Although it’s easy to enjoy the natural beauty of breathtaking mountain trails while hiking, biking, or skiing, you must always keep in mind the risk associated with being on the side of a mountain. Cliffs, in nature and in business, aren’t always easy to avoid. In the event of a slip, it’s imperative that you act fast to counter the lasting, possibly fatal, impact of a stumble.
Our community of home builders has been successfully traversing the path of selling and closing homes this year. However, the time has come to realize that a sales and traffic drop—a cliff if you will—could be waiting around the bend.
Builders must act fast to avoid an untimely misstep. Fortunately, there are precautions you can take. If you put attention toward improving your management systems, you can face the cliff head on like a true mountaineer and continue your journey to the top of the mountain.
Turn to the Forecasts
Paying attention to economic and housing forecasts is imperative to staying on the path to success. When you know what’s in store, you can better adjust your practices to combat any possible adverse effects.
Realize that what is happening in your business is the early warning bell and will most certainly inform these forecasts. Pay attention to your online and on-site traffic, leads, sales contracts, and cancellations. Track permits being pulled and MLS activity in the jurisdictions in which you build. Have discussions with your trade partners, suppliers, mortgage lenders, outside brokers, and appraisers about trends they are seeing.
Understand Patterns
Take time to fully track and analyze patterns in your sales. What are the primary reasons for cancellations? Are there discounts that you need to be offering? Where are your leads coming from? What is the typical demographic of your customer base? Include cancellation information from the past couple of years to fully understand these patterns.
Listen to the Customer
Customer feedback is a valuable tool that grants you further insight into what practices are effective. Follow up with your buyers via surveys and phone calls. Take note of what they did and didn’t like to improve your business.
The Importance of Backlog
Your backlog can tell an entire story in itself. Assess your customer backlog monthly. For each buyer, what is the highest interest rate they can afford? How much cash do they have, and how much are they willing to use as a down payment? What are the sources of their income and cash?
From this information, you can assess the risks associated with incurring them as a customer, begin increasing the deposits you take through the construction process, and adjust your expected future sales pace and net of cancellations expected in your backlog.
Given current market conditions, you should reduce your spec starts by at least 10% every week until they match your average sales pace and net of cancellations over the past nine weeks to combat the increasing state of your backlog.
Create a Trigger Point (And Act on It!)
Develop charts and graphs to track and analyze the above information. Utilize these visuals to decide on a trigger point that indicates a change in the market. This trigger point requires you to take pre-planned actions to adjust your processes to combat the market shift.
Once you identify a trigger point, create a list of 10 actions you can take in each area of your business including:
- Cash balance
- Lead generation/promotions
- Lead conversion/sales
- New product design
- Land or finished lot acquisition
- Land development
- Starts on specs or unsold homes
- Estimating and purchasing
- Office and equipment
- Fixed expense or overhead reduction
Develop or update position guides for each position in the company. Under some trigger points, certain positions may need to become part-time or eliminated. Create a prioritized list of layoffs and the specific trigger point for each layoff. Also create a prioritized list of positions you will hire back or add and the associated trigger points.
Contact Your Preferred Lenders
Reach out to your preferred lenders and negotiate extended locks and interest rate buy-downs to benefit both you and your customers. Assistance programs such as 3-2-1 buy-downs are helpful when interest rates are between 5% and 7% as they help to decrease the likelihood of last-minute cancellations.
Communication is Key
These practices aim to benefit your company and prevent you from going off the edge of the cliff. To reap the benefits, you must clearly communicate all changes to your employees. Ensure everyone knows what changes will be made and how you will support them moving forward.
Shinn Consulting is committed to helping home builders thrive in times of growth and survive in times of crisis. Contact us today at info@shinnconsulting.com or 303-972-7666 and discover how we can help you implement effective management systems to position your business for success in any market conditions.
Jim Weigel is a senior consultant at Shinn Consulting. He specializes in helping builders implement effective management systems with a focus on disciplined leadership and performance excellence to increase revenue. Jim’s areas of expertise include management, marketing, sales, finance, quality, valuation, owner transition.
FREE WEBINAR: Join us on Wednesday, September 28, for an eye-opening Q&A session with Jim Weigel. Jim will be answering your burning questions about banks and finances in a housing downturn. Click here to register.
