the site that is right for them and their needs. If I make my best sites too cheap, then I will get someone who WOULD HAVE bought a less attractive lot buying my best sites. Now when I get the customer that requires my best site, I can’t sell them because I sold it to the customer who would have happily bought the interior lot, but that “lake lot wasn’t that much more so why not.”

Sound sales management suggests that we need to be studying our pace, not only of the community as a whole but of the A, B, and C sites inside of a community and making adjustments if one is selling faster than the supply ratio we have. The worst situation your sales teams can do to builders is cherry pick your best sites first, then ask you to discount your worst lots at the end, eroding your margins of the entire project. Instead, what if we ended each phase and each community with your best lots by setting premiums effectively and adjusting so our best lots don’t sell first – now I just have to adjust the premiums down a bit at the end versus asking you for additional incentive because that “railroad track site is impossible to sell.” It’s a much easier conversation to defend a high premium and offer a choice to a customer than it is to tell customers their only choice remaining is the power lines lot!

Help your sales teams create urgency and control the pace of A, B and, C lots by being diligent in your community sales strategies from beginning to end. Don’t have the time – call us! We do it for you, and we only get paid when we sell!

Originally published May 17, 2018 under Explore the latest topics, updated March 7, 2024

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