The model home business has endured some heavy casualties in the recession, but eulogies may be premature. Although builders are doing fewer models these days, they still see them as one of the most effective venues for converting prospects into sales. The service and financing structures driving showcase homes, however, are changing. The conventional practice of hiring an interior designer to do everything from soup to nuts, including purchasing and installation, simply isn’t an option anymore for many cash-strapped builders, particularly those needing to offload excess inventory.
Some have resorted to small vignettes in off-site design centers in lieu of furnishing actual models. Others have brought the merchandising function in-house in an effort to reduce expenses.
“We keep our overhead costs down by doing our own decorating of models,” Stevie Mistele-Wildt, co-owner of Cobblestone Builders in Milwaukee, Wisc., wrote in a recent BUILDER LinkedIn Group discussion. “We only furnish one home at a time by using retail stores in the area. My husband and I pick out … items that would appeal to us as though we were living there. We have sold three models with furniture and the accessories included.”
Many larger merchant builders are streamlining costs by rotating furnishings out of older models and into new ones instead of buying everything new from scratch.
“Historically, we would design a new model complex and automatically assume that everything in the previous one had to go, whether the items were liquidated in an employee sale or sent out for consignment,” says Matt Sauls, regional marketing director for Pardee Homes in the Inland Empire and San Diego. “Now we are making a concerted effort to reuse things that don’t get damaged over the life cycle, such as case goods, armoires, chests, and other big furniture pieces.”
Sauls says that more than 70% of the models Pardee has opened in the last two years contain repurposed wares--a practice that saves the builder anywhere from $3 to $5 per square foot on merchandising. “Even if we have to store [items] for a few months, it makes more financial sense than buying everything new,” he says. “The interior designers are the critical piece in all of this. Now that we are building our schemes around existing furniture, they have to be puzzle makers. They have to figure out how to blend reused pieces with other items like draperies, accessories, pillows, rugs, and paint colors. They are no longer starting with a blank canvas.”
Another trend sweeping the model home landscape? Promotional partnerships among builders, subcontractors, product manufacturers, and retailers. Smart alliances can spread out costs and create a win-win for all parties involved. “Furniture brands will sell directly to the builder at a discount. Plus, they will package everything and put it in the builder’s model,” notes interior designer Suzanne Felber, owner of Lifestylist Designs in Dallas.
Take the model Felber recently designed for American Custom Builders in Dallas, which is outfitted with merchandise from the retailer Ashley Home Stores. “I called this my retail house,” Felber says. “ Everything in the house was something the consumer could buy within a 10-mile radius of the home or that they could buy online. This alleviated the frustration that people often feel when they see something they like in the model and then can’t figure out where to buy it. With this house, the salespeople could tell them exactly where to get everything, from furniture to paint colors to accessories.”
As a bonus, Ashley Home Stores gave the builder’s customers a discount on any furniture or accessories purchased after the sale of the home. “That way it didn’t go on their credit score and hurt their chances of qualifying up front. It was a nice thank-you from the builder that didn’t cost them a dime,” says Felber, who has orchestrated similar partnerships for other builder clients with local home improvement stores, national retailers such as K-Mart, and product manufacturers such as Sherwin-Williams. In those cases, prospective buyers touring the houses could pick up “how-to” sheets with DIY instructions for design details they liked, such as interesting paint applications, wall treatments, or shelving.
“When your salespeople can tell prospects where to buy or how to make the things they see, the model becomes more of a service than just a decorated room,” Felber explains. “This is where our business is headed. Builders don’t want turnkey models anymore. They want to pay by the hour or by the piece. With the Ashley house, the builder paid Ashley directly and just paid me an hourly fee. He probably saved 25% to 35% over what a traditional merchandiser would have charged.”
Buying design services a la carte certainly saves money, but still, furnishing an entire house requires a hefty sum. That partly explains why some builders hit hard by the downturn have explored virtual models online as an alternative to brick and mortar ones. The big advantage of virtual tours is that these digital versions of model homes don’t require a on-site sales staff or a major outlay for the three 'F's of fixtures, finishes, and furnishings.
“The majority of our clients' marketing budgets have been slashed to the point where they cannot afford furnished models. Because of that, we are seeing a significant pickup in demand for our virtual model homes, the only affordable alternative to a full-scale merchandised model home when done right,” Steve Ormonde, owner of the virtual animation company, Focus 360 wrote on LinkedIn. The majority of his company’s clients are developers of communities with fewer than 50 lots.
Tom Doucette, owner of Doucette Communities in Tucson, believes that virtual model homes will eventually become standard practice for builders in the digital age. But he’s not so sure they’re a viable replacement for the real thing.
“The idea of scrimping on models does not strike me as a good strategy," Doucette says. "It sort of reinforces the idea that times are bad, and prices are negotiable. We are down to a single model in one of our projects, and we are moving in the direction of virtual presentation. I have explored the idea of utilizing computer models, 3D animation, and renderings and want to go this direction, but even the cost of this is relatively high and requires a cash investment that has the distinct disadvantage of little to no recovery down the road. With physical models, we could always look to a partial recovery of merchandising costs upon sale to the third-party consumer. I don’t think anyone is looking to buy original computer design presentations no matter how good they are.”
Whatever the medium, new research indicates that builders are gearing up to do more models in some way, shape or form in the coming months--a sign, perhaps, that the economy is regaining some strength. In a recent survey by Builder Partnerships, a membership organization affiliated with home building consultant Chuck Shinn, 45% of builder respondents said they planned to build models within the next six months. Another 15% said they expect to open new models within the year.
Such models will be smaller and more economically priced than the model homes of the boom with fewer options and upgrades, according to the Builder Partnerships study. But model homes are still considered a worthwhile, if not critical business investment. To the extent that home buying is as much an emotional decision as a rational one, many say there is no substitute for the real thing when it comes to closing the deal.
“In this economy, everyone is price-sensitive. You want to be competitive and not overspend on furnishings, but it's also important not to be penny-wise and pound-foolish. All the builders we work with are still doing fully furnished models,” says designer Jaimi Julian Thompson, president of Artisan Design Group in San Diego, whose client list includes Barratt American, D.R. Horton, Shea Homes, and K. Hovnanian. “It's about bang for buck. Now more than ever you have to get the buyer off the fence. And to get them to spend their money have to excite them and inspire them.”
Felber agrees. “Almost every builder I have talked to can show you the difference in traffic and sales from when they started selling to the point when the model home opened,” she says. “People start their buying process online, but being able to visit a model home to touch and feel what could be the place where they raise their family and start their new lives makes all the difference. With the economy being what it is, we all need to look at different ways of doing what we do. But that's what makes it fun and interesting.”
Jenny Sullivan is a senior editor covering architecture, design, and community planning for BUILDER.
Learn more about markets featured in this article: Los Angeles, CA.