Builders Use Price Guarantees to Pull Buyers Off the Fence

Strategy eliminates desire to wait for further price drops.

By Pat Curry

What the heck are you waiting for? That's the question Reno, Nev.-based Pacific West Communities is asking prospective home buyers in its new price guarantee promotion, which promises to protect the price of their home until the community sells out.

It's the furthest any builder has gone to try to convince buyers that there's no reason to wait for additional price drops.

Pacific West vice president of sales Taylor Cohee says the idea was to eliminate the perception that a price drop today is just a prelude to another one a few weeks later.

"If you really think about it, the landscape of the market is awesome, but the performance sucks," Cohee says. "It's not because the interest rates are bad or there aren't a ton of choices. People are scared. Everyone they talk to say prices are going to keep going down."

Pacific West analyzed its markets and determined where it needs to be price-wise "if it gets much worse over the next 24 months, we could whack our prices $50,000, but now that people expect it to keep dropping, it won't move inventory like you want it to."

By guaranteeing the price through the sell-out of the community, which could be six months or two years, the builder eliminates the fear of a price drop and puts the focus on whether or not it's the right house for the customer.

A multifamily builder with 1,900 apartments and 756 for-sale units in California and Nevada markets, Pacific West will cut a check at community close-out to any buyer whose unit dropped in base price after they bought. Details on the program are located at www.whattheheckareyouwaitingfor.com, a wickedly funny Web site that addresses the market conditions head-on and goes as far as to give buyers Cohee's cell phone number.

Response has been phenomenal, Cohee says. One of his communities had had five net sales in the last six months. With this new program, Pacific West has had nine in the last two weeks. Another community gained five net sales where there had been none the last six months.

"We're seeing inventory really start to move," Cohee says, "now that we've taken the psychological fear out of it." He's also generated extensive local and national media coverage, all of which helps generate traffic.

Price guarantees aren't new, Cohee admits. Pacific West has done versions of them before, but never anything this dramatic.

"Anyone can do it," he says. "It's not a stroke of genius. It's really just who has the balls to do it. Not a lot of people want to take the chance. Case in point-we're the only ones doing it. But if you can determine the capital bottom, you have the inventory, can close quickly, and can set up a program that makes people comfortable, you should do it."

Some other builders are offering variations of price guarantees, although nothing as aggressive as a guarantee through community close-out. Calabasas, Calif.-based Ryland Homes kicked off a national price and interest rate protection in January, with additional incentives available by region, say Ryland spokeswoman Marya Barlow. It's not currently advertised, but it's available as a negotiating tool for customers who are on the fence.

"If they have any reservations, it's a great way to cut through them," Barlow says. "As long as customers need it as a reassurance, we'll continue to offer it."

Price guarantees are a "good sign for the industry and consumers that we feel we've gotten the pricing about as low as it's going to get," Barlow says. "If we're wrong, we're willing to share the risk with our customers."

Meritage Homes offers its buyers a Price Pledge guarantee in certain markets, on homes closed through Sept. 26, 2008, according to its Web site. News reports in Sacramento, Calif., indicated that Los Angeles-based KB Home was offering a price and interest rate guarantee on homes in its Sacramento market, offering the lower price or interest rate if either fell between the time a customer signed a contract and the house was completed. Meritage Homes and KB Home did not respond to requests from BUILDER for comment.

Attitudes in the industry are mixed about price guarantees. Jeff Shore, a sales and marketing consultant based in Auburn, Calif., says he thinks price guarantees send a message that the market is in real danger of falling further, but admits that the fear of falling prices is the current reality in sales offices.

"Prospective home buyers bring this up all the time," he says. "Because this is the single-biggest purchase of their lifetime, that fear can have a paralyzing effect. If a price guarantee calms the fear, it can lead to buying action."

That said, Shore says, price guarantees can work to calm buyer fears in the short run, but buying a house is a long-term investment.

"It is still up to the sales counselor to coach the prospect on the idea that buying a home is something you do for the long haul," Shore says, "and that prices will fluctuate with the market for years to come."

That's the tack that Rob Calk, vice president of sales and marketing at Murphreesboro, Tenn.-based Ole South Properties thinks builders should be taking instead of offering price guarantees.

"There are markets around this country that remind me of the junk bond market of the '80s-high risk with hopes of high returns," Calk told BUILDER in an e-mail. "This concept would be great if it were my personal investment manager offsetting losses of my stock and bond portfolio. ... I would think you would be wiser to educate your buyer that there is inherent risk with any investment, and that real estate, in a market that isn't chasing unrealistic appreciation, has proven to be an investment with minimal risk and steady appreciation over the long haul."

(Source: BUILDER Online News Service
Publication date: March 6, 2008)