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Remodelers Struggle With Clients’ Lower Credit Lines
As the nation’s credit crunch spreads into the remodeling market, undermining the financial viability of many projects, remodelers are reporting some success working proactively with customers and lenders to avoid problems with financing remodeling projects.
“Lenders are more afraid of losses if loans go into default, so they are having properties reappraised. If the appraised value of a property has decreased since the line of credit was approved, a lender may make a corresponding decrease in the line of credit or cancel it altogether,” said Bill Renner of NAHB’s Housing Finance department.
Also, with the financial sector severely constrained, banks are changing their business models and some lenders are even leaving the home equity business entirely.
Vince Butler, CGR, CAPS, of Butler Brothers in Vienna, Va., cites one project where the client secured a $200,000 line of home-equity credit, but when she returned to the bank after making design choices she found they had cancelled the approval. The client managed to secure other loans, but with confidence in her ability to line up credit bruised, she decreased the scope of the job to $60,000.
“Financially sound clients are postponing, cutting back jobs or proceeding with extreme caution,” says Butler.
When finalizing jobs, remodelers need to work closely with their clients in understanding how they intend to finance the work. Butler suggests that clients tap their lines of credit and set aside the money so that it is available when they need to pay bills. Remodelers can also ask their customers to obtain a guarantee letter from the bank to confirm the amount and availability of the line of credit.
“Some clients pay by liquidating investments,” says Butler, “but this is not going to yield much in funds right now.” He also worries that banks readjusting credit according to changes in home values could eventually bring margin calls on equity loans, “rocking a fundamental asset for most people.”
“The fallout comes when it hits companies my size,” says Butler. A reduction in the scale of a large job, he says, “has a huge impact on revenue and staffing.”
“I am worried for my company and for the industry too,” because it is very dependent on large jobs that are primarily funded by home equity loans, he says.
In the long term, Butler says that some banks will view home equity loans as an opportunity, and he is confident that local banks in his market will continue to provide them.
The best thing a remodeler can do is establish a good relationship with a bank to help secure financing for remodeling jobs and to refer customers when they are looking for loans, advises Butler.
The Lender Perspective
Bruce Christensen with GE Money notes that lenders in general have tightened up and are looking for more accrued equity in homes before they will grant a loan. Lenders also have raised minimum FICO scores, but he says most remodeling customers will still qualify because 58% of the population has a solid score of at least 700.
GE Money has been a leader in home improvement lending since 1989, with more than $15 billion in loans financed through an extensive network of more than 10,000 contractor locations.
“Customers who have good credit won’t have problems,” says Christensen. “But those with marginal credit will have challenges.”
He recommends that remodelers should find out about a customer’s credit history and financial resources before closing the deal. Before receiving payment, the remodeler should ask the customer to verify the line of credit and amount with the bank. Christensen notes that lenders are required to provide written notice when reducing or closing lines of credit, so customers should receive a warning.
“Lenders need to be more responsible,” says Christensen. “They don’t want to make bad loans and allow consumers to get in over their head.”
Christensen suggests remodelers seek out local lenders interested in remodeling loans or unsecured lending (which are smaller lines of credit). For larger jobs, remodelers should look for lenders making second or third home mortgages.
Unsecured Loan Options
John Harris of EnerBank USA says he has seen lenders exiting the remodeling loan business completely, while others are discontinuing loan products, modifying loan features or increasing fees. Despite the economic factors contributing to these changes, he says that his bank has not altered its programs and continues to add to the roster contractors with whom it works.
“We want to help manufacturers and contractors increase their sales, grow their businesses and make more money,” says Harris.
EnerBank USA specializes in unsecured loans to a maximum of $45,000 and it is currently financing jobs that could previously have been financed through home equity lines.
“Contractors need to take more ownership of the process,” recommends Harris. “They need to look at their current program to make sure that it meets their needs. EnerBank USA provides a turnkey program that is quick, easy and secure. Home owners and remodelers know where they stand immediately because credit decisions are made in minutes.”
Managing the Worst-Case Scenario
Bill Owens of Owens Construction in Powell, Ohio, says he encountered unexpected problems on a job when a lender cut back a line of credit for a customer without informing them first. The customer wrote Owens checks from the credit line to pay for the remodeling work in progress and was mortified when the checks started bouncing.
“It embarassed the client and pinched the company,” says Owens. Money had already been spent on materials and hours on the job, so the company was in a bind. The client eventually paid for the work once they were able to save up enough cash.
Owens has heard that the bank in this particular situation may be sanctioned for not providing notice to the client on the line-of-credit reduction. But he is also adopting some new practices to protect himself from future problems.
“Clients need to be proactive in checking lines and remodelers need to ask for letters of credit or evidence of creditworthiness,” says Owens. He recommends making sure that payment schedules stick closely to the job so that remodelers can pay vendors and stay current with other payables.
If the payment doesn’t appear, the remodeler should stop the job and not expend any more resources until payment is received, he says. Owens is paying a great deal more attention to draw schedules and tying them to actual expenditures.
Maybe the most important thing for remodelers to consider in minimizing payment problems is the state of their client’s relationship with the lender, he says.
“It’s just another hurdle for the cost of doing business,” explains Owens, who worries about the extra strain for remodelers who are already coping with the challenges of a down market. “We are in no position to be a bank on top of a construction company,” he says.
For more information on this story or on remodeling resources available from NAHB, e-mail Kelly Mack, or call her at 800-368-5242 x8451.
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