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:
- 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.
- 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.
- 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:
- Number of bathrooms, bedrooms, living spaces
- House size, key room sizes (like the master bedroom)
- Garaging and car parks
- Orientation of yard and living space for sunlight
- Section size
- Section gradient and shape (affects usable space of the section)
- Section orientation to the sun
- Views and outlook
- Traffic noise and level of quiet enjoyment
- Privacy and security
- 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!
[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
