IT DIDN'T TAKE BILL PROBERT LONG to figure out that he hated presales.
“I sat in a trailer for 10 months,” says Probert, now the executive vice president of sales and marketing for Newport Beach, Calif.–based John Laing Homes. “I was reselling the same houses, talking to the rabbits and coyotes. It's a bitch when you're trying to sell in a competitive market and you don't have all the information [since nothing had been built yet]. It was tough, and I just thought it was stupid.”
He didn't think any more kindly thoughts about camp outs, even though other builders ran public relations stories with pictures of people waiting in line in motor homes as evidence of a successful community.
“It bothered me,” Probert says, who remembers thinking, ‘Buying a home is the most important thing that people do. That doesn't look very enjoyable.'”
As a result, Probert started using a priority system to help manage demand; today, just about everyone uses them for high-interest projects. After crunching the numbers on pricing, sales velocity, and cancellations, he chucked the concept of pre-selling houses before models are built. In a classic science experiment scenario, one division had two similar products in comparable markets and price points. One used preselling; the other waited to start selling until the models opened. The gross margin on the sales price at the community that used its models was roughly 8 percent higher than the one that used presales.
“It was a substantial enough difference for the team to never do presales again,” he says. Today, about the only time John Laing Homes uses presales is in large multifamily projects, and in those cases, it's just not economically feasible to build all the inventory up front.
South Florida builder Ken Endelson, chairman of Kenco Communities in Boca Raton, has similar concerns. In his Palm Beach Gardens community, Mirabella, six months of presales sold 20 houses. When the models opened, 40 houses sold in just three weeks.
“At end of day, the community could [do well] without presales,” Endelson says. That position puts those builders in a significant minority. Most swear by pre-sales as a way to build excitement about a new community and to get some cash flow going after carrying the cost of land for months or even years.
“We always do them,” says Bob Schultz, a leading sales and management consultant and president of Bob Schultz and the New Homes Specialists in Boca Raton. “People who don't do them say they don't want to sell too many houses too quickly and leave profits on the table. Why sell now—the roads aren't even in—and commit to prices today when they'll probably go up? Someone who might be in the market today might not be in the market three to five months from now. When the window of opportunity is open, take advantage of it.”
The Right Approach One very big reason to do presales, Schultz says, is that it's a lot easier to do them today than it was 10 or 15 years ago when the only sales tools available were site plans, scale models, topo maps, and floor plans. With Web sites and virtual reality, builders can give prospects a realistic tour of both the property and their house months before the first street is put in.
But as with any marketing strategy, there's a right way and a wrong way to approach presales, he says. Potential buyers are only willing to take the risk of a presale purchase for two reasons: the chance to get first choice of a lot and the best possible price.
Ideally, presales should take place on the property so that customers can at least experience the location. If that's not possible because of a lack of water, sewers, or roads, a storefront in the nearest shopping center or business park will work. The sales center doesn't need to be large or elaborate, but it should be clean and reflect the price point of the community. At the very least, it should have an aerial photo of the location and as much product information as is available.
“The more things you can have the buyer touch and feel, the better,” Schultz says.
The optimal time frame for presales is three to four months before the grand opening, Schultz says. If sales start much earlier than that, builders risk cancellations because the buyers won't see anything happen for a long period of time.
The exception is communities such as Beachfront North in Monmouth County, N.J. The Matzel and Mumford Organization, a K. Hovnanian company, began pre-sales Memorial Day weekend for an October opening to take full advantage of the summer tourist season.
“We were out there for five months,” says Richard Selikoff, vice president of sales and marketing. “That was on the extreme, but it was a very seasonal buyer. If we lost that buyer, we would have spent much more on marketing and advertising.”
A sales center on the beachfront promenade gave the community exceptional visibility and led to 170 presales out of 238 total homes. The center featured digitally enhanced streetscapes and scale models of the community. To help buyers envision how their homes would look, they also created rich content for their Web site.
“We try to help people take the concept of the future and bring it to them as quickly and as accurately as possible,” Selikoff says.
Many builders entice presale buyers with a preconstruction price, which implies that prices will go up at some point and that they're getting a good deal by buying early. Schultz says that in the absence of concrete information—an amount and a date of the price increase—the inference is nothing more than speculation. He recommends a different approach. Instead of offering a lower selling price, set the sales price at the same level at which it will be offered at the grand opening and offer a pre-opening incentive that can be used for options and upgrades. Then, gradually reduce the incentive amount, announcing the incentives through regular mailings.
Prospects who bought early will see how much extra they received, and those who wait will see that they missed one opportunity but still have a chance to gain a benefit.
For instance, if a builder plans a presale price of $199,000 and a grand opening price of $215,000, offer the house from the start at $215,000 with a $16,000 pre-opening, limited-time incentive package. Two weeks later, the incentive would drop to $14,000, then to $12,500 ... until the opening, when the incentive would be zero.
“When we do that, we get a lot more pre-sales sooner [rather] than later,” Schultz says.
For buyers who remain reluctant to purchase until they can see models, Schultz recommends offering them the ability to sign a purchase agreement to lock in the price, the product, and the lot. The contract includes an addendum that says they'll be notified at substantial completion of the model, usually the drywall stage. They'll have 48 hours to view the model and finalize their agreement.
“What's happened in that amount of time is that the incentive is lower, they've seen their investment grow, and their propensity to like the model is higher,” he says. “If we do that, we'll get no more than 20 percent cancellation.”
Get The Message Out Building an interest list for presales typically starts with direct mail to previous buyers; they might either be ready to move up or be willing to refer a friend or family member. From there, target residents who live within a three- to 10-mile radius of the site with direct mail. Small newspaper ads in local papers can simply announce that the project is coming and refer prospects to a Web site or phone number. Generally, responses from that type of marketing will result in high conversion ratios, Schultz says.
“When people contact you because you have told them it's a presale opportunity, they get it,” he says. “They know they're getting choice lots.”
Endelson agrees. His experience is that presale buyers are very astute, have done their homework, and know the value of buying before the models are built.
Two weeks before the grand opening of the models, it's time for a media blitz, says Schultz, including a Realtor event—“feed them and they will come,” he adds. Ideally, at that point, a builder will have a site map dotted with “sold” tags.
“Typically, Realtors don't understand presales,” Schultz says. “What they do understand is that they've got two weeks to get their buyers in there while you have incentives left.”
The right message, of course, is crucial, Selikoff says. The wrong campaign can cost a builder significant amounts of time and capital, slowing down a project and costing him thousands a month in interest costs.
“It has to be done properly or it can kill a community,” he says. “Come out right, or don't come out. It's that important.”
Sustain Buyer Excitement The bane of the presales process is cancellations. Without models or amenities on site to keep buyers excited, cancellations can run as high as 50 percent. Builders who use pre-sales successfully—as well as builders such as John Laing that start selling at the grand opening—stress the importance of on-going communication with the buyers to keep them from changing their minds. “Touch” letters, calls, and e-mail build excitement and interest, Selikoff says.
That continuing communication is critical to keep the emotion surrounding the purchase at its peak. Schultz compares it to putting helium into a balloon. It bounces against the ceiling at first, but quickly deflates without an infusion of helium. Schultz recommends some kind of communication at least once a week to “remind them they did the right thing. Keep that balloon bouncing off the ceiling.”
Regular communication also reduces the chance of having someone come along and pop the balloon altogether.
“If you were scheduled to start moving dirt Aug. 1 and something happens, you need to let [buyers] know why,” Schultz says. “If you tell people in advance what will and won't happen, they'll accept it. If you tell them later, it's an excuse.”
By staying in contact with their prospect list and giving them small pieces of information on a regular basis, Matzel and Mumford had a 75 percent conversion rate for Beachfront North and a cancellation rate of less than 5 percent, Selikoff says.
Schultz and Probert also support giving buyers small amounts of information over time. Not only does it help maintain their interest, it keeps them from becoming overwhelmed by the enormity of the home-buying process.
“A lot of times, builders will dump the entire project in one communication,” Probert says. “You get this package and it's a buffet. You get indigestion because you don't need all of it at one time. We give them appetizers.”
Those nibbles include invitations to see the floor plans before the public and to attend special events just for presale buyers. They're designed to capture the buyers' attention and build a critical mass of people to have the best grand opening possible.
Fair For Everyone Like many builders of high-interest projects, Matzel and Mumford struggled with how best to create a process that would be fair for the hundreds of interested prospects. After toying with the idea of holding a lottery for sales appointments, they opted to use a third-party, toll-free phone number, staffed 24 hours a day. Everyone on the interest list received a direct mail invitation to call in for an appointment, starting at a specific time. All the calls were time-stamped to establish their priority number.
The results were outstanding, Selikoff says. With thousands of names in their database, they would have had to shut down their office and dedicate all their staff to handle the calls. Outsourcing worked much better and allowed the builder to keep an arm's length from the process.
Irvine, Cal.–based MBK Homes funnels all its buyers through an online system to create a priority list that buyers feel is fair for everyone. Individuals who want to be kept informed of upcoming releases can sign up for the Insider's Club. To get a spot on a priority list and get a shot at a house requires joining the Very Important Buyer (VIB) program.
“That higher status is where you can chill out to buy a home and be reserved a place in line,” says Paul Simon, vice president of information technology for MBK. “If you want to buy, you have to be a VIB member,” he says.
A Success Story Carl M. Freeman Communities, an Ocean View, Del.–based country club community developer and builder, used a very detailed, process to presell Bayside, a master planned development with about 1,640 homes, a Jack Nicklaus Signature Golf Course, a town center, and a health club. In many ways, the process mirrored the ramp up to a grand opening of the models, taking reservations and deposits but not allowing buyers to purchase until a set weekend kicked off sales.
The goal was to start the process no sooner than 60 days before starting pre-sales and go directly to contract the day of the private preview event, says Patti Grimes, vice president of sales and marketing.
“People do a lot of great things, then let [buyers] off the hook on a reservation that can be lost 30 to 60 days later. We didn't want more than a 60-day window between reservation and deposit until we went to contract.”
To generate the initial reservation list, Carl M. Freeman first reached out to its own employees, as well as current homeowners, and golf club members.
“You had to know someone to be invited to this event,” Grimes says. “We wanted to create an urgency, that this was something you didn't want to miss out on.”
Indeed, reservation holders were invited to a private cocktail party with Jack Nicklaus, at which he described his vision for the course and the community.
Those who made a reservation and paid the $2,500 refundable deposit then were asked if they had friends and family they'd like invited in the second group of contacts, which focused on Carl M. Freeman business associates. The third group was people who had owned one of its homes in the past.
“It's a very high affinity list,” Grimes says.
The reservation holders, all prequalified without contingencies, received targeted communications every 10 to 14 days, presenting the project in several steps.
“You're building confidence with the customer so they can't wait,” Grimes says. “If you're constantly providing education, you're more likely to convert folks on the day of the event.”
It worked. Grimes said the goal was to have 179 reservations for the private preview weekend; they ended up with just over 300. On the opening weekend, 144 buyers went to contract, investing $60 million in the community. The following weekend, Realtors were invited to preview the community, followed by an opening for the general public on July 6.
What'S The Rush? Probert still doesn't buy it. You might convert them, but there's still a significant risk of cancellation, he says. And the sales price at presale will be, on average, 4 percent less than the price of homes sold after the grand opening, he says. He's played the “what if” game with division presidents and vice presidents, asking, “If we do a presale or wait until we have models, what would happen?” He's studied the numbers long enough to convince him that presales don't give his customers the best possible buying experience, and in the end, that's most important to him. That, and the fact that the houses always sell for more money after the models are built.
“I know what I'm talking about when it's a competitive market against model homes without some kind of value adjustment,” he says. “What does it really cost me [to wait]? Sometimes we're not true to ourselves. When it comes down to it and it could be a wash, I tend to go with the grand opening with the finished models. It's an insurance policy to protect your future success.”
