Land Development Keys to Success
Over the past forty years advising real estate developers, I have reduced the keys to success to five principles too often overlooked by property owners/developers. This blog reduces them to readable length on the premise that each one can be expanded by creative developers.
- Front-end Capitalization
Inadequate front-end capital is the major cause of lack of success in developing real estate.
Under-capitalized marketing programs frequently fail to reach the critical “tipping point” of success realized when deposit revenues and loan advances achieve and maintain an amount greater than development and marketing costs. Of course, development costs are generally estimated with considerable precision by experienced engineers. However, the marketing costs to attract each prospective purchaser and convert her/him/them into buyers through the passage of deposits are subject to much less precise estimation. The primary expertise of self-proclaimed marketing experts is often in creative graphics rather than applied economics. Both are essential to successful consumer attraction. The most common error is to allocate quarterly marketing expenditures to estimated costs per prospect evenly through project sellout, whereas experience teaches that attraction costs per prospect are much higher at the outset than when completed amenities and ample pioneer buyers are happily in place.
- Custom Marketing Budgets
A common myth propagated by traditional advertising firms is that all real estate programs are subject to common budget parameters, frequently expressed as percentages of projected total revenue. Clearly, different projects of different values in different locations with variable natural and man-made amenities require custom-made marketing budgets tailored to their specific characteristics and consumer potential. Our experience indicates that each project, from the bare-bones up to the elaborate amenities, require detailed consumer-based marketing plans that bear no direct relation to percentages except as residual control parameters. The advent of website-based marketing focused on direct communications with target consumers proves far more cost-effective than traditional advertising relying upon increasingly expensive media advertising to the general public.
- Target Consumer Programs
Real estate consumers, especially those interested in residential primary or second homes, are subject to variable changes in terms of behavioral characteristics and propensity to purchase — changes that occur from both demographic and psychographic influences. For example, children raised in the Great Depression of the 1930s often retain frugal spending habits regardless of rising wealth, whereas those raised in the post-war spending boom (often called “Baby Boomers”) tend toward the lavish spending habits learned from their parents. Those born during the social upheaval years of the 1960s and 70s tend toward more analytic spending habits. All of these age groups may be consumers for a specific community, but marketing and sales guidelines must be tailored to each group for optimum results. One size does not fit all. The examples of developers who assume that all of his visitors think and act like him/her are both numerous and customarily disastrous.
- Sellout Marketing Strategies
The fourth principle of cost-effective marketing is sellout budgeting. A financial model for multi-year sellout marketing ensures cost control for each year and provides a framework for annual modifications according to past performance and shifts in consumer preferences. The all-too-common practice of one-year budgeting, or initial launch budgeting, is an inadequate approach for all new communities, and should not be tolerated. The superior practice is to plan and budget the entire marketing program through sellout to ensure comprehensive cost control and design of each element in the program
- Pricing Policies
The most common practice in setting prices for all kinds of real estate is to estimate complete development costs and then add a profit factor. The profit factor usually is related to the price of comparable products in the competitive marketplace. For residential developments, the profit factor often includes the principals’ historical experience in this market. National production builders provide parameter questions that must be followed to gain approval to purchase at a formula price. However, the frequent missing ingredient is the annual sales absorption projected through sellout on the basis of economic trends translated into consumer demand. An unexpected downturn often sends many developed properties into foreclosure. The lower risk solution is to base annual pricing through sellout on national and local economic projections with a modest (2-3 percent) annual price increase tied to achievement of sales objectives. In sum, remove the principal’s arbitrary price decisions in favor of sellout pricing policies that achieve a realistic profit margin with adjustable market projections.
These are the five guiding principles of marketing programs that have proven successful over the past forty years. They have been found consistently satisfactory through economic downturns and strong demand modifications. Of perhaps greater importance, they provide a transparent policy document for investors compared to the higher risk rule-of-thumb marketing formulas applied by traditional marketing firms.
Dr. David Forster Parker
For more information, contact Dr. David F. Parker
or go to our web site at www.parkerassociates.com.