Forge new alliances to help drive margins in land-constrained markets, says BUILDER blogger Mike Kalis.
By Mike Kalis
As 2017 begins, U.S. builders are faced with figuring out how to overcome two of the same challenges as last year: lot shortages and escalating land costs. I don’t blame builders for feeling a little antsy about the future. The land you bought on the cheap several years ago is now worth somewhere around five to 10 times what you paid for it — which sounds great. But it also means the next lots you purchase will pose some major challenges when it comes to driving margins. Will you raise your home prices? Will you begin building larger homes? Are you going to crawl around on your hands and knees at construction sites, collecting rusty nails to use on other projects? Price increases will progressively outpace the used market and lower your sales. Recycling nails? That’s a good way to get tetanus and incur thousands of dollars in medical bills — not drive thousands of dollars to your margins. If your company’s core competency is building high-quality homes of the greatest possible value, don’t sacrifice your hard-earned reputation by cutting corners and creating an inferior product. Instead, seek out strategic partnerships that facilitate the home buying experience for customers and give you more control of the sales process — all while putting money in your pocket. Here are five particular partnerships that will help you accomplish this: 1. Mortgage Companies. Though it’s illegal to get a kickback from a mortgage company, many providers will offer anywhere from 25 to 30 percent on projected loan revenue through a joint-venture arrangement with builders. For instance, a $300,000 home loan may represent a $9,000 payment that goes to a brokerage. Your 25 percent of that payment comes out to $2,250. The sweet spot on this agreement is that you control the process: You can be sure the loan is approved and that the sale will close on time. There’s a lot of upside in joint mortgage ventures, and I’d estimate you’ll net anywhere between $1,000 to $5,000 every time a home sells under this partnership. 2. Title Companies. Home buyers can be very particular about many things — but most of the time, they won’t have preferences when it comes to title companies. If you partner with a title company and send hundreds (or thousands) of clients to it, you can be sure the provider will go above and beyond to deliver excellent service. Perhaps it will be willing to perform the closings in one of your model homes, or maybe it will agree to slash its closing fees. Your return on this type of partnership can range from $500 to $1,500 per closing. Multiply that by all your clients, and you’re looking at a nice boost to your margins. 3. Real Estate Brokers. Forming a partnership with a brokerage firm can help you cut cancellations because it allows you to be intimately involved with the back end of the sales process. You could even turn a profit on this partnership if the broker returns a percentage on each listing. Further, partnerships with real estate brokers can yield valuable localized insights regarding growth areas. The key is to find a partner that can deliver this intelligence in a scalable fashion across several markets — and one that also guarantees the sale. With this guarantee, you gain greater control of your backlog. You could net anywhere between $1,000 to $5,000 per deal partnering with a real estate broker. 4. Furniture Stores. Staged homes sell faster than empty homes, and you can easily work out a partnership with a local (or national) furniture store that helps you fill your models with beautiful sofas, rugs, beds, and more. Furniture stores will happily donate their extra stock to you if you agree to leave the tags on each piece. That way, when buyers like what they see, they know exactly where to find these items — and you can get a 20 percent cut for sending them in that direction. With a furniture store as your partner, you can stage your model homes for free and make anywhere from $200 to $800 per deal. 5. Insurance Providers. You’re doing customers a huge favor if you refer them to a high-quality insurer. You save them the headache of conducting research, calling around, listening to spiels, comparing quotes, and stressing out. Usually, insurance companies will be more than willing to partner with a builder that agrees to send them hundreds of leads. You could work out a joint venture that pays you a finder’s fee — somewhere between $300 to $800 per deal. Strategic partnerships will reduce the sticker shock you feel when developing your next batch of land. The five listed above could earn you a nice bonus of anywhere from $3,000 to $13,100 per home. As you control the buying process on behalf of your clients, you can streamline and ease their home buying journey. In the meantime, local vendors and businesses will realize greater success — and they’ll go all out to provide top-notch service.