For our Clients and Friends,
For buildable lots and land to begin to sell again, we need the new construction industry to awaken. Below is an article of such an awakening and I think you will find some encouragement even as I have. There is a lot of data to peruse. I have focused on parcels from 3 acres and larger for the data in this article.
I think there is light at the end of the proverbial tunnel. I would love your thoughts and response as always. Let me know what else we can do for you. – Randy
We are approaching five years since the bottom dropped out of the housing industry. Housing has suffered the severest blow of all sectors in the economy. The hardest hit segment of the housing industry has been new construction and selling buildable lots and land.
Is all of that about to change?
There are some builders who are building new homes as fast as they can be constructed; they are all selling as pre-solds, and they are producing acceptable profits for the builders and the lenders. This in spite of the fact that re-sale home pricing in general is below the cost to build. Through our representation of Forest Glen, a gated luxury community in McMinnville we have been exposed to builders such as Tom Liesy of T. A. Liesy Homes (www.taliesyhomesnw.com ) who is successfully building and selling in Happy Valley (Sunnyside/Clackamas area). Happy Valley has been our own version of California’s disastrous housing crash with losses in excess of 50%.
What is happening to change things? Is this a lesson and a pathway for the recovery of new construction and to the restoration of sales for buildable lots and land? I think it is. Here is what we are learning:
1. To invest well, one needs to buy well:
Happy Valley (and Bend etc.) was the focus of wild speculation until 2007. The price of land was at an altitude which is head-spinning. Today all that land has been through foreclosure and/or bankruptcy and lenders have sold this off at bargain rates to anyone willing to risk building. In our area First Federal sold Forest Glen lots at $43k per lot, down from $280k for some lots at the height of the market. Lots were subsequently sold to builders at wholesale prices above that but still at prices allowing the builder to become competitive with re-sale homes. Lesson one: the price of the land is fundamental to making sense of building at a time like this.
2. To sell well, one must provide great value and incentive; more value than the resale markets:
Builders must forget about the past and understand that almost everyone related to our industry has taken losses of at least 30% and commonly up to 50% (and for some more). Buyers today can and do demand high quality, good space, and desirable amenities for a low price or they will not buy. What will you do? Meet the market demand or sleep it off for the rest of the decade? Builders who find ways to become successful now are growing their reputation and market share now, and are well positioned for greater profits in the future as recovery matures.
3. Is there money available for buying land and for new construction right now?
Yes, but not through normal channels. The builders who are successful are using private money which is also known as hard money. It costs more but it is readily available now rather than waiting for conventional financing to loosen up years from now when it is too late to play catch-up. Remember, hard money is also at historic lows. You will not get today’s amazing sub 4% financing for the project, but most builders are not strangers to the 7-10% they have paid in the past. Think bigger picture; someday in the not too distant future, 7-9% will be the norm for everyone.
Some buyers will still come in with cash to purchase the lot or parcel, and some already have construction-to-perm lending set-up, but for most people today that is an overwhelming task. Today’s successful builders build the home on their own dime. When the construction is complete then the transaction can close with the buyers’ traditional financing with whomever they choose (just like buying a re-sale home). Helping buyers avoid the nightmare of new construction financing is not only crucial right now, it is a huge value for the buyer and that is the heart of the issue of getting them back into the new home market. With just earnest money down, their ‘pre-sold’ home is completed and the buyers get their own loan at historically low interest rates (recently as low as 3.6% for 30yr fixed) with their favorite mortgage broker or bank.
4. No Games; No Gimmicks Allowed:
Before the crash, builders often partnered with preferred lenders for a cut of the profits of the loan. Pressure (often flagrantly unethical pressure) was put on the buyer to use their in-house lender so the builder could have another income stream.
We all remember the days of builders (particularly the national and regional builders) pricing the basic home and then hard-selling all the amenities. With every amenity came a huge mark-up and of course no credit for the fixture that was already factored into the price!
Tom Liesy welcomes buyers to get their own best financing to complete the sale when the construction is complete. He offers his buyers his contractor’s discounts with his vendors on any upgrades beyond his already generous amenities and then does not take builder mark-ups for these upgrades. Any personal choices and changes to amenities and are strictly between the buyer and the vendor. Welcome back, Trust!
5. How can this be model be profitable?
I am certain the public would be shocked at the profits builders were making in the heady days now a long time ago. There was a lot of room for adjustment before pleading poverty. Today, the only way a builder will be able to plead poverty is to remain in the past and stay unemployed for the foreseeable future. Entrepreneurs always find a way to meet market demand with good supply. Determination and creativity can overcome any challenge…
And hard work and intelligent strategy! One must become efficient. Systems and the people to carry out those systems efficiently, are always key to increasing profits and achieving success. Tom can build any home in 75 days. Does that mean it is cheap and poorly constructed? Not if the builder is demanding high standards and the same drive for efficient profitability from his sub-contractors. If the system is thorough and self-policing for quality, then it is a win-win for buyer and builder.
A good sales force is also crucial. The builder should focus on what he is expert at- building quality homes offering the best value to the marketplace and achieving well-earned profits. Select Realtors® can add their expertise to build the brand (the builder), market the project (the neighborhood, the development), create demand, advertise and promote each home, and then manage the entire sales process from farming for prospective buyers to closing happy owners and gaining their referrals for future sales. Even in times of strict accountability for every dollar spent, effective marketing and sales adds value and creates profits.
In the past, builders could not ‘afford’ to pay Realtor® commissions; this myth has been forcefully debunked as former profit margins came to light. Yes, builders could just put a sign out and sell their homes. Today, successful builders partner with competent and proven marketing and sales professionals to create demand and to go out and find buyers. Today builders also need any Realtor® to be willing to bring their clients to talk with builders knowing they will be paid for their services.
There are no longer excuses for the new construction industry to stand idle. Visionary leaders and hard working entrepreneurs are already proving in our markets that it is time for the public to again have options for buying new homes. Bold builders who are willing to face reality straight-on are showing that new construction can compete with the historic low prices of re-sale real estate and win more and more buyers. These pioneers will be tomorrow’s great success stories.
For our clients selling buildable lots and land, the revitalization of the new construction industry will overflow from developments to the countryside.
This is good for all of us!
Randy McCreith, Principal Broker
Bella Casa Real Estate Group