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Diversify Your Custom Home Business Now, When the Market Is Hot

Diversification may not be on most custom builders’ minds today with the housing market enjoying its strongest sales in a decade. All of us are running flat out, and just working with customers and building homes quickly chews through the day.

Now, however, is exactly the right time to diversify your business. You have the sales, the profits and the cash flow to build in some flexibility. When the market turns — and it will — diversifying will be the last thing on your mind.

Consider Adding Remodeling Services

For a custom builder, remodeling is the best initial diversification. It’s close enough to custom building that your skills can transfer. Yet it differs enough so you don’t suffer from the same bone-jarring cycles. Additionally, remodeling is another way to get your name in front of your target market — and that can actually increase your home building business.

Our company has combined remodeling and custom home building for several years. We have won many new custom home customers through our remodeling work. When the housing market slowed in 1995, our remodeling jobs kept us busy. In some years, remodeling has accounted for as much as 75% of our revenues; in other years, less than 25%.

Same Cycles as Home Building, But Less Severe

For many years, industry analysts believed that remodeling was counter-cyclical to home building: when building was up, remodeling was down and vice versa. In reality, remodeling follows the same cycle as home building, but its ups and downs are not nearly as severe. In other words, when housing crashes, remodeling only dips. Remodeling provides a cushion for a custom building operation and reduces the latter’s inherent risk.

Remodeling is also growing faster than housing. According to several forecasts, total dollars spent on remodeling will exceed new construction dollars. And the gap will only get wider. Remodeling will soon offer more opportunities than building. Here are some more advantages of the home improvement business:

• You almost always have a quicker turnaround time on remodeling jobs, so your equity doesn’t get tied up in projects for a long time. Because remodelers tend to do a lot of smaller jobs, remodeling companies usually have a much better return on investment than do custom building companies.
  
  
• Remodeling and custom home building often support each other. Our company works with the same demographics in both segments, so the businesses feed off of each other. Someone for whom we remodeled may come to us for a new home. Or a family for whom we built a new home may want to expand their residence, so they’ll come to us for that.

In addition, I enjoy the different challenges posed by remodeling and find that the lessons I learn in one discipline often help me in the other.

Key Points to Consider Before Getting Into Remodeling

For all its positive attributes, remodeling does have some hazards. Before getting into remodeling, you need to make sure it’s a good fit for your business and, if so, put it into your business plan. Keep these considerations in mind:

• Remodeling is much more management intensive than home building.

The average remodeling operation requires many more employees to handle a similar dollar volume of custom work. For example, a custom builder grossing $1 million annually might build three homes. With strong organizational skills, he could probably run the business by himself.

A $1 million-per-year remodeler might complete 25 jobs in a year and would need at least a handful of people in the field and someone in the office. To cover this increased overhead, it’s not unusual for remodelers to mark up jobs to 50% or more of the cost, depending upon their projects’ size.

• Remodeling jobs are also a lot less predictable than custom home projects.

You never know what you’re going to find when you open up a wall. Because of that added risk, you need strong specs and documentation to protect yourself.

• Remodeling requires a lot more customer interaction.

Our focus on customer service becomes even more crucial for remodeling jobs in which the home owners live in the house during the project. You can imagine the complexities of setting and exceeding customer expectations when every aspect of the job is under constant scrutiny. If customer service is not your strength, remodeling is not your business.

For these reasons, I believe you have to be a better builder to become a successful remodeler. Remodeling poses some substantial challenges, but the positives far outweigh the negatives for custom home builders.

For more information about the remodeling business, contact your local HBA’s Remodelors™ Council or NAHB’s Remodelors™ Council.

Stephen K. Hann is president and CEO of Hann Builders in Stafford, TX. He is a longtime contributor to NAHB’s Custom Home Builders Committee and is 2004 chairman of the Custom Builder Symposium Subcommittee.

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