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An Alternative Approach to Buying a Home or Investing in Real Estate
Group buying for housing, Group buy homes, Group buy real estateHome production remains stuck in Levittown. Mass production techniques are used, but the speculative build model remains, creating unnecessary risk for the builder. Buyers, meantime, pay higher prices than they would if they had been organized in groups to secure discounts. Alternative strategies involving social cooperation have emerged in the form form of Intentional Communities, Co-Housing, and massive buying groups in China.
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Home Production Stuck in Levittown
Home purchase and sale remains stuck in the Levittown model of production. It was William Levitt, who first applied assembly-line techniques to housing construction, producing the first mass produced suburb. Prior to Levitt, the American housing industry was not so much an industry as a loose affiliation of local builders, any one of whom completed an average of four houses a year. Housing is unique and unlike nearly every product produced and consumed: it has remained beyond the purview of volume buying and discounts. And through lax lending and Wall Street securitization of mortgages, it has become an investment fraught with price volatility and risk. Still sold on a one to one basis, buyers have failed to form collective action for their own benefit. They negotiate alone, deprived of leverage that exits had they organized as a group. With regard to production builders, buyers compete with others over a product of marginal or inessential differences. Most builders have only a few different models to choose from. The monotony of suburban tract homes is testament to this lack of product differentiation. .jpg)
In order to create consumer discounts, reduce risk and create product innovation, a new process is needed. Collaborative buying groups enabled via the internet or through traditional group meetings promises to be an evolution of this marketplace. At this time, I believe a necessary one for buyers and sellers to create a more risk averse and efficient system. In large scale planned unit developments and condominium projects, a common practice in pre-construction sales has been based on spec plans and visual mock ups alone, oftentimes secured only by a developers promise to build and sometimes mere options on proposed building sites. In strong markets, this method has consistently succeeded in jump starting new development projects. While providing discounts to early buyers in new communities, once sales targets are reached, discounts are phased out with later buyers paying substantial premiums. While higher prices charged to subsequent buyers are intrinsic to developer profits, they slow sales, putting the completion of the project at risk, highlighting the risk taken by pre-construction buyers. The result of this process has created two classes of homeowners, each with distinct issues: 1) Early buyers risk losing deposits and shoulder execution risk on the part of the developer. 2) Subsequent buyers that overpay relative to early purchasers. In normal markets, after transaction costs, these buyers must endure years of holding this asset in order to generate a profit on their purchase. When finally selling their property, they will likely be undercut by early stage buyers that have already locked in a profit. When the benefits of home ownership are described, missing from this discussion are the calculated risks taken by individual purchasers in this atomized system. Early stage investors shoulder too much risk while late stage buyers too often overpay. Pre-construction sales are merely a half-step to a system that puts consumers in charge of a process to mitigate their own risks while allowing more decision making and control on behalf of buyers. For planned communities and condominiums, a group buying system that aggregates purchasers into groups for the total sale of the project on behalf of buyers would create a more efficient and cost effective distribution model than the present one where only a percentage of the units are pre-sold by the developer. Execution risk mounts as the developer seeks to maximize profits during sell out. In strong markets, the developer may maintain margins of 15 to 50%. In the world of Wal-Mart and the internet, those margins are not only healthy but obscene and are a consequence of the system fraught with execution risk, market uncertainty and dependance on third party capital. In lean times, the speculative build model exposes builder's balance sheets, causing high risk of bankruptcy even among the most tenured and stable firms. On November 9, 2007, Levitt and Sons of Fort Lauderdale (the innovator of the production build model) became the nation's largest builder ever to file for bankruptcy, highlighting the systemic risks of the production build model in housing. Owner Builder Networks offer a way out of this dilemma. However, buyers remain isolated and are denied the economies of scale enjoyed by production builders. Buyers may save money by carrying the construction loan in their name (a lending hurdle many buyers cannot overcome) and by becoming their own general contractor (an occupational challenge and prohibitively time consuming event for most of us). Some of the benefits for the group buying of homes:
For buyers
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Know your neighbor before you buy (if a local community group).
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Community co-creation based on consumer choice, not developer profit.
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Choice in dealing directly with architects, contractors, and or developers for customization not achievable by traditional means.
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Mitigate or eliminate developer profits and lower cost of acquisition.
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Create park, pool and green space based on real demand and not by perception and budget of the developer.
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HOA formed and controlled by buyers from the beginning (this makes it easier to getting Fannie Mae project approval for competitive mortgages).
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Modification of property outside of traditional boundaries (i.e. granny shacks, in home businesses, common buildings for neighborhood child care, meals, etc.)
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Aesthetic novelty and improvement
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Improvement and choice in building materials
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Choice in ecologically friendly location, construction materials, energy sources.
For Developers and Construction companies
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Reservations and sales may be made prior to significant money invested. Activity on posted projects serves as a proxy for studies, eliminating need for feasibility studies or "testing" the market.
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Use credit capacity of buyers in place of your builder credit lines or third-party investors (very important smaller builders).
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Market behavior based on real demand and not speculation (no need for "specs").
A group buying system promises several levels of participation:
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Group with others to approach builders and bank REO departments to negotiate volume discounts. Current large inventories of builder spec homes, condos and foreclosures will allow for substantial discounts from list price. Builders with large inventories of spec homes and condos and will be best targets to approach for volume discounts. REO departments, traditionally accustomed to negotiating with single, large investors will make similar adjustments to accommodate large buying groups. This process may restrict choice and will likely be dominated by consumers and investors interested in lower prices and a higher return on investment. However, after purchase, buyers may form a secondary market to swap homes with others to achieve the home of their choice, provided their first choice was not attained through the initial group buying pool.
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Group with others to build entire plan from raw land to finish product. Buyers start at the beginning and negotiate and select the initial option to purchase land, similar to a developer. The group determines site selection, street layout, green space, size, number, and design of units. This process may be dominated by those groups that want novelty in design, use, and structure. Price may be a secondary consideration. But again, cooperation and consensus building is key.
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Comment: Our current system of production style homebuilding has emasculated architects and designers, while emboldening large corporations that build oftentimes wasteful, oversized tract home communities, disconnected to cities and work (sprawl). Social cooperation in property development and construction may create new relationships to space, new building patterns and opportunities for public space and authentic socialization. Over the past generation, the family size has gotten smaller while the house size has grown larger. The current foreclosure market demonstrates that too many buyers bought larger houses than they could afford. This is due not only to subprime and adjustable rate mortgages, but the social logic of competitive consumption. It creates waste as consumers attempt to outdo their neighbors. Perhaps more importantly, as material affluence spreads to India, China, Russia, Brazil and elsewhere, the structural logic of competitive consumption could tragically end as the resource base to support the American style of affluence is proving to be unsustainable.
Improved Pricing Model - Group Buy
Builder Vs. Group Buy Price CurvesGoogle Presentation A cooperative or group model for the purchase of housing mitigates risk for both home buyers and builders, as purchasers form groups to sell out their own projects. In this model, everyone pays the same price based on a pro-rata portion of the final project. By contrast, the pricing in the spec built production model, buyers negotiating independently with a builder over a long period of time - your price depends primarily upon timing (phase of the project) and your negotiating ability with the builder. Alternative Models to Developer Driven Housing Construction New models of residential property development patterned upon group consensus and cooperation are already in practice and are successful. In the United States and Europe, pre-fabricated housing offers an alternative but still needs the benefit of high volume buying to proliferate and leverage true factory style mass production. In China, a massive groups are forming to buy affordable homes in Shenzen. A collaborative approach exists today in the United States and Europe, but is operating under restrictive ideological banners (Intentional communities) and definitive building patterns based on a Danish concept called Co-housing. It is my belief that in the future homebuyers will form groups on a basis common to everyone: to save money and to create more options for themselves.Group Buying for Pre-Fabricated Housing
Pre-fabricated housing follows the typical production and retailing model to which the majority of consumer goods conform. Lowes, for example, now sells prefab homes as Sears did many years ago. IKEA is offering prefabricated homes in Europe. To create options with other designers and avoid the retail middleman, group buying strategies should prove highly effective in lowering purchase costs for pre-fab home buyers. When buying groups are localized, group buying should lower costs of contractor installation.
Here the traditional prices curves associated with higher sales volumes that are enjoyed by other consumer goods sectors should be passed to buying groups. Because of higher cost and higher profit margins enjoyed by home producers relative to other industries, dramatic savings may result. As important, since every pre-fab home ordered already has a buyer, the developer driven speculative build model is eliminated. As a result, prices have greater stability and lower foreclosure rates are likely to result when buying manufactured and prefabricated homes.
Contemporary manufactured and pre-fabribricated homes offer more variety and construction quality than in the past. The 140 mph wind ratings of Marianne Cusato's Katrina Cottages is testament to the strength and quality of today's pre-fabricated housing. Both traditional and modernist architectural is now available in manufactured housing. Pre-fab modernist designs have provided an affordable way to deliver modernist aesthetics not met in the project or tract house building model. Unfortunately, outside of the Katrina Cottages offered by Lowes, no other large distributors are buying in bulk to help bring costs down.
Many innovative designer-manufactures exist with many more in various stages of planning. Rocio Romero's LV home is an attractive and affordable option that is manufactured from a facility in Perryville, Missouri. A Seattle based company called Place Houses recently launched a mass production model of high end designs. But sill missing from this high end manufactured home model are the economies of scale offered by larger distribution. Because the high cost of the product and large potential numbers of purchases, I believe large savings could be achieved via online group buying practice as opposed to traditional bulk buying and distribution via retail channels.
Zau Tao's Group Buy Project in Shenzen
Over the past few years, China witnessed an even more dramatic price rise than many parts of the Unit|
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