Come snow or shine here in the Northern Rockies, we continue to make progress on our homes. We are about to start the finish phase on this Yellowstone Club project. Pictured is the tower element on this home. 
It will have 360 degree views including Lone Peak, Cedar, Spinx, and Pioneer mountains. Our clients expect to use this as a great private nook in the home.
Five Questions to Ask to Ensure Your Big Sky Builder is Financially Stable
By Pete Lee, Co-Founder, President & CEO
The home building industry has gone through tremendous turmoil over the last three years, and many builders have suffered tremendously because of it. (The industry was off 80%, high to low, in the last four years and is still off 74%). Big Sky, Montana was no exception to this phenomenon. If you’re about to build your dream home, make sure you don’t become collateral damage!
The root cause of the industry’s problem is debt and financial stability. Too many builders got caught up in the “irrational exuberance” of the housing bubble and speculated in the market. The dance was great while it lasted, but when the music stopped, many builders did not have the financial capacity to carry the debt. Hence this fact should drive your line of questioning in picking your builder today:
1. How many spec homes are you or your company involved in currently? Do you own a lot of land?
Spec home and land “carry” are the biggest killers of residential builders. Many builders served their client’s well, but they took on too much debt speculating and they get eaten alive by the carrying costs. If builders have inventory, confirm that they can carry the burden.
2. “May I have a copy of your balance sheet?”
The builder’s balance sheet lets you confirm whether he has debt, and if he does, how much cash they have on hand to service it. If he has a lot of debt (both on balance sheet, off balance sheet (i.e. in LLC’s) or personally), than the odds are that he will be aggressive about retainers, large billings, and aggressive change orders. Such a builder needs to feed the beast (debt) and you could be his meal ticket. A healthy balance sheet should be an indication of a fair-minded builder.
3. “How much debt does your company have? How much do the key employees have?”
The company may have kept clear of debt, but perhaps the founders have taken on a lot of debt themselves (big houses, big cars, boats, personal real estate projects). If the head of the company has a lot of debt, the odds are high that you’ll run into similar behavior to above.
4. “What are your processes for ensuring the vendors get paid on the job?”
Another surprise for builders (and their clients) is contingent liabilities. And a big one is in paying off subcontractors and vendors that perform work on past projects. The law is such that the land owner (read client) is ultimately responsible for any properly filed liens on a project. Therefore, your may pay your builder, he may pay his subcontractor, but a vendor down the line could file a lien on your property because of your builder’s previous failure to pay on some other project. Ask you builder how he ensures against this problem. There are developed procedures that avoid these headaches (call me any time to discuss).
5. “Will you guarantee your price?”
Finally, don’t get sucked into a great sales pitch only to find that the builder can’t or won’t deliver on his promise. Asking a builder to guarantee a price is a way to flesh out competent and honest builders from the disorganized and shady. Competent builders know what things cost, how to control those costs, and should be willing to guarantee some price. If they will not, why not? You have a right to a straight answer. You want to ensure that your prospective builder has no other costs he want to push into your project. Does he have adequate control systems in place? Has he given you a realistic upfront price?
Bottom line: Don’t be a victim of the home building industry depression. With a little bit of informed spade work upfront, you will be an informed consumer and ensure that you’ll get an attentive builder who will service you fairly during the process and after you move in.
Because his cards will always be on the table, face up.
Use Geothermal Heat in Snow Country
By Pete Lee, Co-Founder, President & CEO
Here in the North Rockies (Jackson Hole, Wyoming & Big Sky, Montana) we have “significant” winters (another way of saying l-o-o-o-o-n-g heating seasons!). The plus side: a lot of great skiing. The downside: conventional home heating bills are often high enough to drive a chill up your spine.
But the downside can be avoided by installing a geothermal heating system (also called “ground source heat” or “geo-exchange heat”). Geothermal is a great way to mitigate your heating costs and has become much more affordable & popular.
This is true for three primary reasons:
- Uncle Sam gives a 30% tax credit to encourage use of this low-carbon, green energy;
- The technology has been making steady improvement and now boasts COPs (see below) of 4.5 to 5.0;
- The local heating community has embraced the new technology.
The alternative energy tax credits return 30% of the system costs to our clients. In effect through 2016, the credits are reducing time to recapture your investment from 10 years to an economically viable seven [7] years. Read on, and you’ll see that in some cases, THB Energy Solutions has done even better; one of our systems will pay for itself in 4.2 years—a 24% Return On Investment! Regardless of your political persuasion, you gotta appreciate Uncle Sam helping us wean ourselves off foreign fossil fuels.
Now couple those tax breaks with technological improvements and things get exciting. 10 years ago, a heat pump COP (coefficient of performance) of 3.0 was considered good. Fast forward to today, and units are clocking in at a COP of 5.0. This is huge because the technology has crossed the tipping point of efficiency and cost effectiveness.
Let’s take efficiency first. Geothermal uses grid electricity. So to fairly compare its carbon footprint to fossil fuels (like propane and heating oil) you have to account for delivery. Historically, grid electricity loses about 70% of the fuel energy burned by the time it gets to a delivery point (i.e. your house) due to line loss. In essense, a geothermal heat pump that delivers a COP of 3 has about a 90% efficiency of the actual fuel consumed ((100%-70%=30% efficiency) x 3 COP = 90% actual efficiency). Well, this is comparable to high efficiency boilers burning propane or heating oil. Now, with the improvements, that actual efficiency can push 150% (30% x 5 COP = 150%). There is no way for propane and heating oil to compete and your carbon footprint has been reduced!
Next, let’s think about cost effectiveness. We recently completed a geothermal energy retrofit on a 8,600 square foot house that produced a heating bill of $284 last month. Two years ago, the same bill was over $1,750. The savings for the year will be $11,000; the system will pay for itself in a little over 4 years (a 24% return on investment). Now, that’s cost effectiveness!
Okay, that covers two of the three legs of the stool: finance and technology. The last one is service. And today, that is well represented in the Rocky Mountains. Generally, the Rocky Mountain mechanical community was slow to learn about geothermal heat, but they have caught up quickly. In the last five years, many mechanics have learned all about the systems and there is a wealth of knowledge to tap into (especially out of the Midwest).
All the reasons are here to use geothermal heat in your next Rocky Mountain home. Not only will you be pleased with how small your heating bill is, but it is a good return on investment. And to top it off you can rest assured that you will be well taken care of and that you will be doing your part to help planet Earth.
How to Find a Great Architect / How to Hire a Great Architect
By Pete Lee, Co-founder, President and CEO
I once had a client tell me, and I paraphrase, “We were looking for French Country and we kept getting spaceships. We finally had to hire XYZ architect instead.” Strange as it may seem, such mismatches are more common than one may think. I applaud any client’s big move to switch architects when the original one doesn’t work out, but I have often wondered how much time and money was wasted before the switch was made. An even bigger disappointment is when I meet a potential client and their architect and, as I get to know them, it becomes obvious that there is a poor fit between them. This typically manifests itself by the client and architect individually taking me aside and expressing frustration about the design process. Not only do I see fatigue, but poor communication and a design that no one is happy about.
In such cases, the clients did not spent enough time defining what they want from the relationship. Consequently, they missed the right architect match. To my mind, there are four key questions to answer in finding your perfect architect:
- One, is the architect’s personal design style in harmony with yours? Architects can do a range of designs but they all have “signatures.” It’s best to think in terms of buying quality art; if you like cubism, don’t commission an impressionist to produce your painting!
- Two, do you personally like the architect who’ll hand your project? Design and construction puts stress on any relationship; start with an architect whose personality you enjoy.
- Three, what is the architect’s availability to perform for you in a timely way?
- Four, can he/she work within your preferred budget?
If the client and architect aren’t “simpatico” in these four dimensions, trouble is probably just waiting to happen.
But these are easily resolved. Let’s take the first question: What is the architect’s personal style? When you start thinking about building, ask about builders and architects. Once you have a list of architects, go to their website. Evaluate the photographs of their projects. Do you see some themes within their work? Do they have a wide ranging portfolio? Do you like what you see? Could you imagine living in the spaces they are showing? If the answer is “yes,” then meet that architect.
At the interview, show the architect the specific projects you like on his/her website and state specifically what you like about them. Find out who in the office did the work and ask them about their personal tastes. If you find the architect describing what could be your personal dream home, you are in good shape. When architects design what they enjoy, they get the details right! It’s really that simple. The architect will have thought through the details and consequently the design will come together in the field.
(But be forewarned! Some architects will tell you that they can design anything. Maybe. But can they get there cost effectively and within your schedule? If you push them to do something they haven’t thought through, their heart may not be in it; they may have ignored details, and it needlessly consumes time to do the right research.)
Okay, now you’re found an architect who excels with your desired style. What’s next? Gather whether you can work well together, and there’s no better time than at that first meeting. Make sure your personalities click (the road ahead will have points of stress that can be lessened by a good personal fit). Also, make sure you are interviewing the actual architect who will be handling your project. You don’t want to be shuffled off from the head salesperson to someone you don’t enjoy. Also, check references. These folks have survived the great recession because they are effective sales people. Take the time to make sure they walk the talk. Don’t fall victim to a great first impression just to find out they don’t stack up to the hype.
With the first two questions resolved, you’re on the home stretch to a great relationship. The last two hurdles involve schedule and budget.
Whether you’re looking to build a dream home or a corporate headquarters, it is not unfair to ask architects up front how long a typical project takes to deliver and what are they charging. Listen carefully when they tell you how long it will take. I once had an architect tell me “Yeah, regardless of the client, it always takes about a year to get the house designed”. That surprised me because I usually get my projects completed in about 3 to 5 months. What I realized is that he has a methodology and creative style that results in a longer design process. I didn’t hire him because I didn’t want to be frustrated–even though he is an award winning architect. Tune into who your architect is and have realistic expectations.
And finally budget. Realistically, there’s no way to put a price on a great idea. But you and I can only afford so much. So to me it makes sense to define a fair price up front and avoid spending hours and dollars trying to discover the “perfect” idea.
There are many great architects out there. Find a couple architects that you feel comfortable with and get proposals from them. In my experience, these guys are paid very well and the ones with integrity are going to do the job well. They should be willing to commit to a fair price for a fair scope of services up front.
That’s it! Answer these four questions affirmatively and you should be well on your way to designing your dream home.
Get a Contract for Your New Custom Home that Builds Trust Between You and Your Builder and Aligns Your Mutual interests
By Pete Lee, Co-founder, President and CEO
In the many years I’ve built custom homes, the question eventually comes up regarding contract style.
Contracts take all forms, but the single most important thing you as an owner can do is ensure that the contract aligns your incentives with the builder’s. If you have picked a reputable builder to begin with, this will assist in mitigating conflict before it happens.
Often in high end custom residential construction, not all the details are worked out. Consequently, the budget may be subject to change. This is a critical time when owners and builders need to work together and when the style of your contract will help. THB uses three primary types of contracts:
- Cost-plus with a fixed fee (20% of the time);
- Cost-plus with a guaranteed maximum price (70% of the time); and,
- Lump Sum (10% of the time).
The first two styles dominate our arrangements because they do the best job of aligning our interests with the client’s despite the unfinished nature of the design. The client can rest assured that our incentive is not to run up the price, but preserve the value for the client.
Cost-plus with a fixed fee is a contract style that should help establish trust between the owner and the builder quickly even though the design is still in process. Cost-plus enables the owner to see copies of all costs incurred by the builder during the design and construction process. The owner will thus know that he is paying only costs affiliated with his/her project. There shouldn’t be any hidden mark-ups. The fixed fee above the costs is the fee the builder receives for providing the services. By fixing the fee, the builder only receives a portion of the fee as the percentage of the construction budget and he has no incentive to run up the cost because he does not stand to gain from the additional cost. However, the downside of this contract style is that the builder is not liable for cost overruns (and only stands to be embarrassed by missing his budget). Under this approach, you may find that that the builder doesn’t seem to spend a lot of time worrying about your budget …
On the other hand, Cost-Plus with a Guaranteed Maximum Price (GMP) eliminates the builder’s afore-mentioned potential lack of consideration for your wallet. That’s why THB makes such extensive use of such contracts. You see, all builders know what it costs to build in a given marketplace. Therefore, I believe they should be prepared to cap the financial exposure to the client for a given scope of work and a given budget. Having a a financial stake in accurately predicting and managing the budget is an important part of his job.
This is why Cost-Plus with GMP is so popular with THB clients. We recognize that many of our clients want to start building before all the design details are complete but they still want to know they are being treated fairly, hence cost-plus helps build that trust. Then we go one step further for our clients by ensuring that we have accurately created a budget. We create a Guaranteed Maximum Price (GMP) for our clients so they can rest assured that they will get the house of their dreams–without a nightmare in their final price No hidden costs. No surprises. No sweat.
These are the broad strokes THB’s two most popular contract styles. There are other subtle topics like GMP contingencies and shared savings that warrant further explanation. I’ll discuss them in future posts.
