Successful pricing is really more of an art than science. This is especially true if you’ve ever tried to develop a pricing strategy to sell a home with resale restrictions.
While you can run pricing scenarios that factor in basic assumptions such as interest rates, subsidy requirements, target household incomes available, and minimum down payment requirements—it’s really more complicated than this, because you’re not just pricing to sell. How do you make sure you’re pricing a house right for the first family—while making sure that it remains affordable for future ones?
We sparked some debate around this topic this fall, when we discussed Stewardship Standard 2.1, which recommends that “program’s home sales prices are affordable to the target market without additional (non-permanent) outside subsidy.”
Read on to learn what we heard from practitioners, along with their tips on what you can do to make sure your pricing stays affordable beyond the first sale.
1. Avoid including additional outside subsidies in your initial pricing formula
While we had some initial disagreement on this Standard, most participants agreed that homes need to be priced initially to be affordable without additional subsidies. As Heather Mahaley from the State of New Jersey noted, “You can’t have a program like this if additional subsidies are required. It acts like a sub-market. The price has to stay low so that people can afford it whenever the seller chooses to sell.”
And Steve King from the Oakland CLT told us about his experience: “The issue of not requiring additional subsidy was a big part of our program design. That’s what we sold in the way we designed it and it’s our intention not to have to bring in additional subsidy at any time. We’ve had extreme difficulty selling houses recently, largely due to the market decline and the neighborhoods we’re working in with really high rates of crime. We’ve actually had the ability to lower prices, allowed by the City of Oakland, to try to increase sales. It’s helped-we have been fortunate to have that leeway to lower prices from the funder, but what was intriguing was building that cushion in terms of long-term affordability at the outset to ensure our homes will remain affordable in the future.”
2. Use a lower interest rate or higher affordability window to protect future risk
The assumptions you make behind the math can make a large difference in protecting affordability. Julie Brunner from Opal CLT offered two pieces of advice. First, when calculating interest rates, assume a higher interest rate than what the lowest current market rate may be offering. For instance, you could assume a 6 percent interest rate even though current rates are 3.5 percent. And second, when calculating your target AMI, make sure to include an affordability window—or in other words, make sure your pricing formula incorporates a target AMI that is at least 10% to 15% below your target AMI. This expands your pool of applicants and gives you room to lower prices during weakening market conditions. m
3. Watch out for condo fees! They can destroy affordability
Heather explained that she often sees problems when condo fees are set too low by the developer. “A developer may establish a fee at $150 per month and it’s great—everyone is in–but as soon as an association takes over, fees can double. We started out with affordable [homes] having lower condo fees, sometimes as low as $21, but we learned that wasn’t feasible either.”
So what do you think? We know that there are many other factors that go into building a strong pricing policy. Feel free to give us your input on Standard 2.1 via CommentPress or share your comments below. And, log-in with your free Cornerstone membership to check out this sample pricing template.