aenspire delivering developmentprofit.com

Setting your price list is an important aspect of the development. The easiest competitive position to be in is to offer more value for a lower price. However, nothing comes for free and sometimes perception is stronger than reality. Too high you won’t get any bites, too low and your product may be perceived as being cheap rather than valuable. Your pricing also needs to be high enough to generate sufficient profit to get funding and to cover construction costs, especially if rising.

The price also has be set relative to the market. For a new development (where you have recently purchased the site) you will likely need to be at the top of new comparable product pricing for your feasibility to show sufficient profit. Although you may be operating in a market where you are the only new development — due to location (new subdivision on the outskirts of town) or due to product type (three level small section homes in an established large lot suburb). Here you may be attempting to set new ‘market high’ prices. Be realistic but not necessarily constrained by existing pricing in your effective real estate neighbourhood.

In your initial feasibility you commonly set pricing as an average sale rate based on your market research. As you proceed through planning and design you typically revise this pricing based on what is currently happening in your effective real estate neighbourhood. When you are ready to pull the trigger on advertising your project you need to refine your pricing specific to every section or house and land package.

You could hire a valuer to provide pricing on every house and section. However, professionals are likely to be conservative, especially if they have been culpable for overpricing in the past. Conservative prices are not going to help you maximise profit.[1] Or you could get your chosen real estate agent to put pricing against each home. The catch with this is real estate agent 101: they price high to get the listing and then spend every day after you have signed the listing agreement trying to justify why you should lower the pricing to make sales. Whether that is the reality of a changed market, or the agent just trying to make it easier for them to do their job, this is not going to help you maximise your profit. The best approach is to supplement any professional valuer or real estate agent opinion with your own price decisions.

Determining your pricing will be mostly subjective, unless you are in a commodity type development market where your product is just a cookie cutter clone of very similar priced homes and everyone is selling product in reasonable time (so no need to discount). For other markets you will need to apply some logic to price each of your sections or homes.  This is my six step process to determine individual pricing:

1. Consolidate your agent’s and other professional’s opinions and research on what comparable houses or sections have sold for and are listed for in your effective real estate neighbourhood. Estimate the likely current market price range for each of your product types. Look at how prices differ depending on design features and locational attributes between similar products with a stronger focus on new rather than older properties. If there are few comparables or a large variety of house types with little similarities then your estimate will be more difficult.
2. Establish a base price for each of your different product types, assuming it is the average or normal product in your subdivision. For example, if you are selling sections your base level product may be a 300m section on flat land, with no view, a nondescript location and fronting the main road. If you are selling house and land the base may be a 200m2, four bedroom, three bathroom, two level home on the section previously described.
3. Create a table listing the key attributes where you believe they have an impact on pricing next to each home or section. Each attribute will relate to the house (such as number of bedrooms) or section (like section size). To assist, have the site plans of the subdivision ready that show topography, and annotate any views, steep gradients and other potential attributes. During the design you will have worked towards maximising as many positive attributes and mitigating negative ones so you may already have thought in depth about items on your list, anticipating their impact on value. Attributes to consider include:
4. Number of bathrooms, bedrooms, living spaces
5. House size, key room sizes (like the master bedroom)
6. Garaging and car parks
7. Orientation of yard and living space for sunlight
8. Section size
9. Section gradient and shape (affects usable space of the section)
10. Section orientation to the sun
11. Views and outlook
12. Traffic noise and level of quiet enjoyment
13. Privacy and security
14. Proximity to amenity (next to a park or water).

• Apply a modifier to each attribute that will be used to calculate the price adjustment from the base for each individual section or home. This can be a percentage adjustment or a value amount, for example:

Home	Base Price ($)	Section Size (m2)	Views	Size Adj	View Adj	Adjusted Price ($)
Lot 1	800,000	300	Yes	0	5%	840,000
Lot 2	800,000	330	No	+5,000	0	805,000
Lot 3	800,000	250	Yes	-10,000	5%	790,000
Lot 4	850,000	500	No	+30,000	0	880,000
Lot 5	850,000	320	No	+2,500	0	852,500

• Sense check this pricing for realism compared to the market for the value differences you give to each attribute as well as to the total price. Are you still within market value ranges and does your logic fit what is actually priced by buyers in the market? Tweak where necessary and make further adjustments based on input from your real estate agent to get to your final price list (and agent buy in). The jury is out (at least in the court of my mind) whether buyer psychology dictates you should price something at $799,000 versus $800,000 versus $801,300 to gain a selling advantage. If you can find evidence in your effective real estate neighbourhood that it makes a difference by all means modify your prices. When you come to advertise your pricing it may help you sell (and explain price differential to buyers) by showing a summary of these adjustments. For example, you could group them all under a single heading called ‘Section Premium’, or you may explicitly list the major ones out like ‘View Premium’ or ‘Extra Parking’.

• Audit your total pricing against your feasibility to make sure your development is still showing the profit that you require.

Price Increases and Releases

If the housing market is appreciating you may decide on a price increase and release strategy to maximise your profit. This needs to be done in light of any pre-sale requirements discussed previously. Strategies include:

• Increase pricing after an initial launch.
• Increase pricing throughout the sales period, say 5% across the board or in regular $5000 increments after each house is sold.
• Increase pricing at milestones, using achieving the milestone as a reason to increase. For example, when civil works are complete or the first roof is on.
• Release only a certain volume of product at any one time. For example, stage the supply of sections or homes you put into the market at a certain level of pricing to create scarcity (or the illusion thereof).
• Release a certain product type at this time because you anticipate getting more money later or you want to offload inferior product first.

Remember, if you use an external construction loan, you need to both price to be profitable enough and sell enough product (quickly) to get funding. Once funding is in place pricing decisions can then be based on your prediction of what will maximise your profit. Do you sell out now at current pricing? This reduces the risk of having unsold product when the construction has finished. Or do you attempt to raise prices scheduling the last sale to occur just prior to completion of construction?  You could be too aggressive and miss the market. Having product unsold at the end of construction typically is a problem. You need to repay your lender and even if that has been achieved your profit is tied up in those last units and you need the cash for your next project!

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[1] That is why developers typically provide their well-researched evidence and substantiated price list direct to the valuer who is doing the valuation or appraisal for funders. You want to ensure the valuer doesn’t undercook sale prices.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

There are various methods to sell a section or a house and land package. Which one will maximise your profit depends on the preferences of your target buyer profile and the current strength of the sales market. Different methods of sale include:

• Set price
• By negotiation
• Auction
• Tender
• Expressions of interest

Set Price

This is where you advertise a price for each section or house and land package.  Buyers know what the asking price is and can make offers or negotiate on that basis, although some buyers may be put off contacting you in the first place if they feel the price is too high. If you set a price range, rather than a price point, then you may find legally you must have some product at the lower end figure quoted so not to contravene consumer protection laws. In a rising market this strategy can work quite well as you can progressively increase prices to compel those who have not bought to get in now before further price rises. In a softening market though, it is best not to reduce advertised prices (unless you are desperate for the sale) as buyers may start to think what is wrong with the product. Instead, consider swapping the method of sale.  Advertising a set price is the most common way to list house and land developments.

By Negotiation

This is where you promote the property without a price. This is a strategy where you want to solicit offers from buyers without capping price expectations. Usually the first thing a buyer will ask is ‘what is the price?’ so you need to have a pricelist anyway. When you first launch the development this method is not the best to generate significant interest. However, by negotiation may be an appropriate strategy to sell down the remaining last few properties at the end of your project. For luxury properties, an invitation only, price by negotiation approach may be an effective strategy.

Auction

If you expect significant interest and want to generate additional publicity an auction may be the best option. With multiple properties to sell, you do not want any left unsold on auction day as that implies a failed auction. So either you expect a lot of interest to sell out the project or you only auction a limited release. On auction day you set a reserve, which is the price you will sell at, with the hope that all the interest generated and on the day competition between bidders pushes the price up higher. Auctions often work best for properties already complete, as the risk of the buyer knowing what they are going to receive has been eliminated. Usually a complete property will have an increased pool of potential buyers. (More on auctions below where we compare them to tenders.)

Tender

Selling by tender involves marketing the property with a set sale date that all offers must be submitted by. Similar to an auction, a tender is intended to create an urgency and a call to action to buyers. In a tender the buyer reviews the tender documentation, undertakes their own due diligence and submits an offer to the buyer. Tenders are sometimes referred to as ‘set date of sale’ or a ‘sealed bid’. Tenders are mostly used for commercial properties or unique properties where it is difficult to establish a value, although agents may provide potential tenderers with a price expectation range. Selling super-lots is often done by tender. There are other differences between tenders and auctions:

• In an auction it is the second bidder that effectively sets the sale price, and the winning bid is typically only marginally higher to win the auction. In a tender the winning tender price may be significantly higher than the second highest. This is because in an auction bidders know what their competition is willing to pay, whereas a tender is confidential between each buyer and seller.
• An auction creates an unconditional sale: that is, the property and the terms of sale are disclosed up front and the buyer is legally obliged to settle when they win the auction. In a tender the seller may stipulate conditions that all tenderers must abide by or allow tenders to insert their own conditions. Tenderers with a commercial background will often insert their own conditions anyway. These conditions typically cover: terms of settlement (such as deferring payment for a section for six months after access is granted to help the buyer’s cash flow); further due diligence or financial approval (although you ideally want to ensure tenderers have all the documentation and financial backing before they submit a tender); or anything else the buyer may dream up — and this could be anything for a unique property or a unique buyer. Conditions make the assessment of the winning tender a little more difficult as price is not the only variable to consider.

Expression of Interest

When I worked for a government housing developer, we sold land and development opportunities by ‘Expression of Interest’ (EOI) and ‘Request for Proposal’ (RFP). An EOI or RFP is effectively a tender where there are a number of criteria to submit on, in addition to price. The EOI or RFP document will list the criteria and its relative weighting to be assessed on that buyers must include in their response. For large and complex sales there may be an EOI required first, a shortlist created and then a further RFP for shortlisted buyers to submit on. Financial criteria in EOI and RFP can include:

• Purchase price.
• Purchase price range (where substantial due diligence is still expected).
• Profit margin required (where land is paid for as a residual of set home prices).
• Settlement terms.
• Deposits, bonds and insurances.
• Financial minimum or maximum appetite (where there are multiple opportunities and the EOI is to solicit financial capability).
• Confirmation of funding.

Non-financial criteria, the main reason to undertake an EOI process in the first place, may include:

• Strength of the buyers company.
• Past performance and experience.
• Management staff and systems.
• Health and safety practices.
• Quality control and examples of past work (an onsite inspection may be requested).
• Strength of relationships with subcontractors and consultants demonstrating supply chain resourcing capabilities.
• Innovation demonstrated.

The criteria is either assessed as compliant or scored against a relative weighting. Responses that are not compliant may be rejected or compliance requested of the bidder. For criteria scored they are multiplied by their weighting and added up. For example, the EOI may set three criteria for compliance and four that are weighted as follows:

EOI Criteria	Weighting
Compliance
Funding secured	Yes or No
Insurance obtained	Yes or No
Bonds in place	Yes or No
Scored
Purchase price	50%
Settlement terms	20%
Management experience	10%
Quality Control	20%

The discussions we had in assessing EOI and RFP in the government sometimes bordered on insanity (from my point of view) as we as a group attempted to score non-financial criteria. It is extremely important to define how to score subjective criteria before you attempt to do so. If you are selling a small subdivision to the public or groups of sections to builders you would probably not consider this method of sale. However, if you are working with large corporates or especially government housing providers in a formal procurement process, this may be the requested option.[1]

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[1] If you want to know more on how to best present Government EOI and RFP for housing projects then you know who to ask.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

You know what you are selling and when you have to sell, now it’s the mechanics of how you are going to market and sell. The steps range from establishing your marketing strategy through to practical sales delivery, and includes:

1. Competitive positioning
2. Method of sale
3. Set pricing
4. Create marketing collateral
5. Sale and purchase agreement
6. Advertising
7. Launch
8. Sales management

Competitive Positioning

The objective is to maximise your developments appeal to the buyer profile representing your target market. You want to optimise your marketability in light of your competitive position. This will inform your marketing materials, advertising and sales approach moving forward.

To define your competitive position, compare your project to your competition. You should already know everything about your competitors based on your analysis when you got to know your market (previous chapter — read it again!). If your project is underway and it has been a while since you looked at what your competition is doing, now would be a good time for a market refresher. Ordinarily though, once you have purchased your site, your radar will be firmly fixed on what the competition is doing in your effective real estate neighbourhood. It is important to regularly mine your competitors’ information so you know how to best position your project while you are selling.[1] Keep a record of all the what, when and how competitors are doing on their developments and identify the key metrics for your target market. Compare your project against your competition on these key metrics:

• Floor area and section land area
• Price per square metre of floor area ($/m2)
• Price per bedroom
• Price per square metre of land value ($/m2)
• Number of homes for sale
• Mix of homes for sale
• Rental rates and investment returns
• Absolute price point range
• Average price point
• Design quality
• Design standout features
• Quality of construction materials
• Quality of finishes specification
• Location (schooling, parks, shopping, water, desirability)
• Aspect, outlook and views
• Timing until they are delivered, their current stage of construction
• Targeting investors versus owner operators
• Target buyer profile characteristics
• Cookie cutter vs bespoke vs boutique.

Rank and score how your project compares in relation to competitor projects. Essentially you are creating a SWOT analysis of your project (Strengths, Weaknesses, Opportunities and Threats). Don’t fall into the trap of an overly academic approach. There will be a mix of objective financial data and subjective assessment so you will likely need to take a few liberties and generalisations with your comparison. That is ok as this analysis is just to inform your marketing pitch and make you and your sales team self-aware of your project’s relative positioning. Tabulate and organise the results to make for easy comparison, for example:

Metric	You	Comp 1	Comp 2	Your Rank
Price $/m2	5500	6000	5700	Cheaper
Price average $	500k	400k	520k	Higher end
Views	None	Good	None	Average
Quality	High	Low	Average	Higher
2 Living	Yes	No	No	Better
Style	Boutique	Cookie	Cookie	Exclusive
Target profile	Family	Family	Family	Same

Knowing your competitive position is important so you can espouse positives and have answers to deal with any negatives. Positives — your competitive advantage — should be embraced in the marketing for your project. Whether it’s a script for the sales person or appears bright and bold on advertising, make sure your potential buyers know why you are a better choice than your competition. Where your project performs worse than your competitors then you can tailor your marketing to address, reframe or deflect potential buyer concerns. In the above example your competitive positioning could be summarised in a key marketing message:

“With more value per square metre this boutique enclave of high quality

homes also provides two living areas — a must for today’s modern family.”  

We have embraced the positives (lower price per m2 and quality), enhanced our positioning where we are exactly the same (creating the image that two living areas is a must for our target profile of families) and quietly reframed a potential negative lack of views into a ‘boutique enclave’.  

             Identifying your competitive position and setting your key marketing messages will influence how you approach and what you produce for the remaining steps.

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[1] At all stages of selling, not just when you commence. For example, you might need to change your positioning part way into your sales programme, in light of new competition.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

In some markets for some types of properties, especially in the luxury bracket, you will only get the highest price for a new property that the buyer can touch and feel. Your best strategy may be to hold back as much product as possible until construction is complete and you have fully staged each home (staging means you hire furniture and fit-out the home to how it is intended to be lived in). Speculative homes are called as such because by selling only when complete you are betting on a rising sales market during the construction period to maximise profitability.  

Waiting until construction is complete to sell is a luxury most house and land developers do not end up with or want in the first place. For the majority you want to be sold and done by the end of construction so you can take your profit and move your resources on to the next project. Beyond the speculators, reasons why developers still have unsold product at the completion of construction include:

• The construction loan and other costs are repaid and the developer is under no stress to sell the last few remaining units. On a 20 unit subdivision the first 16–18 units are likely required to cover all your costs, so this only leaves a few to sell anyway. If the market is rising why not wait for maximum price?
• You have the capital to hold the remaining properties yourself as rental investments.
• You have not achieved high enough sales prices to generate sufficient profit and therefore are under stress to wait for higher prices. You have arranged an extension of finance to enable you to do this. The race is on to sell before your finance costs further decrease your profit.
• Purchasers are defaulting on settlement, in which case you are forced to resell units — and probably at lower prices than you originally did.

Therefore ‘when are you  going to sell?’ involves deciding and managing how much of your product you sell before you start construction, how much during construction and how much you want to leave, if any, until construction is complete. It’s a juggling act and achieving maximum profit is contingent on the market at each stage and the constraints imposed by your funders.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

When you sell a section or home before construction you are trying to convince purchasers to buy into two visions. The first vision you have to sell is that the development will actually proceed. Some buyers may be previously fatigued by pretty pictures and promises of developments that never got built. The second vision is that the completed home and section will deliver on all the promises, expectations, features and benefits you are presenting on paper.

            If your subdivision has started earthworks and civil infrastructure then you no longer have to convince a purchaser if the development will become a reality. This will increase your potential buyer pool as many will be spurred on by a project under construction.  If your subdivision works are complete, buyers can physically see how each home section relates to its surroundings and the value of the amenity you have created (parks, paths, access). With house construction underway, a new group of buyers who want immediacy come into play and much less is left to the imagination. Eventually the homes are complete and there is no need to sell any vision as they can touch and feel the finished product. Of course if the delivered product does not meet the expectations set (by the vision presented when pre-selling) then you may find it now harder to sell.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com