Selling Townhomes at Target

Selling Townhomes at Target

Say you're a toy buyer at Target and its last spring and you're buying for
Christmas 2009. Tiger Woods, recovered from his knee injury, is back on the
PGA Tour and doing well. So you order Tiger Woods action dolls. Lots of
Tiger Woods action dolls. After all, everyone loves Tiger Woods. But you
didn't anticipate, could not have anticipated, that some women loved Tiger
too much. And then loved the opportunity for their own fame more than they
loved Tiger.

So the Christmas shoppers come and you just kick yourself for buying
millions of those Tiger Woods dolls and passing up the Sarah Palin action
figures-like the one featured in the Doonesbury comic strip. Having to plan
so far ahead but commit your money now-you didn't see Sarah Palin's
popularity after she lost the election.

So Target is stuck with all these Tiger Woods dolls taking up shelf space
that you could have used for the Sarah Palin dolls. So your only choice is
to lower the price of the Tiger Woods dolls below your cost and lose money
on every Tiger doll. Aggravating the situation is the moms who bought the
Tiger dolls before the scandal hit. Not wanting Johnny and Janey to play
with Tiger now, the moms donate the nearly new or even unopened Tiger Woods
dolls to Goodwill or sell them on Craig's list. So not only does Target have
the price pressure of having way too many Tiger dolls that are no longer
popular, they face further price pressure from the resale market of new or
nearly new dolls.

While the Target toy buyer sees the Tiger Woods doll as a commodity, to
little Johnny his Tiger Woods doll represents play and and a world of
possibilities for when Johnny grows up. To Janey the Tiger Woods doll is a
boyfriend to Barbie (but don't tell Ken). These children form emotional
attachments to the Tiger Woods dolls. The same can be said of those who
purchase and live in townhomes. Home ownership has many many benefits to
both individuals and our communities. And declining prices opens up these
opportunities to more people. But remove the homeowners shoes and put on the
townhome builders and the whole perspective changes.

Multi-story townhomes are a commodity like the Tiger Woods doll. There are
only typically 1 to 3 floor plans offered in a neighborhood. And competing
neighborhoods in the same city have the similar floor plans . And competing
neighborhoods in different cities often have the same exact floor plan and
you're competing only on location.

You can't just swap the clothes and change the Tiger Woods doll into Sarah
Palin. The combination of city approvals and the physical configuration of
the finished townhome building pads lock the builder into a particular unit
with little flexibility to respond to market changes. And you must compete
with the townhome foreclosures, sometimes on new or nearly new units that
may be identical to yours and may even be in the same neighborhood you're
building in.

This uniformity of townhomes makes them even more sensitive to price
competition because its difficult to distinguish themselves other ways.

While some townhome buyers are making a choice for a maintenance free
lifestyle, many buyers of non-rambler townhomes are buying on price. Its
what they can afford today until they can move up to a single family home.

To sell townhomes you have to have a significant difference in price between
the townhomes and single family homes in the same market. Which is why
townhomes did well at the peak of the single family home prices. But that
was then.

I recently spoke to a builder that is buying single family lots in Otsego
for $35,000 and then selling new single family homes for $160,000. While its
healthy for Otsego to see the inventory absorption of the single family
lots-how does this impact the existing townhomes and town home lots? And
townhome land?

While townhomes are moving in some communities most builders will tell you
they're not making a profit. Just clearing their inventory like Target
dumping the Tiger Woods dolls. And if builders are buying lots or land its
likely for single family-like the builder in Otsego.

Everything is related. The lower price of the single family homes puts
downward pressure on the townhome values. The lowered townhome values puts
downward pressure on the townhome lots. What few finished townhome pads are
selling, primarily foreclosures or bankruptcy settlements, are selling way
below the infrastructure cost to develop the townhome lots.

There is zero profit in developing townhome lots today because the
infrastructure costs exceed the value of the finished lot without accounting
for profit or the value of the land. So raw Townhome land today is worth
about as much as a Tiger Woods action figure.