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Residential Real Estate: How to manage your rising costs

Residential Real Estate: How to manage your rising costs

Synopsis
3 Minute Read

No silver bullet strategy will completely erase the impacts of inflation and interest rate hikes, but discipline and innovation can help your real estate company weather the storm.

The year 2022 has not been easy on Canadian residential real estate, and with the Bank of Canada likely to hike interest rates further, circumstances may get worse before they improve. And yet, homebuilders continue to work hard to meet increased demand for housing supply.

In the face of economic uncertainty and price pressures outside your control, what can your residential real estate business do to minimize the impact of rising costs? There is no silver bullet strategy that will bring your expenses down to pre-COVID levels; all will have to absorb some hits to their bottom line. But there are ways you can control the size and severity of those hits.

The following are four things your business can do now to prepare for a world of heightened costs and move forward with minimum impact to your bottom line.

Know your business

As you look internally at your business, pay special attention to small tweaks that will improve your short-term financial outlook.

Cash flow:

Cash flow forecasting will be crucial over the next 24 months, because it enables you and your management team to adapt quickly to change. If the volume of sales you anticipated doesn’t materialize, your cash flow is what will enable you to stay ahead of your debt.

Debt contracts:

Many residential real estate businesses carry variable-rate debt. Loans that carried a rate of two or three percent last year now have rates approaching five or even seven percent. This applies both to your business and your clients who are seeking mortgages.

Look closely at your existing debt facilities: do you have options with respect to types of interest rates, which might allow you to lock in at a fixed rate? At what point are your financial covenants calculated, and how might that impact the result? When have you last discussed the facility with your lender — could there be opportunities for a renegotiation?

Sales contracts:

In looking at your contracts with your customers, what flexibility do you have to pass along costs to the consumer rather than absorbing them yourself? Do you have price escalation clauses? What impact will doing so have on both existing and future sales?

Remember, just having visibility on your numbers enables you to spot opportunities to cut costs, reduce waste, and put yourself in front of any potential future issues.

Know the landscape

External factors will also impact how your business performs. Forward thinking real estate businesses closely monitor shifts in consumer preferences to see where their business fits in the trend.

Seamless experiences:

Some modern home buyers may not require as high touch of an experience on their home purchase as previous generations. Do your clients need to spend a lot of in-person time with salespeople and designers or can you allocate your resources more efficiently?

For businesses specializing in spec homes, make it as easy as possible to purchase a home from you; consider both the friction in the purchase process and the psychology of the buyer. For example, rather than overwhelming the buyer with limitless options for countertops, colours, and flooring, provide them with pre-designed interior packages to choose from. They will appreciate your team’s effort to offer innovative and cohesive designs, and be less inclined to suffer from decision paralysis.

Investing in technology (which we cover in the next section) will also reduce pain points for buyers.

ESG:

Young people buying their first homes may not only be interested in securing the lowest price. Environmental, social, and governance-themed issues are also high on their agendas. Be prepared to answer their questions about your materials, your supply chain, and how your company is contributing to a more sustainable future.

Invest in technology

Many home builders have been slow to fully embrace the potential of technology. Digital tools enable your staff to fill their roles more efficiently in sales, production, estimating, construction, and more. You can minimize costs and reduce staff hours by automating rote or routine processes. You could increase employee satisfaction at the same time because their time will be freed up for value added activities.

Having a website that’s easy to navigate or making your product visible online could mean the difference between one or two extra sales. As sales begin to cool down from their mid-COVID highs, explore online browsing and paying, virtual home viewings, and other processes that reduce buyer friction.

Innovate your processes

A practical way to cope with higher costs is reviewing your processes for designing and delivering your product.

From build to sale:

There is always lag time between building and selling, and again between sale and the buyer taking possession. In those time gaps, costs can move up and reduce your net profits on the sale.

When considering homes on the more custom side, and to the degree your business model allows, collaborate with the buyer and make decisions at various stages of construction. For example, if a client picks a floor that won’t get installed for another six months, the price for the materials can rise substantially within that window. Unless your contracts state otherwise, covering that increase will fall on you as the builder, not the buyer. But if you allow the client to make just-in-time decisions about materials like flooring and countertops, you can streamline your operation and limit the risks of cost inflation.

Hiring process:

Hiring is top of mind for most residential real estate companies, especially now. How can you innovate your staffing model to secure and retain top talent?

Aside from being compensated fairly, many employees are interested in other factors, such as how your business is doing good in the world, what benefits and work-life balance your company offers.

You can avoid being regularly short-staffed by tapping into under-represented segments of the population, including women and Indigenous peoples. Doing so will require you to invest in diversity, equity, and inclusion (DE&I), both in your structure and your internal training. As you create a positive environment for people who have been under-represented in your industry, they will be drawn to your workplace and give you a competitive advantage.

MNP can help

Weathering the storm of rising costs will likely require a creative approach and making significant internal changes. Boost your confidence in the process by having experienced advisors at your side. The Real Estate and Construction team at MNP will help you understand your options and plan a path forward through economic difficulties.

Contact us

To learn more, contact:

Nicole Asselin, MBA, CMC
Partner, Consulting Advisory Services
[email protected]
780.969.1475

Ian B. MacDonald, CPA, CA
Partner, Real Estate and Construction
[email protected]
780.969.1423

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