Homesite premiums and upgrade home improvements are often considered unimportant considerations in a hot market and the most desired commodities in a cold market.
Regardless of the market, it is important to provide the homebuyers with their wants and needs when possible.
Many builders would just like to have the homes built to their original order in a booming market in order to complete the home without much distraction.
In our practice, we have learned that homesite premiums and upgrade home improvements can yield a profit equivalent to that of the base home. Therefore, for every home you are building you can create the profits of two homes when you manage change orders effectively.
In order to ensure the capability to make changes to the agreement, you must have a qualified in-house construction management and field supervisory team adept at creating and managing each change order to your satisfaction and the satisfaction of the homebuyers.
The team members must be educated to understand the importance of establishing, maintaining, and managing a customer service change order mentality to increase profits and cash flow for the company.
The purchasing department must keep the standard and optional prices up to date weekly and daily if possible for the sales team to know the current prices to be used for the purchase of each home.
A price change disclaimer should be introduced on all pricing information: Prices are subject to change without notice and dated.
In a supply chain disruption market, it is essential to be able to exchange unavailable standard and optional features for other products of an equal or better product.
It is recommended to have a minimum of one base price, two optional packages, and the ability to offer personalized changes. Each of these purchasing benefits can be referred to as good, better, and best to accommodate the homebuyers.
Homebuyers like choices and the opportunity to make changes while working with the builder’s sales personnel. Another consideration for personalization is the human factor that one in four people or 25 percent of the population is either aging in place or has a physical challenge.
The Design Center:
It is recommended to operate and host your own design center which will be supported by the purchasing and sales department.
When you can control the exterior and interior process, you are taking further control of the management of the construction process without having additional contractors control your management schedule and fulfillment to the homebuyers.
By pre-qualifying the financial capabilities of your homebuyers, you can cost-effectively help them maintain their budgets. Most often when homebuyers are sent to design centers there is no communication about their financial capabilities. When this occurs, chaos happens.
You can maintain homebuyer satisfaction by ensuring that all parties in the design center process are knowledgeable about the homebuyer’s financial capabilities so that you can help the homebuyer remain within its budget.
Homebuyers should be presented with and educated about the efficacy of their standard inclusions first.
If they ask about optional extra opportunities, they should be presented with the next level of quality and price. Gradually demonstrate the next best grade of products and so on. If you show more expensive products than the homebuyer can afford, you may lose their interest and the sale too.
Upon completing the selection process prepare the appropriate exhibits and/or addendums to the initial home purchase agreement.
When homebuyers make change orders after the initial agreement please create an alert process with the revised paperwork selection process to further ensure that the appropriate change orders have been recognized, approved, signed, and have been received by all concerned parties.
Should you elect to select an outside contractor to supervise the design selections, ensure that your paperwork process is implemented to further ensure the accuracy and pricing of the selections for inclusion in the construction process.
Know your capabilities.
Only provide the changes that you can do correctly and especially, those in which you can make a profit.
Set the expectations of the construction process early in the homebuyer meetings so they clearly understand how the construction choice selection inclusion, homesite selection, and options process works to their advantage.
Sales team members need to be trained to say, “Yes” when discussing order changes that can be accomplished.
Set expectations to explain construction timing. It is better to have all of the changes made at the agreement completion in order to maintain a critical path to completion.
Each change after the original agreement can add time to the completion schedule. It is recommended to add two weeks once an exhibit is completed to the purchase agreement or an addendum thereafter is created to add the item(s) added or changed. This protocol sets the stage for the homebuyers to make their changes early to not offset the construction delivery date. It also helps the construction team prepare and execute the change order in a timely and proper manner.
Change Order and Homesite Premium Downpayment:
Pricing and deposit placement are key components of the process. It is recommended to have the same deposit for the change orders as that of the base price purchase agreement. For example, if the homebuyer wants to have a change order integrated into the agreement prior to the signing of the agreement, the deposit amount should be the same for the base price agreement.
An exception to this point is when the change order is too personal, like a refrigerator in every bedroom closet, poppy red installed carpet in the master bedroom, or two dishwashers and two ovens in the kitchen. Change orders such as these may be to ask for a 100 percent downpayment or even 125 percent downpayment depending upon the work that is necessary to stop or change the order. If an item is installed and later needs to be removed, please consider the construction management in order to bring the home to a marketable and saleable consumer base.
Any change order placed after the initial formal agreement can require 50 to 125 percent depending upon the classification of the change order.
The more cash you receive, the more likely the homebuyer with fulfilling the purchase.
Homebuyers who make change orders that are more costly can recover some of their investment upon completing the final permanent mortgage. For example, the homebuyer may have invested a downpayment totaling 30 percent during the pre-construction and construction of its home. Upon preparing the permanent home loan mortgage at 20 percent of the purchase price, the homebuyer can recover the additional 10 percent at the formal closing of the home purchase or choose to keep the 30 percent downpayment for a lower mortgage payment.
Regardless of the standard features, option additions, and homesite premiums, homebuyers, salespeople, and the construction team members must be in sync to follow the chain of production to ensure that the home is built to the specifications of the initial agreement and changes that occur thereafter.
Every selection needs to be signed off in an executed agreement, exhibit, or addendum to the purchase agreement by the following parties to ensure accuracy of inclusion during the construction process of the home:
- The homebuyer
- The purchasing agent for the builder
- The superintendent of the home for the builder
- The sales team members participating in the sale for the builder
- The outside real estate sales broker representing the homebuyer
The purchase agreement and all change orders to the agreement must be filed and managed properly to ensure no mistakes throughout the construction process. Of course, human error can occur. When it does, the mistake needs to be addressed immediately in order to maintain the construction schedule timeliness and cost-efficiency. If a mistake is not addressed it can be very costly for the builder to fix thereby reducing potential profit.
At your weekly policy, procedure, and operations meeting, review each homebuyer’s specific construction file and critical path schedule to ensure that all of the change orders have been incorporated into the construction of the home and that they are being built in accordance with the schedule.
If they have not, do it.
Ensure that all of your vendors and subcontractors are aware of each inclusion and change order and that they have acknowledged in writing and signed their responsibilities to each construction project. T
Never assume that everyone will play their part perfectly. They will when they are managed.
Summary and Conclusion:
Change orders and homesite premiums are profit centers when properly managed and executed with proficiency and attention to detail.
Builders, vendors, trades, and service companies make more profits and cash flow and the homebuyer obtains its individual personalization and satisfaction to ensure their future referrals too!
It’s a win-win business development opportunity for everyone!
S. Robert August is the President of North Star Synergies, a nationally and globally accomplished and award-winning real estate development marketing, management and sales concern headquartered in Denver. Robert also serves as the Senior Vice President of Business Development for Green Homes Builders of Australia, New Zealand and the U.S., as well as a member of the Board of Directors of Environmental Service Professionals and RSG3D. He can be contacted by cell phone at 303.601.5840 and office phone at 303.500.3400,
[email protected], and NorthStarSynergies.com.