“What can I do to improve my cancellation rate?”
That was a question asked at the end of a presentation I gave to a group of 150 battle-ready builders in Phoenix this summer. Sales of new homes there are off 33 percent through May. “For Sale” signs have sprouted up like weeds in new and existing neighborhoods. Unable to sell their homes, or tempted by a better offer down the street, people are walking away from contracts.
I'd say it's a good question—a very good question.
Several responses come to mind, not all of them pleasant. You could start by building a home that's obviously different than the one down the street. Or, you could resist increasing the discounts that you offer every month. Or, you could stop selling homes to contingency buyers. Or, you could ask for more than a measly $5,000 deposit.
Many builders in Phoenix, especially the newer ones, have never been through anything like this before, where the market contracted—almost without warning. But even old-timers don't remember a time when buyers put down a deposit in one community and then took their deal to the next community to see if the builder would top it, often with success.
What a productivity drain this has become. Many of the public builders report cancellation rates at 30 percent or more, up from only 20 percent the year before. KB Home recently reported a 40 percent rate in Phoenix. Many salespeople don't have the experience or the training to deal with the situation. It's hard to keep track of the discounts even their own companies offer.
It's no wonder buyers walk away from a contract when they put their current home on the market and find out it's worth much less than it was a year before. Unless they have a really compelling reason to move, they are going to prefer to forfeit a $5,000 deposit—which is all many builders require in Phoenix—rather than lose, say, $20,000 in appreciation. That's simple math.
This wouldn't happen, though, if buyers felt like they simply had to own the new home—if they thought the design so superior, the community so wonderful, that they'd make sacrifices to move. One tactic builders can use to foster this kind of spirit is to hold frequent new-buyer meetings: Make sure buyers meet their new neighbors, experience their new community center.
Also, salespeople need to keep closer tabs on their customers and look for early warning signs. Did a buyer who was always coming in the sales office to check on the progress of his home come by less often? Check to see if buyers are having trouble selling their existing residence.
Frequent conversation can also reveal hidden objections. Maybe the real reason a buyer wants to cancel is that she didn't like the way she was treated by a super on a walk-through. Everyone needs to be reminded: It's a buyer's market out there. (For more advice, see “Urgent Care,” beginning on page 212.)
It would help matters if buyers had more skin in the game. If you can get away with it, ask for a bigger down payment.
It doesn't help matters that enticements keep getting juicer. A recent NAHB survey found that 25 percent of builders are dropping prices by more than 10 percent, which could mean a $40,000 to $70,000 price concession. And 75 percent of builders are offering incentives other than price reductions. They could be as innocuous as free granite countertops. But in some hard-hit markets, they may be big interest-rate buy-downs or even free cars.
The problem is that when incentives get bigger week after week, buyers will walk because they feel they can get a better deal elsewhere. It's a war out there, but we need to show some restraint. Don't get caught in this incentives game. Maybe that way we'll have more happy endings.
Learn more about markets featured in this article: Phoenix, AZ.