As the housing downturn has protracted, production home builders have had to retool their business operations to match the slowing conditions. In the earlier stages of the downturn, that meant cutting costs and running leaner. However, in the past year, management focus has again shifted, this time toward generating cash. Consequently, big builder organizations are more focused on sales than ever, according to a recent study by the NAHB Research Center.
But whether builders are selecting the right sales tactics to nab the desired sales contracts remains suspect. Study results found that the most highly effective sales tactics were not always the most used by big builders.
The study, called "The 2008 Soft Market Study," revealed that, in terms of business improvement efforts, roughly one in five production builders put "much more effort" into selling homes now than before the downturn. Moreover, results showed a 15 percentage point spread between those respondents and others who said they were putting more effort into managing subcontractors in the downturn, which ranked second in terms of number of respondents.
"Compared to last year, builders are far more likely to focus their business on improving sales," said Ed Hudson, the study's author. "There's been a huge swing in efforts."
Most builders have used incentives to sweeten the pot and lure buyers off the fence. Roughly 60% of survey respondents said they offered free upgrades on in-home products like appliances, countertops, and flooring.
Paying closing costs and associated fees or buying down interest rates with points also ranked high on the list of most oft used tactics to stave off declining sales. More than 50% of builders surveyed said they had begun offering sales incentives since the downturn began.
But cracking the code on which sales efforts yield the best results has been difficult.
Take, for example, a trade-in program for buyers' existing homes. Under this type of program, home builders purchase would-be buyers' existing homes for usually between 90% and 95% of the homes' appraised values. In doing so, builders avoid contingency sales, and buyers sidestep the hassle and expense of selling their existing homes before purchasing new homes.
According to survey results, trade-in programs not only ranked the fifth most effective incentive overall, they also generated more "very effective" responses than any other incentive. However, roughly a third of respondents said that they offered this type of incentive program, making existing home trade-in programs the eleventh most commonly used sales tactic out of 14 different incentive options.
Paying closing costs and associated fees or buying down interest rates with points was the most effective sales tactic, with more than 70% of respondents saying it was either an "effective" or "very effective" incentive. Yet fewer builders surveyed said they used that type of tactic than offering free upgrades or allowing buyers to make more home modifications.
Free upgrades, on the other hand, were the number one sales tactic used by builders. However, it was the third most effective sales incentive, with only 20% of category respondents ranking it as "very effective."
Full study results can be found at the NAHB Research Center's online bookstore (www.nahbrc.org/bookstore).