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.