Author: Ben Cole,
University of Denver, Daniels College of Business, Burns School of Real Estate & Construction management, Winter Quarter, 2009

The purpose of this paper is to examine some of the methods and research that developers use to guide their development strategies and market their properties. Building, selling and buying homes is a cyclical business. The success or failure of a new residential development is often the function of the behavior and emotions of the buyers who, like the overall market itself, are subject to up and down swings that can be difficult to predict. In residential development, it is critical that the developer study buyer behavior and use the findings of that research to guide every strategic decision made in the development process.

When a residential developer looks at an empty site of dirt, he knows that there are a number of critical baseline questions that he must answer before he can decide what type of project he is going to deliver to the marketplace. While he may possess an expertise or preference for building a particular style of home, he must, if he wants to rely on more than luck, do his due diligence and research into who his buyer is most likely to be and what that buyer wants in a new home. The developer only wants to build what he can reasonably sell and so he must arm himself with the information that will put him in a position to be successful. He begins his investigation by doing a feasibility study.

Methods

The feasibility study would analyze the demographic information of the local and regional area including age, household size, and income levels as well as looking at social and cultural data. Much of the quantitative demographic information is supplied by census data. The study would also look at the current supply of housing including sales history and attempt to make a prediction of demand for various housing types. The gathering of this information requires a lot of field work including direct observation of the type and quantity of housing available in the area. Certain information such as buyer preferences can be obtained through surveys and focus groups. The developer must also research the restrictions and limitations that regulatory agencies might impose on his development. The method for gathering this information is through direct interaction with the agencies themselves. Such agencies can impact the timing of the development as to when construction could begin and end. Since real estate is a cyclical business, the timing of the construction of the development, which is a variable that is difficult to control, is as critical to the success of the project and as building a well targeted and conceived project.

The research identifies who the target buyer for the product should be and with that knowledge a strategy can be developed to guide the type of product to be built, what amenities its needs, how it should be built and what it should sell for. Consumers are expected to make decisions that maximize utility and wealth, given price and income constraints. Tastes and preferences are typically inferred from observing outcomes of consumer actions.(Gibler)

Factors That Force Reevaluations on Research and Methods

There are larger forces than supply and demand that shape the overall market and quite frankly it is the overall health of the economy that is the ultimate determining factor in how well a new development will perform. The path that the economy will follow has proven nearly impossible to predict accurately. As such sometimes the best research can be rendered meaningless by unforeseen swings in the market in either direction.

A dramatically rising residential market like the one from 2000 to 2005 makes most research look very solid. A dramatic economic downturn however, pulls the rug out from under the strategies based on research. Often the problem is the time lag between the period when the research was done to when the strategies and implementation of those strategies, specifically building out the project, occurs. Often that period can takes several years and a great deal can happen during that time period as it relates to buyers’ interests, preferences, tendencies and the health of the market, all of which influence consumer behavior.

Even though developers may have done all their homework and built a well targeted product for a specific buyer, the state of the economy can make a well conceived project a major success or a devastating disaster. In the current market, there has been great reluctance on the part of buyers to jump to purchase a new home. Home sales have plummeted in the last few years. Buyers are reluctant to purchase homes out of fear the home prices will continue to fall as they see no bottom in sight. They are concerned that the price they pay for the home today will probably be higher than what they could pay for it in a few months. Buyers therefore sit on sidelines waiting for a sign that it is okay to purchase.

These factors influence the methods that must be used to sell property. Developers then scramble to respond to the change in buyer behavior and slow down in the rate of sales. When traditional and conventional ways of doing things no longer work alternative strategies must be employed. As such, many more properties are being offered through auction. The auction attempts to alter buyer behavior by injecting excitement and opportunity into the sales process. How that behavior can be altered and manipulated is a function of how the latest consumer behavior research can be applied to the process.

The research begins, as most behavioral research does, by asking questions of why buyers are behaving as they are; why are they not buying? What are they afraid of? What methods can marketers and sellers use to deal with those fears?

Interviews of Real Estate Marketing Professionals

To answer some of those questions, I interviewed a couple of marketing experts, Kyle Cascioli, a professor at DU and Sue Hawkes, an owner of a residential marketing company in Boston, who are now using auctions to sell residential real estate.

Professor Cascioli (Interview 1 attached) calls what is happening in the current market a “structural event” and compares it to the Great Depression. Both sellers and buyers of real estate were caught off guard by the events of the last few years and are in shock and denial about where true market value is and how it can be achieved. Buyers and sellers are out of sync with each and it is difficult to “agree on value and consummate transactions”. His interaction with both buyers and sellers makes him believe that buyers are in a position to take advantage of this structural event. Through his method of marketing, which includes a unique approach to auctions, he works with both buyers and sellers to bring them together to achieve “true market value”.

His research begins with collecting data on the seller’s history in trying to sell the property: the price points they have tried to sell at relative to what the historic cycle, and what all the data and the metrics of the market say, and what similar properties are being sold for. He uses a number of online models such as zillo.com which is basically an automated evaluation model that you can type in any address for any property in the United States and you are able to see all the data that comes up --- it is a computer algorithm that basically values that property and provides a mean price for the property. We look at all the supply and demand and the typical metrics associated with the property in the market and then try to find out what the motivation of the seller is.”

Ms. Hawkes (Interview 2) incorporates different methods in her understanding of how the consumer behaves in current market. She states that the success of her accelerated marketing programs, a term she prefers to “auctions”, is based on a great deal of number crunching. Her method of understanding buyer behavior it based on buyer observation which she quantifies through surveys, exit polls on her properties and consumer focus groups. She then plugs the numbers she assigns to defined variables into a regression analysis.

“We constantly compare variables from one sale to the next to determine how and what buyers will respond to. To determine how best to sell the remaining units in a condo project we first study the market to look at the sales histories of all comparable projects. How much did units sell for when the market was strong and how much are the selling for in this down market and how many? How did comparable units like the ones we are studying sell for at other auctions? We are then able to make a preliminary assessment as to what they will sell for at auction and determine a minimum reserve price that will look like a potential bargain to buyers. We will later use the spread between the last asking price and the minimum reserve price as a way of getting the buyers interested in attending the sale. Then, however, the real number crunching begins because the most important variable that drives the success of an auction is the number of people who attend the auction as possible bidders. The more bidders, the higher the sales prices and the more units sold. Our ability to predict that number of potential bidders is the key to our success. We do that by plugging a particular set of variables into a regression equation which compares these variables to all previous similar sales. The variables would include the number of people who visited the site during the marketing period, the number of people who called us from seeing our advertising, the number of people who requested brochures, the number who pre-registered for the auction, the number who got pre-qualified by our mortgage brokers, etc. When we plug in all those numbers and compare them to auctions in which we know how many bidders attended those auctions, we are then able to predict how many will attend the auction for the property in question. Based on that number, we are then able to predict what the units will sell for by going through a similar comparison. To predict sales price, we are looking for a specific ratio of bidders to units offered. Through our experience and analysis we know that if we get a 3 to 1 ratio of bidders to units we will be able to move our prices up about twenty percent above the minimum reserve price. So if we have thirty units to sell we want to have if least 90 bidders in order to move our average price from $400,000 minimum bid to $500,000 final sales price. If our analysis predicts that we will have only about 60 bidders at the auction then we would reduce the units offered to 20 so that we would maintain that desirable 3 to 1 ration. In effect, we are studying the buyer’s behavior during the marketing period and making predictions based how they are performing; we can then manipulate certain variables, such as the number of units we offer at auction to produce a desired result. You would be surprised how accurate we can be with these methods and we feel the use of these methods separates us from competing marketing companies.”

Comparison of the Two Approaches

While there are baseline ways of studying how properties are developed and marketed, there are many varying methods of conducting research and applying the data as shown by the different approaches of the two professionals interviewed. In this section, I will discuss how their approaches differ in their underlying assumptions and application of their research. Mr. Cascioli, who is an academic as well as practicing professional, has given a lot of thought to how and why the residential market has changed and has developed a method of marketing that he feels is a response to the “structural event” that has altered the market. In that sense, he has a big picture approach and context for his new method of marketing. Ms. Hawkes, on the other hand, develops her method of marketing as a means of expanding on the basic operating procedures of her company as she understands that alternative methods must be used in light of the fact that the old and more typically approaches she has used before are no longer effective. Mr. Cascioli’s approach to research is to collect, analyze and synthesize third party research and he relies heavily on internet sources such as Zillo.com. Ms. Hawkes research is more first hand and experienced-based as she has been in the real estate marketing business for over 35 years and has a great deal of market data that she has accumulated in the course of doing business. Over that time she has developed many systems for quantifying and analyzing that data, specifically using regression analysis, which she also applies to her new method of marketing.

They differ greatly in how they view the relationships of sellers to buyers and the difference has as much to do with how they perceive buyers as how they perceive their own roles in the sales transactions. Mr. Cascioli assumes that ultimately buyers and sellers will make rational decisions, with each weighing the risks and rewards of their decisions that will enable them to complete the transaction. After he brings buyer and seller together he allows them to interact directly with each other --- “So we put them together and get out of the way and let them make a deal”. Ms. Hawkes approach is very different as she sees her role as the facilitator of the transaction. She does not let the buyer and seller interact at all as she is relying on her ability to quantify and interpret the behavior of the buyer to determine the outcome of the sale. Mr. Cascioli allows the buyer, who has had contact with the seller, to preempt the bidding process. Ms. Hawkes would never allow preemptive bidding as it adds a variable to the equation which could throw off her ability to predict and direct a desired outcome. Mr. Cascioli sets the stage to allow the buyer/seller dynamic to determine the price; Ms. Hawkes stages an event that will hype the price. He is looking for give and take and she is looking for favorable ratios of bidders to units offered. In his scenario the final buyer determines the final price. In her scenario, the last bidder to drop out of the bidding competition determines the price, since the ultimate buyer might have bid more but did not have to because there was no one still bidding against him.

Interestingly and curiously both Ms. Hawkes and Mr. Cascioli label their marketing methods in ways which the buying public might not agree with. Ms. Hawkes, who does not like the “auction” word, says that her “accelerated marketing program” is more like conventional marketing, whereas, Mr. Cascioli uses the “auction” word openly and freely in describing his methods. Both their methods, however, seem to be the opposite by definition of what they are claiming them to be. Ms. Hawkes’ method leads to an auction in the purest sense in which people openly bid against one another and the final transaction is confirmed by the auctioneer banging his gavel and yelling “sold”. Mr. Cascioli’s “auction” resembles more of a hybrid of conventional and auction methods of selling in that the buyer and seller are allowed to transact and negotiate with each other and complete a transaction without an auctioneer being involved. The auctioneer is only involved, as a backup, if the previous buyer/seller negotiations do not lead to a final sale. I would reverse the labels they are using and call Ms. Hawkes method an “auction” and Mr. Cascioli’s method “an accelerated marketing program”.

Both Mr. Cascioli and Ms. Hawkes provide two very different approaches to marketing the product that could possibly yield the same result. As they both claim successful results, it is not possible to determine from the interviews if one approach would be better than the other. Although each feels that his or her method works for any type of buyer or property, one could assume however, that Mr. Cascioli’s method would work better where there are a few unique properties being offered and the buyer/seller interaction could be beneficial and controlled, while Ms. Hawkes method would work better where there are multiple properties that are similar in nature, like a large condominium project, and the ability to manage many buyers is critical to the success to the success of the sale. The process of selling and pricing residential property is very abductive in that there are no set facts or definite correct way of how to do it.

In order to have any success a developer of a residential project must do his market research to clearly define his target buyer and understand that buyer’s preferences and use that research to guide his development decisions. He must then hope that the fundamental assumptions that supported the research do not change dramatically during the building and marketing of the project. A developer I once worked for, who built a 310 condominium project on the water in Tiverton, Rhode Island told me that “we do our homework and base all our decisions on that, but in the end it seems that you are better off being lucky than good”. His project which was to be built over several years in five phases started out looking like a huge success with over 150 homes sold in the first two years with a lot of very satisfied buyers. By the third year, however, he could sell no more than 20 homes and he then sold the remaining standing condos by auctioning them. He does not plan on building any more homes until the market turns around. In the end, all his consumer research proved to be time sensitive and if there is one thing that consumer research shows it is that consumer behavior fluctuates greatly over time.

Interview 1

Kyle Cascioli
Adjunct Faculty Franklin Burns School of Real Estate & Construction Mgmt.

I conducted a 45 minute interview over the phone with Professor Cascioli on Thursday, November 12, 2009. I recorded the interview and transcribed it almost word for word below.

Interview Questions

1. Professor Cascioli, you are an adjunct professor here at DU in the Construction Management and Real Estate department, which happens to be my major, as well as a practicing real estate professional. I’m doing a research paper on how scholars and practitioners in a particular discipline conceive of other human beings when they study and interact with them and I would like to relate the topic to my major. So I’m particularly interested in how buyers’ behavior relates to real estate. How do you think the down turn in the residential real estate market is effected by or is affecting buyer behavior? And how do you make that assessment?

Cascioli: The market is shocked that the annualized above-rate-of inflation for all areas of real estate in the apparent bubble goes beyond all normal cycles. You have cyclical behavior, when you look at long trend lines such as the stock market or real estate values of anything like that. You have what’s called structural events. Like the great depression was a structural event, and so we have had a structural event, and looking at the normal real estate cycles going back to World War II or the early 1950’s, and people just never really thought that their property for an extended period of time could be worth less than what they may have paid for it. So I would say shock and disbelief and denial, in terms of trying to deal with this housing crisis that show structural events such as the great depression.

This would apply to both buyers and sellers, both can’t believe that they can’t get in the market or achieve in the market, what has always been referred to as fair market value. And fair market value is kind of a misnomer to begin with, because there is nothing fair about the market. The market reflects supply and demand and essentially what willing and able sellers and willing and able buyers who are not under distress, which has implications for this structural event, can agree to and consummate transactions. The sellers are shocked that they can’t get fair market value, and really the driving term is true market value, so the difference between fair and true is what one can achieve in the market given certain characteristics like where in the country are you? What’s the supply and demand? Is there job growth? What’s the pricing plan of the home? What’s the sellers motivation in terms of for selling the home? Are they the distressed seller because they are unemployed? Are they being relocated? Are they looking to retire and down size their property? Those sorts of things relative to the pleasant sort of surprise or shock on the buy side because buyers feel there are great deals to be had. Buyers are doing extremely well during this structural event. For buyers additionally because of all of this, buyers are somewhat more emboldened, they have more choices in terms of supply and quite frankly if they’re qualified and have cash or they have been approved for financing, which is not nearly as easy today as it was when money was loose in the economy during Alan Greenspan --- so they are more aggressive in their offers. If someone has a property, whether they bought it ten years ago, 15 years ago or 5 years ago and bought the property for $250,000 and he thinks that after 5 years it ought to be worth $300,000 or $325,000 and in fact they can’t generate offers in the market place for more than $210,000, you know they are shocked and they don’t understand why this is so. Most sellers seem to think that their property is special and really real estate is a commodity so there are many substitutes, unless you are talking about a very specific and unique property such as one with a view of the ocean or one where there isn’t many similar properties around. They are somewhat more insulated from the extremities in this structural condition, but none the less, they are still impacted by it. If a property is perceived to be worth maybe $1.5 million which it may have been worth 2 years ago, now some one may only offer $1.1 or $900,000 depending upon there true emotional attachment to the property. So buyers are emboldened and sellers are shocked.

Some sellers are very scared of the idea that there home or property may be worth less today than it was when they bought it. In a market like today where houses and property are not getting the same value {The tape broke at this point and several seconds of conversation were lost in repairing the tape}

Many times in auctions sellers make the mistake of asking for an unrealistic price for a property. This makes the property sit on the open market for potentially a long time which will continue to drive down the price and make buyers feel like they can make even lower offers. Many times asking for a very high price at first will result in selling the property for even less than it would have gone for if asking for a more reasonable opening price.

2. After looking at your companies website I saw that your business is promoting auctions to sell real estate, why are auctions a potentially successful method of selling real estate in a down market?

Cascioli: Well that is another great question. Well there are several components to answering this. And let me just say that historically in the United States, auctioning has been seen as a stigmatized method for dispose of properties. That is it has typically been used as during down times or periods of distress, excess supply, bank owned properties, foreclosures, tax sales, those types of things. But if you look to Australia or the UK or South Africa, auctioning is the main stream method of selling properties. I guess the positive thing about auctioning is that, and there are many types of auctions, it depends on the type of auction you are running. Typically what most people associate with auctions is what is called an absolute auction, which means there is no minimum bid, essentially the property is going to be sold to the highest bidder regardless of price. In that case it is a very unnerving process for a seller because you are depending upon the success of the marketing campaign and how many people are really interested in the property, how many qualified buyers and willing to bid. The result of the auction could fall within a wide spectrum of what the true market value of the property might be. So the good news about an auction is you can sell a property quickly and when you want to and hopefully attract a number of bidders who recognize the true market value and bid it up to that value, because they recognize the value of that property and they want it. If you don’t run a successful marketing campaign you either cancel the auction and have spent money and have lost money marketing the auction and the effort that you put into it. Or in this case of an absolute auction, you run the auction and you don’t have a critical mass of bidders, and you get the low end of the true market spectrum for the property. In which case you have taken risk and you suffer for taking that risk. Those are probably the positives and the negatives. The good news is you could sell the property quickly the bad news is you could sell it for less than what you hoped to achieve. And if you go to our website there is really nothing that speaks to any kind of distressed sale or anything like that, most of the properties are pretty quality properties. We are not doing foreclosures and that kind of thing. Of course in America there is a stigma associated with auctions, they smell blood in the water and you can make a killing.

Could you repeat the question?

Ben: That’s answering the question well but the question was why are auctions a potentially successful way of selling property in a down market?

Cascioli: Well there is two parts to answering that. One is for the reasons that I already described. In a down market you can list the property. See historically you list the property with a realtor high above its true market value and you wait for somebody to come along and make an offer and you negotiate and you hope to get close to your true market value. In a down market if the property is overpriced you won’t get any offers. You will languish on the market for 6 months, 1 year, 2 years in some cases. In which time the buyers know that the property has been listed for a very long time and hasn’t sold, that emboldens them to be even more aggressive low priced offers for the property. That’s something where you have to compare auctioning to listing in the market. If you are going to list the property below its true market value and usually what would happen in that case you get more offers and you could bid up those people to a traditional listing model. Again sellers aren’t willing to do that. In the traditional method sellers normally get hurt if they over list the properties and if you under price the properties they will probably sell quickly. In fact, there are studies that indicate that the longer a property is on the market due to it being overpriced, ultimately the less money the seller exits the property with vs. if they had priced it closer to true market value instead of over pricing it, they would have sold it more quickly. The auction model itself works because when you under price the property and depending upon which mediums you are advertising it in you actually attract more buyers. Because when people see that property they will recognize the attributes of the property the square footage, the location your construction, the amenities, and all those types of things it will go well. Here is a property where everything else I looked at is $250,000 or $300,000 and this property is being auctioned and has all of these attributes and starting bidding is $125,000 and so it will attract attention, in fact it will get a higher return of investment under the auction model than you would under the traditional model for just that reason. So the short answer is that under the auction model you will attract more sellers more quickly and ultimately bid up the property than overpricing it and having it languish on the market and over a longer period of time dropping the price until it gets to a point where you will ultimately sell it below true market value, and of course you have to account for your carrying cost and holding period, for having all your cash tied up in a property that takes a year or a year and a half to sell, or make your mortgage payment carrying a property that is being financed over that same period of time.

3. What is it specifically about auctions that appeal to buyers? And do auctions work better for certain target groups of buyers like first time home buyers or empty nesters?

Cascioli: Well this is where my model differs than traditional auction models because in traditional auction models there is a buyer’s premium. So anybody who is bidding on the auction has to pay a premium to the auctioneer to bid on the property and they factor that in to what they are ultimately prepared to bid. The first part is they know a property that they know a property that in a short period of time on a given day at a static point in time they have a chance to compete to buy a property for what they believe would be a screaming deal and not deal with intermediaries and save money on fees, at least under my model. I think that is what appeals to buyers in the auction model but by the same token I think that they are somewhat frustrated by the fact that they are going to have to compete for the property and there is no guarantee that they will get it

Ben: That goes into the second part of my question of do you think that auctions work better for certain target groups of buyers like first time home buyers or empty nesters?

Cascioli: It essentially comes down to two things. First is the property itself. Properties that have fewer substitutes achieve better results than properties that have many substitutes. So that’s why Martha’s Vineyard homes or Cape Cod homes or Aspen ski-in ski-out home tend to do better via auction than a tract home in a suburb. That’s number one, number two is I think auctions tend to do better particularly in our model because we are really an online marketing platform. So we look for basically tech savvy buyers who are younger professionals who are internet comfortable and have not bought in to the traditional realtor model such as being represented by a realtor on the buy side or represented by a realtor on the sale side. They know where to find the properties that they want online. They want a lot of graphic good data. They know how to do all their research on their own and they know everything that want to know on the property and the auction and the seller and they want to deal directly with the seller if they can. So I would say that it seems to do better with the under forty crowd.

4. What method of research what you use to find out if auctions would appeal to buyers? How do you find out what you need to know in order to have a successful auction?

Cascioli: The first thing is the seller’s history in trying to sell the property: the price points they have tried to sell it at relative to what the historic cycle, and what all the data and the metrics of the market say, and what similar properties are being sold for. We look at everything that a realtor would look at. There is a lot of very interesting online models such as zillo.com which is basically an automated evaluation model that you can type in any address for any property in the United States and you are able to see all the data that comes up --- it is computer algorithm that basically values that property. We look at all the supply and demand and the typical metrics associated with the property in the market and then we try to find out what the motivation of the seller is. Our typical client has tried to sell their property for quite some time from 6 months to 18 months the traditional way and hasn’t been happy with the results and wants to try something different. We do not do a lot of absolute auctions. We tend to do auctions with a minimum undisclosed reserve. And are sellers are typically motivated so that if they come anywhere within there target range which is typically pretty close to true market value, that they have been softened up from the traditional marketing approach and from having their property on the market for a while and in this case have had kind of a reality check based on the market. Then most of our research goes to how we reach with our marketing campaign to the pro quo buyer in that market. We do not like running ads in the Denver Post because this is a very expensive, but we prefer the micro publications that will target buyers in the Washington Park area. We do flyers in high pedestrian areas where the property is located and people will either see it if they want to move up or within a given market. The flyer has a picture of the property and says that we are going to auction it and if you are interested give us a call or go to the website. And then a lot of the research goes into optimizing a tailor made property website for the subject property for the auction so that when people are in Google or other search engines and searching for a property and type in Washington Park Town Home that we show up on the first page.

How do you find out what you need to know in order to have a successful auction?

Cascioli: You know every auction is like a box of chocolates ---- you never know what you are going to get. The interesting thing about auctions is because you are picking a fixed date at a static point in time to sell the property. That you have hopefully only reached that pool of qualified buyers who are, --- by the way, we are targeting buyer-occupant, that is people who are buying properties to live in, not investors --- that will pay a market rate or closer to true market value for our properties, so depending upon that total buyer-occupants that you are able to tap in the market for that given weekend has a lot to do with the success. So clearly you don’t want to run your auction on super bowl weekend because you will have a limited pool of buyers for that property. The way we structure our model is that we can postpone our auction for a week or ten days before that auction if we do not like the activity or the level of interest that is being generated by the pre auction marketing campaigns. Its really a question of the quality of the websites and the content and the data of the subject property that’s being auctioned and then the effectiveness of the marketing campaign to reach that pool of potential buyers of that given date in that given market.

5. Does your understanding of the buyers come out of a lot of number crunching or does it come out the direct interaction with sellers and buyers?

Cascioli: That is another great question. It really comes out of direct interaction with the buyers. In fact our platform is to get intermediaries and auctioneers, and we know we are doing something right because we get and use realtors data and auctioneers data. What we are doing right is that my marketing drives all of the content with the potential buyers directly to the seller so we don’t filter that. We put the buyers and the sellers in direct contact to talk about the property ---because really who knows more about the property than the sellers who own the property and who knows more about what they are looking for than the potential buyers. So we put them together and get out of the way and let them make a deal. And in our model interestingly enough, we give bidders the opportunity to preempt the auction by entering a sealed bid direct to the seller up to ten days prior to the auction date. And if the seller and the buyer can come to terms prior to the auction date then we won’t have the auction; they will cut a deal and close the property. We have had a couple of those that have worked that way.

6. What conclusion would your research and experience reach as it relates to consumer behavior for real estate offered at auction?

Cascioli: This kind of relates to the stigma I referred to earlier. The other part is that there is also many stakeholders that have invested interests in seeing auctioning not succeed, that is the National Association of Realtors and all the other groups that surround the traditional approaches to selling real estate. What I will say in closing is that it never fails to generate offers and sense we do not do absolute actions it always gives the seller perfect information and allows the market to speak to them directly about what they like and don’t like about the property, what they believe is the true market value of the property is at the time of the auction and even if the seller does not sell it because they did not achieve what they wanted or the bids did not fall within there acceptable range of true market value then the seller has gained perfect information from the market in oder to allow them to make intelligent decisions regarding that property moving forward whether that be take it off the market, live in it for another year and see what happens, list it again with a realtor but with a lower price.

Interview 2

Sue Hawkes
President and CEO
The Collaborative Companies and Velocity
Marketing, Boston, MA.

I conducted this interview over the phone with Sue Hawkes on Monday, November 16, 2009. I recorded the interview and transcribed it almost word for word below.

Interview Questions

1. Ms. Hawkes, I’m writing a paper on how consumer research is conducted as it relates to real estate development and marketing. I worked for you one summer on the development called The Villages on Mount Hope Bay in Rhode Island and I remember all the talk about all the market research that went into that project. Can you tell me a little about that?

Ms. Hawkes: The Villages on Mount Hope Bay is a wonderful project. The site is a former oil tank farm that dated back to World War II. Over the years it had many owners who tried to figure what the best use would be for the site. During that time the tanks were removed and the soils were cleaned up to a level acceptable for building homes on them. The new owner was Starwood Capital who, among many businesses is a large developer. Starwood prides itself on doing all its due diligence and research before moving forward with development and they hired several different firms to do the same feasibility and marketing studies to compare the results. The Collaborative Companies was one of those firms that was hired to do a marketing study and we were later hired to market the project.

Our study included collecting data on demographics and employment, and on housing market conditions including a detailed analysis on all condominium projects in the area. From that study, we made detailed recommendations as to who we thought the buyer would be and what type of housing that buyer would want

2. When I worked there during the summer of 2005 sales seemed to be going quite well at the time but later you sold condos there using an auction. What happened and why did you change the way you were marketing the condos?

Hawkes: Things were going extremely well. We sold about 150 homes in the first two years. But what changed was the economy. Who the buyer was, which were empty nesters in this case, and what they wanted didn’t change but what did change was there ability and motivation to buy a new home. Empty nesters typically have a house to sell before they can buy another one, but in this market they couldn’t sell the house they were living in. They had also lost some, and in some cases a lot, of the net wealth, and so their ability to buy changed. The interesting thing about empty nesters is that, since they already own a home, they don’t have to purchase a new one but they do only to change their lifestyle. It’s a very emotional purchase. Well the downturn in the market sucked the wind out of their sails and sucked the wind out of our sales --- I have use that pun too many times in the last couple of years.

3. So why use an auction?

Hawkes: Well we had a lot of standing inventory that couldn’t be sold through conventional marketing techniques so we turned our attention to the auction. We had to do something dramatic. An auction catches the buyer’s eye. It presents the possibility of a bargain, you know, being able to buy at a discounted price. It creates interest where it is difficult to create interest otherwise. And by stating that the units will be sold on the certain date, it creates urgency to buy where urgency could not be created otherwise.

4. How much research goes into making a decision to use an auction or to set up and auction to work successfully?

Hawkes: That is where we feel we separate ourselves from other companies that do auctions. By the way, I prefer to call them accelerated marketing programs because the word auction implies a distressed sale and we like to maintain the high quality of the marketing program that we were previously using. We take a lot of the techniques we use in conventional marketing, we includes of market research, and apply it to the auction. In fact, we like to say that only difference between our conventional marketing methods and the auction is who is asking for the check. In a conventional program, a sales person asked the buyer for the check but in an auction program, the auctioneer asks for the check when he yells “sold”.

Everything we do is based on buyer observation which we quantify through telephone surveys, exit polls of our properties, focus groups, etc. and then we plug the numbers into a regression analysis. We constantly compare variables from one sale to the next to determine how and what buyers will respond to. To determine how best to sell the remaining units in a condo project we first study the market to look at the sales histories of all comparable projects. How much did units sell for when the market was strong and how much are the selling for in this down market and how many? How did comparable units like the ones we are studying sell for at other auctions? We are then able to make a preliminary assessment as to what they will sell for at auction and determine a minimum reserve price that will look like a potential bargain to buyers. We will later use the spread between the last asking price and the minimum reserve price as a way of getting the buyers interested in attending the auction. Then, however, the real number crunching begins because the most important variable that drives the success of an auction is the number of people who attend the auction as possible bidders. The more bidders, the higher the sales prices and the more units sold. Our ability to predict that number of potential bidders is the key to our success. We do that by plugging a particular set of variables into a regression equation which compares these variables to all previous similar sales. The variables would include the number of people who visited the site during the marketing period, the number of people who called us from seeing our advertising, the number of people who requested brochures, the number who pre-registered for the auction, the number who got pre-qualified by our mortgage brokers, etc. When we plug in all those numbers and compare them to auctions in which we know how many bidders attended those auctions, we are then able to predict how many will attend the auction for the property in question. Based on that number, we are then able to predict what the units will sell for by going through a similar comparison. To predict sales price, we are looking for a specific ratio of bidders to units offered. Through our experience and analysis we know that if we get a 3 to 1 ratio of bidders to units we will be able to move our prices up about twenty percent above the minimum reserve price. That’s why we do only minimum published reserve auctions because you cannot make the same predictions in an absolute sale or unpublished reserve. So if we have thirty units to sell we want to have if least 90 bidders, for that 3 to 1 ratio, in order to move our average price from $400,000 minimum bid to $500,000 final sales price. If our analysis predicts that we will have only about 60 bidders at the auction then we would reduce the units offered to 20 so that we would maintain that desirable 3 to 1 ration. In effect, we are studying the buyer’s behavior during the marketing period and making predictions based how they are performing; we can then manipulate certain variables, such as the number of units we offer at auction to produce a desired result. You would be surprised how accurate we can be with these methods and we feel the use of these methods separates us from competing marketing companies.

Ben: Thank you very much. This has been very helpful.

Bibliography

1. http://www.google.com/hostednews/ap/article/ALeqM5ihXQCw18xJkJ6BMEWq4Eyw1l20DAD9BT4AC02 J. W. Elphinstone reporter for the Associated Press. Nov 10 This article is based on the research done by Case-Shiller who study the housing market and calculate a home-price index.

2. http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us---- The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.

3. http://en.wikipedia.org/wiki/Case-Shiller_index This article defines who Case and Shiller are and discusses their research. This article provided some background information on the research done in the housing market.

4. http://business.fullerton.edu/finance/jrepe/pdf/2003Vol6N1/06.63_84.pdf Consumer Behavior Applications to Real Estate Education Karen M. Gibler and Susan L. Nelson Great article on buyer behavior in real estate

5. http://localism.com/neighbor/barrett Profile on Kyle Cascioli

6. http://www.rockymountainnews.com/drmn/real_estate/article/0,1299,DRMN_414_5730672,00.html DU Real Estate Class, Book Help Couple Auction Home John Rebchook, Rocky Mountain News Published October 25, 2007. Article discusses Kyle Cascioli’s DU class using his auction method

7. Zillo.com This is the site that Professor Cascioli referred to in his interview. He uses this site to market research and track pricing on housing.