How to market new construction

Question from a reader:

Jim, I’m interested to hear the thoughts of Realtors on how best* to market lots in a new/proposed residential subdivision. The methods being employed in Fluvanna and Louisa at present are:

(1) Make all lots available for sale to anyone (via standard marketing tools, i.e., MLS, print ads, etc.)…Simply market the hell out the thing in every way possible. Of course there should be architectural standards for the subdivision, but basically sell any/all lots to anyone for the desired price. They can sit on it, build, resell it, or whatever.

Pros: faster lot absorption, higher lot price potential
Cons: speculators purchasing lots and sitting on them, undesirable heterogeneity in home styles, market-level sales commissions

(2) Require buyers to use one or more pre-selected builders…In several instances, I’m seeing developers hire listing agents to sell lots, while requiring buyers to use a pre-selected builder(s). The developer pays the listing agent a minimal commission (1%) on the lot sales, while the agent gets a market (6%) commission on the sale of the home. While not necessary, I’ve observed a limited approach to marketing the lots from agents in this model. I’m not sure why, but they seem to focus more on the sale of the home than the lot.

Pros: minimal sales commissions
Cons: buyers may not want to use pre-selected builders, slower absorption

(3) Sell all lots to one or more builders …assuming the desired price and absorption can be negotiated, and the builder is not some startup guy who could fold if a single home doesn’t sell, this is probably the best situation for developers.

Pros: no sales commissions, predetermined absorption
Cons: small builders may back out, price discount likely

*Best, in this context, is how best to maximize value/return on the development of the subdivision. That is, how best to sell lots as quickly as possible at the highest price possible.

I’d like your thoughts, and hopefully thoughts from readers of your blog.

I’d like to expand on this a little bit more and include buyers – what are your expectations when buying new construction?

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1 Comment

  1. TrvlnMn January 8, 2007 at 16:10

    I’m not in the market. But I will share my thoughts on the subject.

    With option 1. That was how the “original” Lake Monticello (before it expanded outside of is gates) was developed. What I’m really hearing is “we might sell a few and some really crappy looking low end houses might be built which will affect our ability to sell to the high end out of state transplants.” (because that’s exactly who can afford the outrageous prices- transplants and people trading up).

    With option 2. If I can afford to buy real estate to build on- hell will freeze over before I let someone dictate to me what builder I’m going to use. I strongly dislike the architectural tastes of builders in this area (I’m going to include the national builders as well with this bunch because it’s just “more of the same cookie cutter crap- and I want more than 4 feet between my house and the house next door). Additionally something just doesn’t sound right about the commission structure. But I’m not in the business so I wouldn’t know that for sure.

    With Option 3. As with all the other options- if minimizing the sales hassles to profit made is the goal then this is the option to take. If you wanted to maximize the commission then you could also try and negotiate the deal with whatever developer you sell to (provided it’s not a national developer or Kessler’s old outfit) – to be the exclusive agent marketing his development (kinda like Real Estate 3 does with all the developments that their builder division produces).

    Personally I like Option 1 (with one modification). I know a lot of people originally chose the Lake Monticello area because of the opportunity to “have the new house built especially for them.” I also understand that some people might want to buy a lot in a new development but don’t want to be rushed to develop it. I think different architectural styles (within reason) are healthy for a neighborhood. However understanding all that I don’t want a double-wide trailer going in right next to my “Spanish style, 7 ft. high Walled Hacienda compound” – I would suggest figuring out what sort of building standards will be desired then try to set it up that builders need to meet those design standards. I’m not sure how it would be done- but I think it could be.

    Those are my thoughts. Take them or leave them as you choose.