Should a Builder Become a Remodeler?

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The new home sector has shown extraordinary strength as the national economy has meandered through the past three years.

April 01, 2003

 

Stan Ehrlich

The new home sector has shown extraordinary strength as the national economy has meandered through the past three years. Low mortgage rates have allowed millions of families to enter and move up in the new home market. But an economy that can't seem to get untracked ultimately might cause home building to run out of steam as well.

Builders who work in multiple markets might withstand a housing downturn, especially if market softness isn't all-encompassing. Regional economic differences could allow a geographically diverse builder to merely expand in one territory while contracting in another. Similar opportunities might exist for builders who build at multiple price points within the housing market.

But what of the builder whose sales slip dramatically and who doesn't have other markets or options? At a time when homeowners might expand their homes rather than move up, should builders turn to remodeling as a stopgap while waiting out a slowing economy?

Builders who never have remodeled should think long and hard before turning to that aspect of the industry to shore up income during a market slowdown. Not only are margins and dollar volumes dramatically different in remodeling, but the construction itself is markedly dissimilar to new construction. Rather than working at a cold, impersonal construction site, remodelers work in and around someone's home. That someone can get very emotional if the job site is not swept each night, or if the cat is allowed out the front door accidentally while lumber is being carried in. In remodeling, every existing wall represents a new challenge, which, when opened, can reveal unseen wiring, plumbing or ductwork problems.

One other significant difference involves labor. Many smaller remodeling projects are not accomplished easily through the use of subcontractors. Framers, for example, are not apt to spend a half-day framing a new closet, and they certainly won't frame it at the per-square-foot rate charged for framing an entire home. Thus, many remodelers rely on their own crew(s) to accomplish the myriad tasks necessary to complete a remodeling project, crews that new home builders might not have available if their new homes have been completed mostly through the use of subs. (And don't minimize the potential liability from having unknown tradespeople walk through an existing home where jewelry and other valuables might not be concealed.)

From a business continuation perspective, builders temporarily turning to remodeling also should understand that they face competition from full-time remodelers. Low bid, for example, does not always get the job in remodeling. Many customers have come to learn about relationship building and the need to spend more to ensure that their project is completed professionally and according to a predetermined time schedule.

Every builder knows that all construction is not alike, and every builder knows that certain types of jobs are more profitable than others. But in remodeling, making up deficiencies by increasing volume does not necessarily work; completing five bad jobs instead of one only leads to five times the loss.

Builders looking to prepare for a slowing economy should do plenty of homework before turning to remodeling. While diversification can be healthy for a business, remodeling might not be the cure for a builder's ailing bottom line.

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