Industry News
Industry News - December 2007
Watch Out for Cut-Rate Builders!
(Source: Katherine Salant.com)
A home buyer's idea of a great deal is often "the most house for the least money" and "the lowest cost-per-square-foot in the entire city."
In contrast, a home builder's idea of a great deal is "the best house for the money from a builder whose clientele includes a large number of folks who are coming back for their third house."
What accounts for such divergent views? Many buyers have a serious misunderstanding of what the cost-per-square-foot figure represents and what skills and experience building requires.
The problem starts with the buyers' assumption that any simpleton can build a house. Then, it logically follows that because building doesn't require much knowledge or training, buyers are being gouged if they pay very much. That leads to the conclusion that accepting an offer from the guy in the pick-up truck who says he can deliver the house they want for 10 to 20 percent less than the competition is a great move. Add to this the actual dollar amount of savings promised by Mr. Pick-up. It can cloud the judgment of otherwise sensible consumers.
Put yourself in the buyers' shoes. You check around and find that the cost to build your 3,000-square-foot dream house with the features you want will be about $450,000. A savings of 10 to 20 percent means a reduction in price of $45,000 to $90,000. Why not, you say, go with Mr. Pick-up over Joe Smith & Sons, who has been in business since the beginning of time? (Well, at least 50 years.)
Never mind that Smith's houses carry cachet; local real estate agents say the firm's houses bring at least 5 percent more than comparable-sized homes every time they hit the market. With that extra $45,000 to $90,000 (or maybe even $100,000 if Mr. Pick-up can get all the deals he's checking on) you can even get those to-die-for distressed-walnut kitchen cabinets.
Rather than focusing on Mr. Pick-up's price, however, you should zero in on his ability to build your house. In many places it's surprisingly easy to hang out a shingle (or paste a decal to a truck door) because every jurisdiction does not require a home building license. Even when it does, the license may be a mere formality that involves filling out a form and paying a fee. It's no indication of competence.
Of course there are many reputable custom builders who drive pick-up trucks. Some of them are small outfits working out of a house. They don't have an office suite the way a larger firm such as Smith & Sons has. What distinguishes them from Mr. Pick-up is that they have years of experience building houses -- and the resulting references, portfolio of finished projects you can go look at and former clients you can call.
When a builder in a pick-up says he doesn't have references because he's just starting out, take your money and run. He may have folded the tent on a business with a different name because a job ended badly. Or he may truly be just starting out and offering a steep discount because he wants to establish a track record. He's honest and he knows how to build houses, but he doesn't yet have the management skills required to complete your job on time and on budget.
No one acquires such skills overnight. As
Though Mr. Pick-up's price is tantalizing, you're better served to bite the bullet, forget "10 to 20 percent cheaper," and go with Smith or someone of his caliber. Otherwise you're likely to learn the hard way that any simpleton cannot build a house.
Even when you go with Smith you still have to do your homework, check references, ask Smith's recent clients if they feel that they got what they paid for and go look at several of his houses. If you're really thorough, you'll check his subcontractors, too.
Going back to the confusion over the cost per square foot, what does this figure represent? It takes no account of quality, which should be No. 1 on your list of must-haves. But it's easy to see why buyers latch on to the cost-per-square-foot figure so quickly. In our current era of the big discount, consumers have learned that if they look hard enough and long enough, they can get a significant discount, whether buying a car or a pair of running shoes.
But there are big differences between buying a car and a house. A car is standardized. It will be the same car whether you buy it from Honest Ed or Big Jim. And you can test drive it before you sign a contract.
Houses, however, are not standardized; no two builders build alike. And you can't see what you're getting when you sign a contract -- the house hasn't been built yet. If you lean too hard on the builder to lower his prices, he'll either walk away or substitute inferior-quality items, and you won't be the wiser.
It's also important to note that when a builder quotes a cost per square foot, he's giving you an average for the entire house. He does not mean that every square foot in the house will cost exactly that amount. What any specific square foot costs depends on what's in it. A square foot in your kitchen or bathroom or home theater will cost a lot more than a corner of your living room that's merely space.
However, when you're trying to figure out whether your budget is realistic, a cost-per-square-foot figure can be helpful. If several custom builders in your area tell you a house with the features you want will cost about $ 150 per square foot (this is a pretty standard figure in many parts of the country), the cost to build your 3,000-square-foot dream house will be about $450,000. If you only have $300,000, you know that something has to give. You can settle for a smaller house and get all the features and finishes you want or try to get close to the 3,000-square-foot size with a bare bones treatment of the interior and exterior. Or you can aim for somewhere in between.
The builder who says he'll give you the best house you can get with your $300,000 would probably suggest that you reduce the size and focus on the basics -- solid framing, good windows and energy efficiency -- and add the pricey finishes over time. Shrinking the house by 20 percent would still leave you with 2,400 square feet, more than adequate for most households.
The builder would also probably suggest a simpler roof with a shallower pitch and a simpler floor plan with a more or less rectangular footprint instead of the T-shaped one with the family room projecting out the back that your had your heart set on. If there's any slack in the budget, he might propose one really upscale item such as a mahogany front door with a solid brass handle as the beginning of what's to be added later.
What sort of endorsement is implied by buyers who come back for their third house? By the time a couple builds their third house, they've become sophisticated about home building. They're familiar with the building process, they know what to expect, and they know what is and isn't under the builder's control (weather, for example can delay things for weeks).
They also know that they will be working closely with the builder for the duration of the project. If they come back to the same one for a third house, they're clearly comfortable with the builder and happy with his work.
Buyers coming back for a third time also tell their friends, who may approach the builder to inquire about building their dream house. And this makes the builder as happy as his customers.
