McLaury joined a panel of speakers at January’s International Builders’ Show (IBS) in Las Vegas who discussed how builders can sell homes in areas that have been swamped with foreclosed homes often marked down to bargain basement prices.

Although the wave of foreclosures has not necessarily peaked, the good news is that the problem is concentrated in only certain parts of the country, panelists said. Also, targeted marketing against foreclosures is working — aimed primarily at the first-time home buyers who have proven to be the most viable prospects at a time of exceedingly sluggish sales nationally.

Lisa Jackson, vice president for John Burns Real Estate Consulting in Irvine, Calif., said that the number of mortgages entering the foreclosure process should peak this year at 3.1 million. Subprime mortgages have faded as the source of delinquent payments, she said, replaced by the continuation of adjustable rate mortgage resets and economic-related stress.

John Burns Consulting estimates that there are 82 foreclosures that start as the result of every 100 net job losses.

“Foreclosures are a lagging indicator of the economy,” Jackson added, “and they will continue even after job losses.” Even in the best of times, she said, there are roughly 750,000 residential foreclosures occurring in any given year. However, she predicted it won’t be until 2016 that foreclosures return to the pre-recession levels of 2006.

The experiences of Southern California, whose economic tribulations in the 1990s mirror what has been happening lately nationwide, suggest slow going on the road to recovery, she said. The region’s escalated job losses lasted three years, but the impact stretched out for eight.

As other speakers on the IBS panel observed, many builders are facing significantly less extreme circumstances than those being felt today in the most battered markets in Arizona, Nevada, California, Florida and parts of the Midwest, which, according to Jackson, accounted for 60% of all foreclosures at the end of last year’s third quarter.

The Foreclosure Capital of the World

Dealing with just about the worst sales environment imaginable, McLaury of KB Home said his company was able to eke out about 500 home closings in Las Vegas last year.

“In the mid-2000s,” he said, “Las Vegas was on fire. Now, it is the foreclosure capital of the world as the result of the boom from 2004 to 2006,” when his division was delivering 3,800 homes annually. “We have had to make some changes,” he said. “We moved as quickly as we could tweaking, then we did major retooling.”

KB’s three-pronged approach in response to a major housing slump was to steer production to a smaller and more affordable product, implement marketing ideas to attract buyers, and train and motivate the sales team.

McLaury said it made sense to target the first-time buyer market because trade-ups have been “where everybody is upside down in their home.”

Recently, said Carol Ruiz, principal of public relations for Red Rocket Marketing and PR in Culver City, Calif., 2.7 million home owners have owed more on their mortgages than their homes were worth. That phenomenon has been more pronounced in the biggest boom-and-bust markets, such as Las Vegas.

McLaury said his company aims for pricing that straddles the median price in the resale market and comes in at a 5% to 10% premium over the median. Foreclosures, which typically command prices below the median, are charted on a map, and KB has been able to identify variations in locations that enable it to see cost savings of as much as $20,000, he said.

KB is building smaller homes on smaller lots; on the inside, there are fewer but larger rooms, and fewer walls. The buyer chooses the floor plan and picks the number of bedrooms and baths, and is able to choose design features from “a great design studio,” McLaury said.

The builder has also increased its cycle time to three times yearly. Permits are in place in 30 days and sales to closing time runs an efficient four months.

Competing With Foreclosures

“Las Vegas has been struggling with foreclosures for some time,” McLaury said. “The good news is there’s a lot of people who want to buy a home.” KB has its sights on “people who don’t own today, who have looked at foreclosures and are frustrated. They see how easy it is to buy a new home — in four months.”

Foreclosures definitely haven’t been easy for novices in the housing market. The majority of buyers of distressed REO properties are investors, he said. In Las Vegas, they account for about half of foreclosure sales. First-time buyers can be lured in by the advertised price of a foreclosed home, but they find out soon enough that these homes commonly end up selling for much more, and it is difficult lining up financing to complete the purchase.

With a shrunken marketing budget, McLaury doesn’t have the resources to advertise in local newspapers, but he does use flyers in his sales offices, conduct home buyer seminars, send out e-mail blasts, reach out to renters and extensively survey every buyer who closes.

“We ask the buyer to compare,” he said. “A new home is so far superior to a foreclosure and our effort is getting the customer to understand that. We point to the value of what’s being offered.” Superior energy-saving features are high on the list of what is emphasized to the buyer.

KB points out that pursuing an REO can cost much more time and money than a prospective buyer expects. Further, the typical home now owned by the bank is sold on an as-is basis, contains products that may not be under warranty and may hold some surprises that result in costly utility bills and the headache of remodeling.

“We send the message home,” he said. “With a brand new home from day one you are buying peace of mind.”

So that they better understand the competition they are up against, McLaury said he takes his sales teams on tours of different foreclosures. They also shop what new builders are offering. “Prices are constantly changing, what builders are offering to get sales is constantly changing.”

In addition to motivating its sales people, involving them in every aspect of the sales process and using them as a conduit for information from prospects, McLaury said that KB has brought brokers “on board.”

“We view our Realtors® as partners,” he said. “We continue to educate them as things are changing. They’re fed up with selling REOs, but they have to show them to clients who want to look at them. They prefer to sell new homes. Foreclosures are not a quick payday anymore, and our four-month cycle is beating them.”