After the red-hot boom years of the pandemic, the homebuilding market has been showing signs of cooling, says industry expert Russ Stephens. “We’re seeing hesitancy come into the market with all the uncertainty from interest rate rises and inflation,” says Stephens, cofounder of the Association of Professional Builders (APB), a business coaching service for custom home builders.
In the past few months, he says, custom home builders have experienced a drop in inquiries; they also have seen customers pull out during the design process. All of which marks a return to normality, he notes.
5 Business Tips for Homebuilders
Trying to anticipate the housing market is never easy. But to help builders get better prepared for whatever the market brings, Stephens shares the following tips.
1. Know your finances.
The two most important things builders can do? Understand your profitability, and market your business.
“Builders and contractors don’t pay enough attention to their margins,” Stephens says. “They operate in a high-revenue environment with wafer-thin margins, so it’s absolutely critical they understand their finances, especially when the market moves.” To truly understand their finances, builders should factor inflation into their pricing and forecasting.
And always market your business—even in good times. “You have to market your business through boom and bust,” he says. “It’s not something you can switch off because you have plenty of work, because by the time you switch it on again, it will be too late.”
2. Manage your time.
Owners of building companies, especially smaller ones, tend to spend too much time on job sites and not enough on growing their business. And that affects their profitability.
Builders buy more time by employing more people. Better time management relies on a virtuous cycle: better marketing, which leads to more business, which enables builders to hire more people. When builders don’t generate the margins needed to employ more people, “they’re not spending enough money on the marketing that creates excess demand,” Stephens says.
Builders also should have a structured recruitment process and a strong culture to attract and retain talent, he adds.
3. Reform your sales process.
When builders don’t have a documented sales process, they end up following their customers’ buying process. “That puts builders on the back foot, and margins get negotiated away,” Stephens says. According to APB, builders with documented, repeatable sales processes sign contracts at higher margins, and they sign contracts with a higher percentage of their prospects.
Understand the daily actions your sales team takes, and assess what does and doesn’t work. APB recommends a 3x3 strategy: Call, text, and email a prospect every day for three consecutive days. This allows prospects to engage with you, so even if they miss an email, they still get the text.
4. Remember forgotten knowledge.
The sales team should always have an objections manual—which lays out the most common objections from customers when they’re about to sign a contract, as well as the most effective methods for addressing those objections. A customer suddenly expresses a lack of confidence in the company? Maybe they would benefit from more client testimonials.
“Consumers are making the biggest purchase of their life when they sign a contract to build a new home, so naturally they feel hesitation and procrastination,” Stephens says.
RELATED:
- The Association of Professional Builders Releases Profitability Guidelines
- The Year Ahead for the Residential Construction Industry
New builders who started during the Covid-era boom times might never have used an objections manual at all. Even among experienced builders, the use of such manuals has declined in recent years, he observes. “In a red-hot market, they haven’t needed to overcome consumers’ objections.”
Now is the time to create objections manuals that capture all that forgotten knowledge.
5. Focus on your KPIS.
Builders should regularly monitor KPIs that include both leading and lagging indicators, Stephens advises. While the lagging indicators include gross margin, net margin, and fixed cost ratio, the leading indicators include the amount spent on advertising and the number of opportunities created by paid ads. “The lead indicators give early warning signals of problems ahead,” he says.
When you monitor the percentage of opportunities from paid advertising that become likely customers and, ultimately, signed customers, you can determine if you’re advertising with the right message and in the right places.
Advertising can be a mindset shift for custom builders, about half of whom rely totally on referrals, Stephens notes. “You can’t scale a building company based on referrals alone. You need paid advertising to generate excess demand that leads to growth.”
Is there a risk in creating more demand than a builder can handle? “Not at all,” he says. “Human beings are hardwired to chase scarce resources. That’s why most successful builders have a backlog of 12 to 18 months.”