Guns vs. Butter

Guns vs. Butter

In my college macroeconomics class, we studied the relationship of guns vs. butter.  Basically, you can invest in defense or civilian goods, but cannot maximize your investment in both.  You need to decide how to strike the appropriate balance between the two needs. 

In real estate, I find there is a similar corollary between home design and pricing.  It is impossible to get everything you want when contemplating new product design if you also want to make sure you hit a certain price point.  I refer to this as the battle of the sales team vs. the bean counters.  I know it does not sound as glamorous as guns and butter, but follow along with me for a moment. 

On one hand, the sales team will want good architectural design with strong home elevations on the front and rear.  Heaven forbid you have any secondary bedrooms less than 12’ x 12’, the furniture just won’t fit.  You have to have granite countertops as a standard, as well as a preponderance of different size windows to make sure all the rooms are cheery and bright.  Also, make sure that the garage is at least 20’ x 20’ or the cars will bang doors against each other.  Finally, the outdoor covered lanai must have a textured finish to the deck, since no one really wants broom finish concrete.  With all these items in place, the sales team will then tell you they will be able to hit your monthly sales targets.  All will be well in the world and bonuses will be plentiful. 

The financial team will then throw cold water on that parade and tell you that you can’t afford that level of detail and finish and also expect to make any profit at market price points.  End of story.

The struggle is how to resolve the dilemma without throwing everyone into the MMA octagon to see who is the last man standing.  (My money is on the sales team, but that is a story for a different day).

As with the guns and butter dilemma, the key is compromise.  I find it best to identify market price points first.  After all, a family only has so much money to spend for their home.  With that in mind, you can then prioritize the home features to strike the best balance between cost and price.  At the end of the day, the market will tell you what features are necessary at each price point, so long as you are providing the right mix of benefit and value. 

Unfortunately, I can’t tell you how many times I have seen product and feature design serve as a justification for higher than market price points due to the level of detail and finish being provided in the homes.  In these cases, the teams eventually learn the hard lesson that you can have guns or butter, but you can never have the same amount of both.

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328