“We don’t negotiate too much with the clients.If you teach them like this, you will spoil them”

Part 4

of the post “Do you like “role games”? Let us play the… residential developer
To read part 1, please press here
To read part 2, please press here
To read part 3, please press here

Mr X is a serious successful medium size developer in his country. After having heard so many people talking about Romania, he decided to come over here and invest as well, targeting bigger profits than what he could earn at his place (do you know anyone who would leave his country in order to earn less than back home?). More or less his project reached a budget of 15 million Euro. About 10 million was the bank’s participation and he also invested another 5 million Euro cash, without taking into consideration the hundreds of working days he invested. His project’s overview was:

His investment’s route

So the whole development cost to Mr X in 4 years time:

• 14.883.850 Euro
• Out of which, 9.832.500 Euro loan
• And 5.051.350 Euro he invested cash from his own pocket.
• 400 working days of his life
• Plus another 160 working days he lost, in order to return to his routine

“For sure you can sell with 2.500 Euro / sq.m., I guarantee to you”
Mr X was very anxious to start selling his apartments. Before having signed with a “bigger” Real Estate brokerage company, he had discussed with several others too. What he noticed was quite interesting. There were three categories of companies: The ones who were approaching his project in a serious way, asking questions, analysing, requesting time to reply. Some others who were more aggressive and they were trying to present their advantages, starting from “I speak the same language with you” up to “we have too many connections and we will give you better marketing costs”. Also, there were some others, who were ready to promise him anything, just to get the project. A N Y T H I N G.

So many people told him that “for sure you can sell with 2.500 Euro / sq.m. I guarantee to you. I am expert in sales and I can sell with even higher price, if you want”. On the other hand, the “bigger” firms usually were telling him that “things are difficult; you should start with lower prices”. After a while, he realized their strategy too. They wanted to start with a low basis in order to receive bonuses for higher prices achieved. “Fair enough, if I will get the profit I want, why not someone else to earn as well?” he thought. Finally he chose a company which “guaranteed” a “low” price. “They look serious professionals; their reports look good, why not?”

He decided to start with a sale price lower than 2.000 Euro / sq.m. “And if things are so good as all people tell me, then I may raise it” he thought while signing with the company their desired object: The exclusivity contract.

“For us selling apartments is like selling water in the desert. It is our art”.
Participations in Real Estate exhibitions, advertisements with banners on buildings, radio spots, internet campaigns… press conference, launching party and many more promotional moves started soon. Mr X was signing payment orders for all kinds of marketing “tools”. Very soon, in less than a month since the official launching of the project, a representative of the Real Estate company asked to meet him.

“We have already sold 10% of the apartments. It is time to raise the prices”. “Isn’t it too early?” “No, on the contrary. We HAVE TO raise them, in order to initiate people to come and buy more, before we raise them again”. “Are you sure we won’t get blocked?” “Absolutely. The prospects are more than excellent, 2008 will be a great year, full of profits for your company and ours”.

“What about the new measure for VAT 19% on apartments, starting with January 1^st, 2008? Shouldn’t we try to sell our apartments faster, targeting to the Real Estate funds as well?” “We already use this argument, but you don’t have to worry. It is November and by the year end we will probably have sold almost all your building. For us selling apartments is like selling water in the desert. It is our art. You should better concentrate on your second project and let sales and worries to us”.

“We took our measures, we stopped raising the prices, as you noticed”
2007 ended with excellent sales. In papers. “60% of the apartments are sold, you have cashed in the 10 – 20% advance payment by the buyers” a representative by the Real Estate company informed him. He was not the same one with the previous one, nor with the ones he had met in the very beginning. As months were passing by, it was more difficult for Mr X to meet the “top executives” of the company. They were either busy, or “out of Bucharest, on short vacation”. What he had “cashed in”… was paid to 100 different expenses. Plus the prices for construction materials started climbing and he had to pay more than he had planed to.

2008 started bad. Sales were down, as the implementation of VAT practically froze the market. The transactions were significantly less than 2007, but noone seemed to worry. “Things will change soon, it is a matter of time” he was informed by another company representative. “But anyway, we took our measures, we stopped raising the prices, as you noticed” he added.

“We don’t negotiate too much with the clients. If you teach them like this, you will spoil them”
During the summer of 2008, Mr X started complaining to the Real Estate company. “We don’t really negotiate with the clients; we actually don’t even listen to them. We show them the sketches, announcing our rate card and then it is up to them to return or not” he said furious to another company representative. “Mister, you are right, but this is a strategy. We don’t negotiate too much with the clients. If you teach them like this, you will spoil them”. “You mean that they will ask the same conditions for the second project of mine?” “No, for the other projects we have in our portfolio”.

People were busy enjoying their long summer vacations… while Mr X was worried. He had realized that the price of his project was gradually increasing, but the sales were blocked. He asked around… his friends, bankers, other Real Estate companies. He didn’t want to break his contract, just to see their approach too. Most of them found the strategy “inform the client for the prices and wait him to come to you” logical. He got worried. They didn’t KNOW any other strategy to sell, for most of people “a client” was just “someone who had money to spend” and they would “help him spend it”.

Too little, too late…
Officially the world economic crisis started in September 2008. So it was easy for people in Romania to blame it on the world crisis for the local one, which hit the market too (even if the reasons were not all the same). Mr X tried to take things under control. He tried to change some things in marketing, to initiate sales… But it was too late and the moves were too little to have an impact on his sales.

He continued paying the tremendous fixed costs for promotion etc for few more months, until he decided to stop. And he had to face an ugly reality…

On Friday, 16.07:

• An “ugly” reality
• The 10% advance became 10% payment and then “bye bye” or “let’s go to court”
• Painful decisions
• Difficult dilemma…

(Necessary clarification
Please allow me to clarify something: I strongly believe that a big part (maybe half) of the residential developers being active in Romania today are people who either were tricked while chasing easy money or they developed on purpose bad constructions, in order for them to cash in more money in shorter time. But for every developer who behaved like this, I also meet one more serious, professional, with strategy and plans. A person or company who tried to develop something good, with respectable quality, civilized, aiming to build a strong brand name and to achieve his clients to be happy for buying his property).