Denver Business Journal: October 28-November 3, 2005

Outside the cookie cutter
Production builders are offering more 'custom' choices for buyers

By Erin Bodine

On a snowy October day in Centennial, newlyweds Bridget and Will Kreutzer sit at a KB Home Studio desk answering a sales consultant's questions about upgrades for their new home.

Do they want skylights? No.

Do they want a kitchen island? No.

Do they want to upgrade their stair rails? They need to consult their budget and think a little bit more about that one.

"There's a lot of choices for everything," says Bridget, as she thumbs through a design packet that contains roughly 5,000 options for colors, materials and finishes. "You find something that you really, really like, and then you build off of that."

The Kreutzers, both in their mid-20s and first-time home buyers, are participating in a growing trend in production condominium and home building: the opportunity to decide on dozens of amenities for houses that otherwise wouldn't be considered custom.

A glut of resale homes, competition in the new-home market and sophisticated, demanding buyers have forced production builders and developers to offer many options in order to edge out rival home builders, add value for their customers and pad their bottom lines.

Under this plan, home buyers often are encouraged to get pre-approved for loans that exceed their house's base price and then roll the upgrades into their mortgage.

So how do companies decide which options to offer people such as the Kreutzers?

Several metro Denver home builders say they use a combination of surveys, focus groups and trend-watching to determine the features they'll provide.

Hope Marie Dunlavey, director of design operations at Village Homes, an Englewood-based "community" builder, said her company began conducting design center-specific surveys about four years ago in order to keep up with design trends.

As a result, the company discovered important details it should be including for different developments, such as taller, bigger garages for mountain home owners who need space for SUVs.

Today, Dunlavey says Village Homes has found its niche by providing customers ways to personalize their production-type houses.

An average Village Homes base price is around $300,000, and most buyers spend roughly $45,000 -- or 10 percent to 15 percent -- of the base price on upgrades. Buyers can customize just about anything except for foundations and load-bearing walls.

Dunlavey, who has 10 years of experience in the manufacturing side of home building, works with Village Homes architects and purchasers, goes to builder shows and surveys buyers in order to understand her clients' needs and determine how much they're willing to pay for extra amenities.

She also uses extensive data from The Genesis Group, a Denver firm that conducts research for the real estate sector. "They help us keep our pulse on the marketplace," she says.

Then, Dunlavey says she asks, "How can I get [these upgrades] to be less expensive and able to be built on our production schedule?"

At KB Home (NYSE: KBH) -- where there are more than 20 subcategories from which buyers can choose, ranging from Corian countertops to surround-sound wiring -- pre- and post-purchase studies play a critical role in determining which features the company will provide.

"We live and breathe the survey," says Linda Totsch, vice president of the Centennial KB Home Studio and model merchandising for the central region, which includes the metro areas of Denver, Chicago, Indianapolis and Albuquerque, N.M.

Totsch sits in her KB Home Studio office, where her pink hard hat rests on fat binders filled with statistics about options at various prices that potential buyers may want.

KB Home conducts its own exhaustive surveys of the metro Denver market before buying land and polls its customers up to a year after they've purchased a company home.

The company considers making an option standard in a new KB Home development if 75 percent of buyers surveyed before building expect that option to be included.

In post-purchase surveys, if enough customers say they wish they had had the option of bamboo floors when making design decisions, for example, Totsch says her company might consider adding that upgrade.

Because all products have to have national suppliers, contracts and appeal, it's somewhat rare for KB Home to offer an entirely new option or feature.

But a recent fad in California, for example, called "outdoor living," has prompted the public company to incorporate outdoor cooking areas into some of its home designs.

Totsch also sits on a 15-member product merchandising team that includes corporate representatives, purchasers and studio executives from across the country. The merchandising team chooses products for the entire company and meets every other month to discuss new trends, frequency reports and national contracts with vendors.

Frequency reports, which tell how often an item is being purchased at KB Home Studio, often steer the team's decisions, Totsch says.

She says her company also asks vendors selling items at Lowes or Home Depot if they're seeing a lot of demand for certain products.

Explaining her company's strategy, Totsch says KB Home asks buyers, "What are you going to buy in the next six months that we can help you get here and put on the mortgage?"

Across the country, KB Home buyers spend an average of 13 percent of a home's base price on upgrades. The Centennial studio's average year-to-date is 14.1 percent, or roughly $28,000 per home, on upgrades.

For new, high-end urban developments, such as the Pinnacle at City Park South, home buyers tend to spend less as a percentage of a home's base price on upgrades. That's because many of the optional features for lower-end homes are already standard, says Scott Menefee, who oversees the Pinnacle project as senior director of real estate development with the Minneapolis-based Opus Group.

Condominiums in the Pinnacle development, which will break ground in January, start at $300,000 and cost up to $3 million to $4 million for penthouse spaces.

Menefee says his company will offer a complimentary meeting with an interior designer from the Chicago-based Riha Design Group, and he expects buyers to spend about 8 percent of base prices on upgrades.

"In our experience in other cities, when you get to a project of this scope and height and prominence, there are just some givens," he says.

These givens include interior quality that matches an expensive exterior, granite slab used for all countertops, hardwood or tile kitchen floors, and stainless steel appliances.

Menefee says Opus used two major surveys, one from Equity Marketing Services, a Chicago company, and a recent Genesis Group survey, to help its optional and standard feature decisions.

"Almost anyone who does residential [building] in the Denver area goes through [Genesis], because they're so good," says Menefee, whose company is currently contracting with Genesis for focus groups to determine how well the development is meeting customers' needs. "We keep an eye, along with our designers, on what the trends are."

The company also conducts exit interviews as customers leave the Pinnacle sales center.

"So far, we feel we've been pretty on the mark with our interiors," Menefee says. "[Customers] do like the fact that we're offering so many choices, not just packages."

After visiting the KB Home Studio five times, the Kreutzers have narrowed their wish list.

Ultimately, the couple decides on maple cabinets in "toffee" to guide the interior design of their Sherbourne-model home being built in southwest Denver's Quincy Lake.

Will estimates the couple will spend roughly 14 percent to 15 percent of their home's $254,995 base sale price on upgrades to add value when the home is resold -- at the high end for local buyers.

"Bridget, you have expensive tastes," Will says teasingly as he turns toward his wife.

That's exactly what Denver-area production builders are counting on.

Back to News main