March 1, 2013 By In Uncategorized No Comment

Enhancing your profitability can be achieved by choosing the right Optional Features List for your customers to select from.  Think through your options pricing prior to commencing construction on your homes.  Ensure your sales program is set up to take advantage of this opportunity.

Luxury Upgrades That’ll Cost Extra

It’s the Little Things

Buying a newly built home is a lot like buying a new car at the dealership—optional features cost extra. Buyers will pay more for premium granite, a fancier fridge or an epoxy-coated garage floor. And upgrades can be a lucrative part of a builder’s business, with profit margins as high as 60%, depending on the option.

Indeed, buyers like the Moghadams are helping builders return to profitability after a long downturn. During the housing boom, homes were loaded with expensive features, and buyers snapped them up, regardless of price. These days, however, upscale buyers are choosier, selecting pricey options that are within their budgets and still practical for the resale market. An estimated 10% to 30% of a home’s base price is spent on upgrades. And companies say these optional features have been spurring growth in high-end home construction.

Record-low interest rates are driving much of this spending, with a 30-year, fixed-rate average of 3.68% for conforming loans, which are below $417,000 in most markets, or 4.13% for larger loans, according to HSH.com, a mortgage-research website. Monica Kaiser, for instance, added nearly $70,000 worth of upgrades to the $1 million-plus San Diego home she and her husband purchased in December. The Kaisers decided to spend the money now—instead of later—for the upgrades they wanted. The Kaisers opted for a $10,000 staircase with wrought-iron balusters and nearly $4,500 for tile and stonework in the home’s 4½ bathrooms, along with other features from builder Standard Pacific .

“With interest rates so low, you’re not going to be able to get what you want any cheaper at any time,” says Ms. Kaiser, a mother of three who works for local media outlet. “To put a lot of these upgrades in down the line would have just been silly, because we’d be paying more to take out a loan or dipping into other assets.”

Some builders present buyers with thousands of choices that let them build a near-custom home that won’t resemble anything else in their community. Customizing a home can make a customer less likely to cancel the deal. “They’re emotionally attached to what they have designed,” says Joan Marcus-Colvin, senior vice president of sales, marketing and design for the New Home Co. “They have actually pictured themselves living in that surrounding.”

To this end, builders construct lavish model homes to showcase the full range of options. Toll Brothers, a luxury builder based in Horsham, Pa., is known for models that “pretty much upgrade everything,” says Denise DiBlasio, who manages Toll’s design studio in Bucks County, Pa. Toll will put a fireplace in the master bath or a wine grotto in the basement.

This pool/spa package costs an additional $140,000-$160,000.

In North Palm Beach, Fla., Toll poured hundreds of thousands of dollars into upgrades for the model home at its upscale Frenchman’s Harbor community, where single-family homes start at $1.7 million. The company says it is not unusual for a buyer to replicate the model or to copy the kitchen, regardless of cost.

This Toll Brothers model home in North Palm Beach, Fla., showcases optional features that buyers can select; prices vary by home size and region.

Toll, like many other builders, has bricks-and-mortar design centers stocked with samples of everything from carpet colors to granite slabs that customers can touch and coordinate with other items. Interior-design specialists are on hand to guide buyers on what’s hot and help them avoid design disasters.

The New Home Co., a three-year-old upscale builder in California with starting prices as high as $2 million, took in $9 million from its design studios in 2012, up from $7.6 million the prior year.

Michael Hamilton bought a Standard Pacific home in San Diego, model home shown, opting for a larger lot and a $100,000 backyard guest house.

Dawn Wotapka joins Lunch Break with a look at the many costs involved in upgrading from a builder’s basic model–how much extra you’ll pay for various finishes and amenities–and which ones are worth it. Photo: Jessica Klewicki Glynn for The Wall Street Journal.

Publicly traded builders, who sell more homes but generally don’t disclose profits from upgrades, can rake in much more. Jeffrey Burnett estimates he and his wife spent three full days at Toll’s Boca Raton, Fla., design center, one of 15 nationwide, selecting extras for his $2.5 million home under construction in Frenchman’s Harbor. In the end, Mr. Burnett, chief executive officer of Labor Finders International, a nationwide blue-collar staffing company based in Palm Beach Gardens, added $800,000 worth of upgrades, including a $100,000 tennis court and a steam room.

In the past decade, builders have increasingly been allowing buyers to pick favorite items through a website or app. Buyers can almost think of it like a game: They choose options to build their dream homes, then add or delete items as the budget permits.

“It was like I was going to the store,” says Ms. Moghadam, the Irvine, Calif., buyer of the New Home Co. house. “I would sit on my iPad and I would just pick out all the options I liked: cabinets, sinks, hardware, faucets. You could just do it at home and have fun with it.”

The most money is usually spent on kitchens, bathrooms and flooring, according to BDX, the marketing-services and technology company behind the Envision online design center that helps customers select options. Buyers upgrade flooring 73% of the time, cabinets 70% and appliances 63%, the company says.

In the kitchen, large, granite-topped islands that seat four to eight people are popular, as are supersize showers with sitting space, says Jeffrey Lake, Standard Pacific’s national head of architecture.

Northeasterners like crown molding and wainscoting, while Florida buyers often spring for a screened-in lanai and a bathroom specifically for the pool area. On the West Coast, consumers are more likely to add large glass doors that can be opened to seamlessly combine the family living space with the outdoors, he said.

Builders warn buyers to keep an eye on spending to avoid appraisal woes. An extensively upgraded home could appear overvalued when compared with recent nearby sales. If that happens, the builder may have to cut the price or ask the buyer for extra money at the closing. For that reason—and to help pay for the purchase and installation of the upgrade—some builders require upgrade deposits in advance. The Moghadams, whose purchase contract for extras covered 32 pages, paid for 50% of their upgrades upfront, though that was spread across multiple payments.

M.D.C. Holdings, a builder that operates under the Richmond American Homes name, may ask for an additional deposit if a buyer’s interior-design upgrades exceed 13% of the base price. Typically, the additional deposit is 50% of the amount spent above 13%. Above 18%, the buyer may have to place a deposit equal to 100% of additional upgrades. The company may also ask buyers to pay for unusual choices upfront. “If you order the pink carpet, we’re probably going to ask you to put the full deposit on that one,” says Bob Martin, the Denver-based builder’s vice president of finance and business development who is currently picking out upgrades for his new home. “Nothing against pink,” he adds.

And, given consumer demand, more builders are making some upscale features—things like granite countertops and stainless-steel appliances—standard, even in lower-priced homes. Some builders, like Miami-based Lennar, purchase popular options in bulk at a discount and include them in the home’s base price. This approach appeals to buyers who don’t want to make many decisions or feel nickel-and-dimed when opting for an upgrade like an extra electrical outlet.

One upgrade tends to hold its value: land. Former NFL player Michael Hamilton decided to build a new Standard Pacific home in San Diego after seeing a roughly half-acre lot with views of coastal sage shrub and other native plants near 1,600 acres of preserved open space.

Premium lots in the upscale Bellasario at Stonebridge Estates community cost up to $215,000 above the neighborhood’s $900,000 base price. The upgraded lot gave Mr. Hamilton room for another upgrade, a $100,000 backyard cottage for guests. “I wanted that lot and I wanted the casita,” he said, adding that “I wish I would have gotten a couple more upgrades.”


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