HEAD to HEAD is now a thing! What kind of thing, you ask? Well, it is something in between a podcast and a webinar, and you are invited to attend one or all of them! On February 16, 2021, Kimberly was joined by Chris Hartley, VP of Sales for K. Hovnanian Homes in Dallas. We had a lively discussion about throttling or controlling your sales pace. What is working? What are the best practices so that you don’t hurt your long-term prospects in your market? Should you continue to advertise? Price increases? Lotteries? General Real Estate Agents? Every action has an equal and opposite reaction, so how can you make sure you are managing for now and for the future when the market turns? Chris Hartley is known for being one of the most innovative and forward-thinking sales managers in our industry, and remarkably, he is willing to share his knowledge with you. If you weren’t able to join us live, or even if you did, but didn’t catch all the incredible information we shared, please grab those earbuds, grab something to take notes, grab a snack and join us. For more information, and to see what is coming up, please visit: https://NewHomesSolutions.com/head-to-head
If you would like to read the discussion between Kimberly and Chris, below is the transcription as translated by Youtube:
Kimberly: Welcome everybody to the second only Head to Head. This is not a webinar and not a podcast-it’s something in between. It’s its own thing; it’s Head-to-Head. I’m so thrilled of course to have Chris Hartley who needs no introduction at all joining me, but we will give him a little bit of an introduction. If you want to reach out to either of us, this is our contact information (For Chris Hartley: email@example.com and for Kimberly Mackey: newhomessolutions.com) Chris is a badass that’s just what he is.
Chris: You’re too nice.
Kimberly: He runs marathons, he has a sales team that he manages full-time-a huge sales team with huge goals. You sold how many during the first quarter so far?
Chris: Right about 300 first quarter. Too many!
Kimberly: Too many according to corporate which is perfect for the conversation today. He’s a speaker, he’s a little bit of everything. He’s also a philanthropist. What board do you serve on Chris?
Chris: Zillow builder advisor board and I’m on the Atlas RTX and I’ve been on the American Cancer Society board for a few years. So just a few. It depends on what’s going on in the world.
Kimberly: You know the American cancer society is very close and near and dear to my heart. My mother was very active with the American Cancer Society before she passed, so that’s an organization that I give to freely every year. Great group. Welcome, everybody. We’ve got a huge topic to get to today, and we’re going to be talking about something that is a very hot topic in the industry right now and, that’s sales throttling.
Chris: You know, it’s funny because your topic is literally at the perfect time. It’s at the perfect time considering half of my communities are on sales restrictions. There are builders throughout the country that are on restrictions as well, but what’s so fascinating about this is if we recall, it was what 10 months ago almost to the date that we were having joint webinars and calls, and everybody was freaking out because the NBA season had just canceled. It was almost like the next level of everything else canceling, and we were all joining together panicking on what in the world were we going to do if we were going to be heading into another recession. It’s fascinating that 320 days later we are talking about how in the heck do we slow things down and manage our business better. I never would have guessed – I guess that if I would have guessed, I would have bought a whole bunch of builder stocks in April of last year when they all crashed, and today I would be extremely wealthy. yeah
Kimberly: Builders are not the darlings of Wall Street normally. It’s a high-risk business. It’s crazy. We should have bought some. Hindsight’s 20/20. I started in March with Carol Morgan and Leah Fellows. We were doing webinars to help people get through. People were panicked. “Oh my gosh we’re shut down; how do we still communicate with our buyers?” The industry just went through this total transformation, and I have to say, I believe for the better that we opened our minds to some things. You and i were just talking during our tech check, that because of all this insanity, people have forgotten about the customer journey and the customer experience, and we can’t let that happen.
Chris: There is one statement that I would love to make; we do prepare for these discussions, and I do have all my notes, so if you see my eyes just go up, it’s because I’m cheating. I have a huge sign in front of me that says ‘Don’t forget the customer journey.’ No matter what – good times and bad – you can’t forget that if it wasn’t for the customer, none of us would have the opportunity to do what we do for a living anyway. It always fascinates me – I had an amazing VP of Sales one time telling me when I was still selling homes, I was a big to-do list person – I still am – and she came in and she would always ask to see my to-do list. I never quite understood why she cared what my to-do list was. One day, she came in and said, “I’ve been watching your to-do list for months, and you know the two things you don’t have on there are (1) sell a home today and (2) take care of my customers.” It was interesting because it should just be something that comes every day to us anyway, but for a lot of us we get so busy throughout the day that we forget if it wasn’t for the customer, we wouldn’t have a job anyway. When you look at this, I’m so proud of our industry and where we’ve come in the last 330 days, because for those of us that are old enough – and there are a lot of younger people on this call too, but I’m considered older now that I hit 40 – For those of us that went through the Great Recession, if you remember it was almost like every person for themselves, every builder for themselves. There was not a lot of joint togetherness maybe because we didn’t have Zoom and all those kinds of things to make our industry better. Whereas when this happened in March of last year, it was a tight-knit group that joined together and said, “There is enough for everybody. How do we get together and make this happen?” That was a great sign for allof us moving forward. I think today to your point, we are better today than we were 330 days ago. Things like what you’re doing here with Head to Head, and with what so many other speakers and trainers are doing, it helps the industry. I know we had a couple of hundred people signed up for this, and I know a lot of people will listen to it later when they can on their time, but it’s an exciting time to be in the business. We can’t forget the customer, though, and that’s ultimately what it’s all about.
Kimberly: That’s very well said, and you know I’ve gone through this journey myself during the pandemic building a home and going through it, and even knowing what I know about home building, I must tell you, some things didn’t go quite right. Now because I know the industry, I didn’t panic or freak out over it, but we must remember that people don’t buy homes every single day.
Chris: No, they don’t buy new homes every day.
Kimberly: Any home. And especially build a new home and go through that whole process. We get so busy and so wrapped up as you said in stuff, that we forget. And we’re going to continue to forget if we don’t map out that customer journey, and we don’t map out those touchpoints and the handoffs and have those seamless so that everybody is singing from that same proverbial sheet of music.
Chris: You know what’s fascinating during what we were just talking about how not everybody does this every day, and not everybody buys new every day? I’m a huge reader, and I know you are too. I listen a lot better than I read because I’m in the car a lot. The NAHB put out a fact here maybe two or three weeks ago that out of the adults they surveyed, 15 percent of the general population said that they would consider owning a new home in the fourth quarter of last year. When they typically do this survey, they ask the question, “Do you want to go new, or do you want to go pre-owned?” For us new homes people we call it used, so I wasn’t going to insult any REALTOR® that was on the call, but in 2019 that number was only 19 percent. Only 19 percent of people considered new. In the fourth quarter of 2020, it was 41 percent, so that’s a 22 percent jump. 22 percent jump year-over-year in people that consider new. When we look at the issue and why we have the issue of throttling, to begin with, it’s simple; there are more people looking to buy new today than ever. If you equate to that, because I get this question a lot when I do a lot of teachings is they ask, “How in the world during the global pandemic do you have more people buying homes today than almost ever?” Let’s make a statement too – we went up last year 11 percent year-over-year for new home sales in the entire country. This year we’re expected to go up five percent. This will be the first year since 2006 that we’ve gone over a million new homes. That’s insane.
Kimberly: It’s not even a drop in the bucket of what’s needed.
Chris: Not even a drop. Then you look at the four reasons why people are buying homes today. 2.7 percent interest rates when 5 percent was not that far ago. The millennials have entered the market. I’m not a millennial. I miss that, but forever we have been talking about when the millennials jump in, when the millennials jump in, you’ve pulled the millennials out of the renting cycle with low interest rates. Then you add in the fact that you have a lack of resale homes. Across the entire country, it’s less than two months when six months is considered healthy. I think I saw it was 1.8 or 1.9. Then you add in work from home. You’re able to drive out further to afford a home, so as we’re looking at the factors of what has put us in this position, it’s a good thing. This is a good problem to have. I’ve heard people say, “Oh, it was easier back in the day.” We just need to stop complaining about it, and look at it as an opportunity, and embrace it. But have fun with it. Learn from it. Don’t forget the customer during it, and then profit from it. That’s what we need to do.
Kimberly: Just by budgeting your time as a salesperson – sales managers, you’ve got to coach your people through this. We throw our salespeople out there, and we just expect them to know how to do this. I worked with a group a couple of weeks ago, and we spent five hours, and we hammered this stuff through. Here’s what your customer’s saying, and what does it mean? They thought they knew, when in fact it was just a lot of assumptions. We’ve got to stop assuming things if we’re going to get better. As Chris said, now is our time to shine, but it’s also the time when we need to have a relationship with our buyers more than ever because there’s so much unpredictability in our market. We don’t know when we’re not going to be able to get windows. That refrigerator they want? That’s two years down the road. The light fixture that they ordered is probably not coming in. Are they going to have to change floor tile? Probably three times. Are prices going to change? Yes. Stuff is going to go wrong, and if you are one of those people, “Well, I don’t like conflict, Kimberly.” I say, “If you don’t like conflict, then get good at telling people what could go wrong upfront and get animated in the way that you explain it so that it’s memorable. Then say it repeatedly about 50,000 times, because they will forget in the stress of building.” You have to do those things, or they’re going to have a bad experience.” We know that our cycle times are getting pushed out. Gone are the days with the three and four turns a year for big builders.
Chris: Four. We haven’t seen four in a while. Three was okay, but now it’s more like two. We do have a lot of new people that are on this, and what’s great about this webinar, is we have a lot of people with experience. We have some amazing names on here, but we do have some people that are new to the business. Two things I want to talk about that you’ve thrown out there. Do you want to explain what throttling is, and then you explain a cycle time to a typical person that’s not in management that’s not watching the books probably as much as what some other people are?
Kimberly: Yes. Let’s start with sales throttling because that’s a new term for us. Back in 2002 and 2003, we had a little bit of this, but we were able to manage it differently. This is a different animal. This is like 2003 and 2004 on steroids, so this is completely different. We are having to manage sales pace for two reasons: (1) we’re selling so far out, we’ve burned through any standing inventory that we have, and (2) if you don’t, it’s because it’s not priced anywhere remotely right, or it’s a total dog and you need to look at your plans because. Those are the only two reasons it’s not selling. In my market, there’s a 0.4-month supply. Point four, not four months. We must manage that sales pace from a builder’s perspective. You might think, “Oh all these sales are great! I need all these sales!” No, you don’t, because you can’t manage your pipeline that long. You can’t keep a buyer engaged that long, and you don’t know what your pricing is or your risk when you’re talking about selling homes that far in the future. We need to sell homes that we can build now, because even then, because of the cycle of building the home taking longer – moving it from a four-month cycle to a six-month cycle from start or dig or from wherever you are depending – now you’ve added two months. That’s two months more risk for a builder.
Chris: Not only risk, but it’s your carrying costs, it’s your insurance, your interest. It is your taxes, it’s your utilities, it’s everything else. I have a strong sales team here in Dallas. I was very blessed to come in with a really strong team, and I have two phenomenal sales managers, and they did a great job educating the team, but I’ll tell you the team always asks the question, “Why are you slowing me down?” You have a couple of different things. You have the construction side of the business which is saying, “Hold on a second, our average guy is used to carrying 20 homes at a time, and now you want us to carry double that?” A division president is looking at this and saying, “Well, I can’t go out and just hire a whole bunch of people that don’t know our process, and then in addition to that, what does it cost to hire these people?” Not only is it the salary, the bonus, the 401k, the insurance, are your sales pacing high enough that warrants a second person?
Kimberly: Then what do you do with them once the market turns?
Chris: That’s the whole other question. Do you have a massive reduction of force when the market stabilizes itself? That’s another concern. You have warranty which is saying, “Wait a second. There are not enough trades to handle the work that’s coming through.” You have the land department that’s saying, “Our land costs are going through the roof. We need you to slow it down.” But then you have salespeople who are saying, “Money, money, money, money!” I get it because I’ve been in that situation. One of my favorite salespeople of all time named David McCleary used to call me up and say, “Hey, I know this is a little bit less of a deal than we want to take, but one in the hand is better than two in the bush.” I used to just laugh at that. I’m thinking now we would say no, that’s not the case. This is not the case that it’s going to be, and we must manage it and I look at it from a salesperson standpoint. This was the message that was sent to our team: If we had an abundant amount of land – meaning we would never run out – already on contract, already developed and ready to go. Your phases were hundreds of homes ahead of us. If our trades were abundant, and every home builder in DFW was also not trying to sell every home they could, if our construction managers were robots and not humans – we’re not building cars on a manufacturing plant that runs 24/7. These are people that manage and build these homes. We are going to burn them out.
Kimberly: They are already building in a pandemic too.
Chris: They’re already struggling with that too. Then you just look at all those issues there, and you need the throttling. You need to slow it down because you’re ultimately damaging your team. Not only are you damaging your team, who are you damaging the most? The customer. Again, we are doing the customer a disservice by not slowing things down. I’ve heard some build times in DFW from sale to close right now, and I’m not even kidding you, is 12 to 14 months.
Kimberly: This is on production builds, people. We’re not talking about custom homes.
Chris: We’re not talking about custom. I have the shortest attention span of the entire planet telling me I’m going to have to wait 12 to 14 months for anything, that would just drive me crazy! Not only to mention that we have no clue what the costs are going to be of these homes in 12 to 14 months. We struggle to know what they’re going to be here in 30 to 60 days. As a manager, if you’re trying to tell your sales team this is the reason we’re scaling back. It’s simple. If you cannot replace the land that you have in front of you today, if your number is going to shrink from 2021 to 2022, you are operating poorly, and you need to pull it back. If you have people lined up at your door to buy houses, and you’re still giving incentives away, you need to pull them back. If you do not price increase correctly, you need to figure out what you’re doing. There are so many ways that we can do this. I know we’re going to talk about several of these examples, but long story short, you just need to sit down and educate your team as to why you must do this. Ultimately, it’s so they have a job in the future too. There is such a thing about selling yourself out of a job. Remember that old saying? It’s been a long time since we’ve heard it, but it’s a real thing.
Kimberly: It is a very real thing, and I’ve run builders out of land before. Stuff like this happened simply because they couldn’t accept what their new absorption rate was. Now that we know, this is your new absorption rate, people. Your absorption rate is the number of homes that you’re selling, and the rate you’re burning through your land, so you need to know. You must pace your land position accordingly. I believe we have some smaller builders on, and you can take advantage of this too. I know they’re thinking, “Well, I don’t have that problem. I’m not a big production builder, and Wall Street isn’t looking at my numbers this year versus next year, so I just need to make hay while the sun is shining.” You still have a limited supply of land. You still have the same risk that any builder has, so pace your land position accordingly, and you can do some things to increase your market share during this time. One of the things is by determining what that absorption rate is. You can act like a big builder. Sometimes you have to fake it ‘til you make it. You can say, “I only want to sell three, I can only start three a month, or I can only start two a month, so I’m only going to sell to a month.” Then you advertise that. You act like you have big builder syndrome. It’s like we can only do two a month, and once those two are gone, that’s it. I can’t sell anymore for the rest of the month.
Chris: You bring up something that needs to be discussed too. When you are putting restrictions on teams, there is no such thing as over-communicating with your sales team, with your construction team internally. There is no such thing as over-communicating with the customer either because what you are putting them through is what everybody else is putting them through. We are not the only builder in DFW that is on sales restrictions today. I don’t know of any that are not on sales restrictions today. When they’re going out, and they’re looking at homes from you, they’re also looking at homes from other people. This is not an uncommon discussion, but what’s probably very uncommon is telling them the truth. Sadly, it’s telling the truth. Telling them that we are only allowed to sell two homes a week, and right now we have an interest list of x amount of people, so if you want to purchase here – and we would love nothing more than to sell you a home – then let’s go ahead and get you on that list. I’m going to do my best job to keep you informed and up to date, but I also need to set the expectation that prices are going to go up. Prices are not going up out of greed, they’re going up because our construction costs are going up every month, and what we used to be able to do on homebuilding was lock in your prices for an extended period. That’s not the case today. You’re locking construction costs 30 days, whereas we used to be able to get an entire quarter out of some suppliers, so setting that expectation to say what your price is today is not what your price is going to be tomorrow. I don’t know what it is, but I can make you this promise – if you love this home, it’s worth the wait, because you don’t want to go buy your second choice and drive past your first choice every day and wish you would have waited a little bit longer. It’s your house.
Kimberly: It’s a long-term thing. We get these people who come in, and they want to buy a home, and they need all these things in the home – that’s always my favorite – but they want it all yesterday. Then they can’t have it and what do they do? They go buy a used home that has none of the things that they positively must have because we weren’t good enough to tell them that if you do these things, you’re not going to make a short-term decision for a long-term solution. Don’t do that because you’re going to regret it. But closing techniques are not what we’re talking about today.
Chris: When we’re talking about throttling, we’re talking about different ways that you can do it. That was one of the discussions that we had. I truly do believe there’s a right way and a wrong way to do it, and one of the things that you wanted to talk about was price increases. We’ve talked about this plenty regarding cost increases well for all of those that are in the business, a dollar for dollar is not a dollar for dollar when it comes to terms of margin. If you’re taking a 10,000-dollar construction cost hit to your bottom line, you are probably having to raise your pricing by 14 to 15,000 to maintain the same margin. There are two ways of doing this. You either gradually step it up 2,000 dollar increases every week every two sales or every three sales, or you just go boom right off the bat: here’s a 15,000-dollar increase.
Kimberly: Which might wipe out your pipeline, so if anybody has too much pipeline that might be the way to go – 15, 000 right off the bat, but it will clean out your pipeline because for every thousand dollars that you go up, you eliminate part of your buying pool. They just can’t afford it.
Chris: Not only that but what else did we do if we just raised our prices 15,000 dollars overnight? We created an appraisal nightmare.
Kimberly: Oh, the appraisal problem is so out of control.
Chris: This comes down to being amazing operators in your business. As you’re looking at this, let’s say you must take an 8,000-dollar hit. I’m going to use easy numbers because I was a journalism major, not a math major, so let’s go 8,000. There are four weeks in a month typically, so go up 2,000 a week. As you’re slotting your build jobs, make sure that you’re not starting the home that sold 8,000 dollars higher before you’re starting the house that sold 2,000 dollars higher, because you need to stair-step that closing to manage that appraisal. The second thing about this – and this drives me freaking crazy – is that there are still builders around here that don’t have good working relationships with their community partners – meaning the competition – to strategize together what they can do. A low appraisal for one builder in a community is a low appraisal for all the builders in the community, so if you’re not maintaining and watching the pricing throughout the entire community – we call them a price increase tracker where I’m tracking every single builder’s price every single week so I can see who’s going up where – then you’re doing each other a disservice. It’s also a good business philosophy for you too because you are starting to watch where I sold this house here at this price, I sold this house here at this price, and who’s closing first so I don’t have an appraisal issue. I promise you, you can get a two-grand increase today, but getting an 8,000 increase is going to be dang hard. As you know, because you work with a lot of veterans, who are we screwing? We’re screwing the FHA, the VA and the USDA buyer who has their appraisals come through that oftentimes need that 100 percent financing to get the house, and they don’t have reserves like a lot of the conventional ones do. You’re doing your business a disservice, and you’re doing your customers a disservice because you’re not paying attention to your business.
Kimberly: You’re also doing the community a disservice. The worst thing that can ever happen is that we must roll back, so I think you can’t manage sales pace when it gets out of control by pricing because it almost has a rebound effect. You create the frenzy because people are trying to buy before the price increases, and it prices them out. I saw this in the past in 2005/2006 when I worked for a publicly-traded builder. They were building for 11 percent margins, and I said, “Why are we doing this for practice in this market? We need to get those prices up. I’ll show you how, so you don’t lose absorption by getting your prices up. This is how you do it.” We did just that because it created that frenzy. Well, you couple that with today’s market, and it’s crazy. We can’t go too far too fast. On the other side of it, the appraisers are telling me that they’re seeing what apprentice appraisers are trying to do, and they have no clue. They have no idea how to do a new build, so they’re not doing them on cost. Nobody’s doing cost appraisals anymore. Forget that. They’re trying to do it on market appraisals, they’re being lazy, and we don’t help them because we, as builders do not put all our to-be-builts in the MLS. Put your to-be-builts in the MLS!
Chris: Because I’m on the Zillow Builder Advisory Board, I will tell you now that Zillow is part of the MLS, I would strongly suggest that you put your to-be-builts on MLS because it’s going to become more and more a part of the business as we watch appraisals in general. You make a good point talking about not pricing up to get eventually caught. What’s fascinating about this is that I am seeing builders that still have a large incentive plan out there.
Kimberly: I don’t understand it. Stop putting your incentive out there.
Chris: They’re raising prices every week, but they still have a five percent incentive. Get rid of the incentive first. Scale it back to what you need to capture your mortgage. Most builders have their own mortgage companies. Scale it back to capture your mortgage rate, and then go from there, because the buyer would much rather have a low price than a higher price and a huge incentive. They don’t see it that way. If there’s any builder on here that’s still pricing up to price down, if you were in front of me, I’d slap the snot out of you. There are builders in DFW that do it. That just infuriates me.
Kimberly: Some publicly-traded builders are still running 30,000-dollar incentives. I think, “How about you just price your homes right. If you don’t have a sales force that knows how to sell value in this market, then they don’t know how to sell value in any market.” The REALTORS ® are running around in the used home market showing what little bit is out there, and what’s out there is not pretty. Buyers are bidding on these not pretty homes that they know are going to take another 50 to 100,000 dollars or more to get them to where they want them, and they’re up-bidding saying, “We’ll bring cash to the table because we know it won’t appraise.” I heard of one the other day where the buyer brought 30,000 dollars extra to the table to get the sale knowing that the home was probably up priced by 30,000 dollars knowing it wouldn’t appraise. That’s what’s happening. If you can’t sell against that, I’m sorry. That’s got to stop. We can’t do that.
Chris: The other thing that we were talking about before we jumped on here too, is besides price increases, what else can you do? We talked about limited releases on your grand openings. Limited on a new phase.
Kimberly: Limited releases across the board.
Chris: Now is a perfect time, and if you’re a production home builder. I started the industry in 2003 with Pulte Homes in Kansas City, so it was a small market, but the only thing I ever knew coming out of college into the industry was what we called line building or production building where we only opened 10 lots at a time, and you sold seven or eight of those before you open the next ten. Your construction team went line by line by line, and the community looks so clean and so good all the time, whereas here in DFW – and I never had seen this until I moved to DFW – I’ve done this in five different markets – we will open up the whole dang 300 lot community and say build wherever the hell you want to build. It’s crazy to me because you can have somebody here that lives here, and then five years later they finally get a neighbor. The thing that I kept hearing is, “We build neighborhoods with multiple home builders, so it’s tough to control it now.” Who cares what the person next door to you is doing, you can still line build your stuff. So, as we’re looking to release phases and release lots, we are controlling the environment in which they’re being released which also lets us control the customer expectation too. If somebody comes to us and says, “We want that one.” Well, that one’s not going to be available for a while. You can wait for that one, just be prepared to pay significantly more. When you’re crushing your results,
Kimberly: Or we’re going start it six months down the road.
Chris: Yes, exactly. When you’re controlling your lot releases in general though, it is just a better way for you to operate for everybody. It’s better for the trades, better for your construction team. It’s ultimately better for your customers because they don’t have construction going on three or four years down the line. It’s just a better way of doing it. You have price increases, you have limited lot release, and you have sales restrictions. Let’s say you do all those things, the famous topic today that we’re seeing for the first time since 2006 – lotteries.
Kimberly: Ugh, the “L” word.
Chris: Unless you lived in Phoenix, Vegas, probably California for the most part we didn’t see lotteries. Maybe Florida? Did you have lotteries?
Kimberly: We did have lotteries, yes. We had to manage people camping out, so that was always an issue because it becomes a security and liability issue.
Chris: We didn’t have lotteries in Kansas. There weren’t a lot of people that were where I was even though it’s a great place to live, but it was uncommon and unheard of. You know you and I have a good friend in this industry, and I don’t know if he’s on here or not, but always give credit where credit is due. Kevin Oakley with Do You Convert is one of the smartest guys I know. I truly believe that. We have a new community coming up that has 123 lots, and in fairness, we could probably sell all 123 lots in one month. Now, that would just be the dumbest thing you could ever possibly do. Let me educate you because this is going to make sense to a lot of people as to why we throttle to begin. When we buy land, we buy land how far out? One year? Two years? it takes a while, right? It takes 12 to 14 months just for a piece of land to get developed, and that’s in Texas.
Kimberly: It depends on where you are. If you’re in Arizona, you’re three to four years out.
Chris: If you’re in California, you’re three to four years out. We’re very blessed in Texas that it only takes us 12 to 14 months to take a piece of dirt to let’s put a house on it. We’re going to go off my example here; we have a 123 lot deal that we went under contract for a year and a half ago. When we went under contract for that part of the deal – it’s a beautiful master-planned community that we know is going to sell anyway – but we assume that that community was going to sell five a month or 60 a year which is a great thing. You have two salespeople there. We assume that the community is going to take two years to cycle out at an assumed margin and assumed profit and so on.
Chris: Exactly, so you’re performing. This is a great way to explain to your sales team that if you come in and you sell all 123 of those in one month, if you double up your construction team, you can carry 40 at a time – maybe 50, you’re still nowhere in near building that thing out in a year. You still must slow it down. You still must take time to do it. As we’re looking at this, we have an interest list that would choke a donkey It’s ridiculous how long this thing is, but we have this huge list for these 123 lots. How do we do it fairly? How do we do it best for the customer? How do we do it best for the company? How do we do it best for everybody? You’re kind of in a lose-lose-lose situation because you’re probably going to upset somebody.
Chris: We called our good friend Kevin Oakley, and we said, “Here’s the deal: we have a lot of people on an interest list. We sent out a survey.” The first thing I would tell you to do is survey your interest list because the truth of the matter is that interest lists today are so long that nobody is touching them. I talked to Dave Betcher formerly with Lasso; now he’s with Atlas RTX, and he was laughing with me the other day. Our interest lists are so big, the demand is so big, and online salespeople are so busy that they’re not maintaining the lead list the way that they used to. They’re just lucky to get a phone call and say, “Let’s try to set you an appointment where we can get you three, four, or five months out.” Long story short nobody’s touching your list. Take your list besides the normal drip campaigns and send a survey out to your list state that we have five questions to ask you. You do this on SurveyMonkey. (1) Are you still interested – yes, or no? (2) Are you interested in the home if they’re going to be priced at this price point? Give them a price point that’s 15 to 20,000 thousand higher than what you think you need to be, because who knows where you’re going to end up. Who knows what other cost increase you’re going to get, and why not shoot it high? It’s better to under-promise and over-deliver. (3) Then ask, do you need to sell your home before you buy – yes, or no? Let’s be real. We don’t want contingencies. (4) Do you have x amount of money for an earnest deposit today? and (5) Are you pre-approved? We did this, and we got our gigantic list down to being manageable. It’s still a big list. It still matches the number of lots we have in the community, but we know for a fact we’re only going to sell eight of those lots at the grand opening. Eight. We know that roughly eight percent of the people on the list are going to get a house, and the other ones we’re probably going to disappoint. Then let’s make them work a little bit harder. All of us have our in-house lenders or a recommended lender. You don’t have to use our recommended lender to buy a home as that’s against RESPA guidelines, but you can ask them to get pre-approved with your lender. You can, and if they fight you on that, you can still work around that. Whatever it is, show us the pre-approval. Show us that you’re ready to go. Show us that you have the funds for a full earnest deposit. Then the next thing you want to do is have them do what Kevin calls the house in the sky. Come in, set an appointment with your sales team, and build out that house. Here’s our base price – give them a range because let’s say for instance – for me I don’t know what my pricing is going to be because I haven’t got my final cost from construction yet or from purchasing. Come in and say we’re going to meet between 340 and 360. Let’s just say it’s 360 to play it safe. Under-promise over-deliver. We do packages here on a lot of our stuff which is amazing. I love packages, and I can tell you all the reasons why I think you should do packages.
Kimberly: Especially if you’re in a lottery situation, you probably want to stick with that. Chris: Well, you don’t want to go to a design center and have no freaking clue what your price is, so I can tell you out of all my beautiful packages, this is exactly the price of the home. This is the best case, and this is the worst case, so let’s go ahead and get you pre-approved for that amount. Let’s see who goes through that process, because let’s be real, you’re not going to go through the process unless you’re interested in going through the process. Then that big list is now a small list, and now it’s a manageable list. Then you can sell to those people. Here’s how you’re going to do it. You’re going to do it in the lottery. I will tell you, and I’ve spoken to people all over the country including Kevin yesterday, and he was the genius that told me about this; make sure you’re recording your lottery. Record the fact that you’re writing down a name and dropping it in the bucket.
Kimberly: RESPA! Fair housing.
Chris: Yes, you do not want to be sued. The last thing you need is to be sued because you were trying to make things fair. You know one of our good friends, and we’re not going to throw builder names out, but they do a fantasy football simulator for this, and they record it. It’s genius. I get these ideas are Kevin Oakley’s, and these ideas are not mine, so I want to preface that he’s the genius behind this. I’m just going to borrow it, but there are ways to maintain your interest list and still make it fair for as many people as possible. Then your goal from there is to take the other 80 people and still make sure that your sales are going to continue at a controlled pace.
Kimberly: That’s the thing; we get confused though, about that. We have this huge quantity. You need quality right now. Can they buy? Will they buy? Are they ready, willing, and able? If you’re not asking those questions, you’re not going to get there.
Chris: No, you’re not going to get there. but there are so many good ways of doing things. I made the statement earlier that home building, in general, is so helpful to everybody. I probably talk to two to three builders a week that I had no clue who they were, that found me on LinkedIn and said, “Hey, can you help me with this particular question here?” We’ll help you. If you see a home builder that’s doing something amazing, just reach out to him and say, “Hey, I’m about to have that same struggle. Can you take 15 minutes and explain it to me? I texted Kevin Oakley yesterday morning said, “Can you jump on a call with me this afternoon?” He was more than willing, and I don’t pay Kevin for his information. He does get paid for that, but not always. Use your resources to figure out how you can get through this because we’re not in this alone. We’re not.
Kimberly: We must help each other out for sure.
Chris: There is something that I love here in DFW; we have a DFW sales leader text message, and there are 19 of us on this text, so 19 builders represented in this text message. We text each other all the time to ask, “Are you open during this crazy weather? Are you experiencing lumber increases?” We just ask the questions, and our mentality here is because we’ll do almost 50,000 permits in DFW this year. There’s enough business for all of us, but if we’re going to help each other along and help each other out, that is going to save so many future headaches for us. I promise you, whatever I’m going through today, those other 18 people already have been through or are about to go through it.
Kimberly: You may have a bit more of an abundance mentality than many builders that I have encountered, so in many markets, there are some builders here who play nice in the sandbox, and then there are others who just take and don’t give back. If you take stuff, you’ve got to give stuff. It does help the industry. It just helps everybody because again, there is plenty. We have had a couple of questions in the chat, and the first one is the elephant in the room. I knew we were going to get this, so let’s talk about outside real estate agents, and so how do you manage outside real estate agents in this market? I’m going to answer, and my short answer is going to be, it depends on who you are. If you’re a small builder, you can position yourself, and you’re not at the point where you’re sales throttling. You can position yourself right now by paying maybe higher commissions so that you get recognized because there is such a shortage of used home inventory that REALTORS® who have never sold new are selling new. Now, I will put a caveat with that, and I also must have a disclaimer; I do run a builder relations program for one of the largest Berkshire Hathaway franchises in the country. We have seven counties, and over 700 agents in this franchise, and I have 33 builders in my Preferred Builder Program, so I must disclose that because I may think about this a little differently. I like an educated REALTOR®. I don’t necessarily want to work with the masses out there, and I don’t want to work with those bad REALTORS® who are snaking up customers from your parking lot, who are rebating – giving commissions back – and who were not the procuring cause for the sale. I will never argue for anybody who is not the procuring cause for the sale. Now’s the time to educate some REALTORS®. Make them your raving fans and your VIPs if you’re a small builder. Put on my other blingy hard hat and say If you’re a big builder, I understand macroeconomics. I was a business major. I get it. Supply and demand. Demand is up here; supply is down here. That’s going to cause pricing to go up, and it’s going to cause the builder to be less willing to pay commissions. We are seeing somebody who posted the question that’s seeing it and hearing about it in Texas. Oh, it’s not just Texas. I’ve got this in builders in Ohio, Wisconsin, Minneapolis – in that area, in that market. We’re seeing it in northern Virginia, we’re seeing it in Florida, we’re seeing it in Texas, we’re seeing it in Arizona, we’re seeing it in California. Builders are lowering commissions going to flat rates, and I would suggest that that may be short-sighted. I would recommend that they do a much better job at managing their registration policy, but I get it, and I do understand. If you don’t need to pay it, the market’s not demanding that you pay it. It’s basic economics. Chris, do you want to chime in on this needle I’m trying to thread?
Chris: I teach a REALTOR® continuing education class called Understanding New Home Builder Contracts and Addendums, so I do have a vested interest in REALTORS® selling new homes. I will tell you this, I’ve taught that class to 2,500 agents in DFW, and I’m going to make a statement that I think that 90 percent of real estate agents are God awful at their job. Now, before you freak out at me because I can see your eyes,
Kimberly: There’s an 80/20 rule. I get it, and now it probably is a 90/10 rule. I’m okay, I’m okay.
Chris: I think that 70 percent of on-site agents are horrible at their job too.
Kimberly: Maybe more.
Chris: There are there are awful players on both sides of the equation. What I’ll tell you, is that an educated REALTOR® that is good at their job, that procures the sale for a builder, will always be welcome in a builder’s office. What is happening to the industry, and what’s crippling the respect for REALTORS®, is the REALTORS® that are going, and they’re snake oil salespeople outside the sales offices saying, if you put me on that contract, I’ll give you back all of the commission minus 500 or a thousand dollars – whatever it may be.
Kimberly: Ugh, that’s so cringeworthy.
Chris: There are dozens of these REALTORS® in DFW that make a killing doing this, so from a builder perspective, I’m going to make this very clear; I understand where some of these builders are coming from when they’re cutting commissions. Let me explain why; these builders, or at least what they are telling the consumers and the agents, is that to help us control our costs, to help us keep the prices down so much, we are both going to take a little bit of a hit from this. We’re going to take a little bit of a hit, and we’re going to ask you to take a little bit of a hit to help keep the prices low so our consumers can buy homes. I know that that’s a fancy way of spinning something. I also was a VP of marketing for a long time, and I think the genius way of putting it. What we struggle with in Zillow, being on the Zillow Builder Advisor Board, we study this; 80 percent of buyers get to the point of putting in an offer before they go find an agent. That’s a tough pill to swallow when you are a builder, and you’re spending millions of dollars on marketing.
Kimberly: You should never pay that. You should never pay it. I will never advocate for that in the best or worst of markets.
Chris: What happens, is that when you are in competitive housing markets, is you’re going to have the builder next door, and all of us have it on our little signs that state if you’re working with a REALTOR®, they must be present on the initial visit. Texas is huge. It’s a big ass state, so one of my communities to the other is three hours away. One REALTOR® can’t have more than one client and be always everywhere. Pre-register them. Give them a business card or whatever it may be. We just need to know that they’re present assisting in the deal. If we were to say no, the rule is you must be present – the REALTOR® must be physically here, then they go directly next door because I have six other builders in the same neighborhood selling the same size lots. The builders say, “We’ll take you.” Well, they may not have the best product and the best price, and the best salesperson. but they just default. They win because they bent the rules. It’s a fascinating challenge that every builder has. When we are setting more appointments or we’re locking our doors to an appointment only and focusing more on the online sales team, we’re finding the REALTOR® co-op going down. The good REALTORS® are still selling houses.
Kimberly: Because they’re engaged in the process. They’re legitimately bringing you buyers, and even if they’re bringing you a buyer that registered with you two years ago. I just had this happen. The buyer registered two years ago in a community. They were just out of bankruptcy. They had all these issues. They found this REALTOR® who got their credit cleaned up, helped to put them on a program, help them to save money, help get them to where they could buy a home. They had a dream of owning a home in that community, but they didn’t know how to do it on their own. The builder was too busy to do all those things two years ago. I’m not saying two months. I’m not saying two weeks. I’m saying two years passed, and this REALTOR® has documentation of everything she’s done along the way. She takes them back and tries to register them in that community and the builder said, “Oh no. Sorry, you’re not procuring cause. They were here two years ago. Come on, guys! You’ve got to have some common sense with this. When your REALTOR® is truly a partner, be a partner with them. When they’re a snake oil salesman, don’t pay that. You’re part of the problem when you’re paying that stuff, and you know it. Your on-sites know exactly who they are.
Chris: I don’t know if there’s a division president in the entire country that wouldn’t pay a REALTOR® full commission for bringing a customer to them. What we’re trying to do is handle the masses at this point. Let me back that up. We’re still paying three percent, but unfortunately, with the majority of what we’re seeing not being on the up and up, you do have builders are going the other way. I sold and managed in the recession in Arizona when builders were paying nine percent commission, so what we’re seeing today, where we’re seeing one and two percent. those same builders will probably be – when things slow down – doing five, six, seven, eight, nine percent. Who knows? The market has changed. The industry has changed. Homebuilders have changed. How we get buyers has changed. Until we all either team up together and decide on how we’re going to operate this business or educate them or enhance them or whatever it is, we’re always going to have some sort of an issue. There’s always going to be some sort of a builder that’s going to be the first one to take a risk. There is a builder out of Atlanta that just fascinates me. I’m going to say who they are; it’s ResiBuilt out of Atlanta. We started studying them on the Zillow Advisor Group five years ago, and they were a no-name builder out of Atlanta at the time. Today they are a top 10 private builder in Atlanta. In five years, they went from nothing to something. On their website, they offer three ways to get in their home: (1) you can rent their home, (2) you can buy it with a REALTOR®, and (3) you can buy it without a REALTOR®. The price on the website is two and a half percent lower without a REALTOR®. Two and a half percent higher with the REALTOR®. They have a video, and I encourage you to go to the website as the video states why you should use an agent and why you don’t have to use an agent. The decision is completely up to you. Here’s the crazy thing; they still have 45 percent of their buyers use an agent, so there are still people that find value in having protection and having an agent, but those are the people that truly believe in it. The other ones say, “We’re getting a better deal. We didn’t have a REALTOR® to begin with. Why can’t we have the deal rather than going and finding a snake oil salesman to give me back my commission? The builder’s already doing it for me.” It’s an interesting way of doing it, and I haven’t seen it pick up in other home builders. I give hats off to ResiBuilt for having the guts to do it. It seems to be working for them. Some interesting things are happening in the market, and know when we’ve only got five minutes, but I want to make a statement here; the question comes up all the time, “When do you think this is going to end?” I said earlier that I do a ton of reading and a ton of listening. The economists are saying that when the interest rates hit three and a half percent, which eventually they will, that’s when we’ll start to see stuff shift. We’re sitting on 2.7 today roughly. Three and a half percent, who knows when that is. Could be a year from now, could be two years from now.
Kimberly: If the fed starts easing – which there is some suggestion that there may be enough inflation that they might have to start doing that – if they started now, it would take them about four to five years to get it to the point where it starts truly negatively impacting things, and at that point, they’ll adjust. They’re not going to just Raise, raise, raise, raise, raise. They’re not going to do that. We know that, but the thing is just like price increases also increase demand when the interest rates tick just slightly up, you’re going to see that increase in demand too. Be prepared for those things. Chris, what are some closing thoughts? What do you think that builders need to be on the lookout for so that they’re not burning bridges today that are going to cost them sales tomorrow? This market is going to end. This is not sustainable.
Chris: First things first are to lower your incentives, (2) price increase accordingly, (3) restrict your lots, (4) overly communicate with your prospects, (5) do not forget the customers in the backlog. Do not only think that the people that you must worry about are the people that are going to be sold. Worry about the people that are already sold because those are your advocates. Those are the people who are standing behind you that decided. Take care of them. The next thing is to make sure that your land team is the absolute best it can be. The first person you should hire in a company is a land person. The best freaking land person you can find, because if you have land, you’re going to have sales. If you have an awful land person, no matter how good your sales team is, they’re not going to be able to sell it. Then have a great purchasing team because your purchasing team needs to leverage everything they can. When things start to tick down, they need to start renegotiating those, because costs are not going down unless land costs go down, and true costs go down.
Kimberly: We are not seeing any hint of that anytime soon.
Chris: We are not, so the most you can do is protect it. Try to get as long of terms as you can, but as a sales leader, even if you’re not taking cost increases, protect your backlog. Protect your margins, and start to increase that pricing anyway, so when you do get a 10,000-dollar hit overnight, you’re not having to take it all at once.
Kimberly: It’s a kiss of death for all the reasons that we talked. When he’s talking about protecting your backlog, your sales team doesn’t know how to do this, and they don’t know how to do it without leadership. I know you’re busy, but if you are not looking at what I’m going to call great SEX – Melissa, your CEX, your customer experience. You’ve got to map this; you’ve got to help your sales team to know what to say and when to say it. You’ve got to help them with the handoff, so your builders also know what to say and when to say it, and you’ve got to make sure that they all are on board with saying it. Chris was probably one of the first ones back at his previous builder where he was videoing the handoffs to make sure that that customer experience was handed off the right way and the same way every single time and that the right information was communicated. Put it on video, but that pipeline management is as big a sales training issue. Not only that, but it’s also going to benefit the company going forward because you’ll have these policies and procedures in place. You can shine in this market instead of giving yourself a black eye that’s going to be with you. REALTORS® don’t forget, and buyers don’t forget.
Chris: Reputation is everything.
Kimberly: It is, and we suffer already. We’re already a little bit in the hole on that. I’ve got some programs coming up that I must get a shameless plug in. I’m doing the Power Hour with Carol Morgan from Denim Marketing this Friday. Make sure you sign up for that. Then next month I have the one and only JP. We call him John Palumbo. He is going to be on the program. He has international experience. He’s the closing nomics person, so he has written more books than most of us have ever read. It’s just amazing to me. He’s a wealth of information, so make sure you come back and communicate with us. Let us know what you want to hear coming up. Thank you all for your valuable time and for joining us today, and Chris, thank you.
Chris: Thank you. I always appreciate you.
Kimberly: Thanks for the kind words guys. I Iove the chat as it’s going on. Thanks a lot, and if I missed anybody’s questions in the chat, feel free to reach out and email us.