Originating Real Estate Related Non-mortgage Business

by 07 May 2009

Building Income through Building Materials                                                             

Regardless of the nature of the business or the specific industry they participate in, the goal of any for profit business is to maximize their profitability in every way and in any way possible.  In the final analysis there are only two methods of achieving this goal.  This is not rocket science as the first method is to increase sales production.  The second method is to reduce costs.  Reducing costs is not only by far the most effective method; it is also much easier to accomplish.  “Why” or “How can this be”, you ask?  Simply stated every dollar in cost reduction goes directly and immediately to the bottom line. 

The same even holds true for the progressive mortgage broker and loan officer for their residential or commercial Developer, Builder and or General Contractor clients involved in the Real Estate construction industry or with substantial rehabs.  It does not matter if they are large or if they are small.  It does not matter the type of the projects your residential or commercial Developer, Builder and or General Contractor clients are involved with or the size.  These very same, sound and simple basic business fundamentals apply to all.  Their goal is to increase profitability and reduce expenses.  By assisting your residential or commercial Developer, Builder and or General Contractor clients to increase their profitability and also reduce their costs you will now have a value added service to offer that will set you apart from everyone else competing for the loan origination business.  

There are three methods that you, as a mortgage broker or loan officer,can assist your residential or commercial Developer, Builder and or General Contractor clients, regardless of size, to immediately become more profitable. Because you are already actively involved as their financial source, you now have the added opportunity to earn an additional RESPA compliant fee and source of income.

Decrease Cost of Materials and Supplies

You might immediately dismiss this method by thinking that your residential or commercial Developer, Builder and or General Contractor clients have already achieved this, especially the very large ones.  Nothing can be further from the truth!  The residential or commercial Developer, Builder and or General Contractor do not actually purchase the building materials and supplies for the structure they are building.  This is the function of the subcontractor! 

Although the subcontractor may very well purchase their building materials and supplies from a nationally known retailer or lumber yard, they would be provided with only a very nominal discount based on retail pricing, if at all.   

If the subcontractor is larger and acquires their building materials and supplies from a regional or local trade wholesaler they would be provided with discounts, if at all, based on distributor pricing.  Their costs would be approximately 10% below retail.

The national chain stores and lumber yards do not manufacture what they sell. They are retailers with large mark ups who acquire their inventory of in stock building material supplies from a nationally recognized wholesaler of building materials.  They purchase at the deepest discounts, best pricing and most attractive terms available to them.  In turn they sell to the subcontractor and may provide them with a discount from their marked-up retail prices.

The trade wholesalers are similar to the national chain stores and lumber yards but they operate on a larger volume with smaller mark ups.  The national chains, lumber yards and trade wholesalers rely on nationally recognized suppliers that have decades of experience in their specialty. In turn they also sell to subcontractors.

The subcontractors, in turn, mark up their purchase cost 25% to 40%.  This marked up cost becomes part of the winning bid which in turn becomes part of the actual cost to build the residential or commercial structure. Your residential or commercial Developer, Builder and or General Contractor clients now have two additional layers of cost in their projects:  The marked up price from the physical source of acquisition as well as the marked up cost from the subcontractor.

If your residential or commercial Developer, Builder and or General Contractor clients are ready to take their business to the next level and outperform their local market they will readily and heartily pursue the next step. It's so easy and so obvious, but not many companies do this.

What’s the next level? It is simply for your residential or commercial Developer, Builder and or General Contractor clients to purchase the very same quality building materials and supplies, in accordance with local code and specs, from the very same national wholesale building materials and supplies distributors the manufacturers sell to.  By doing so your residential or commercial Developer, Builder and or General Contractor clients will have purchased ‘direct’ and by- passed the middleman mark-ups, plus they will have taken advantage of ‘factory direct’ pricing, terms, discounts and services. 

In short, if your residential or commercial Developer, Builder and or General Contractor clients are not purchasing their building materials and supplies directly from a national wholesale building materials and supplies distributor, who buys in volume and directly from the manufacturer; they are simply not obtaining the best pricing, terms, discounts and the related services available to them.

Although there are several wholesale building materials and supplies distributors who can offer these services, there is but one national company that readily offers all of these services to the residential or commercial Developer, Builder and or General Contractor, regardless of their respective size or sales volume.  This national company will pay a RESPA compliant referral fee to the mortgage broker or loan officer.  Here’s the good news:  The referral fee is RESPA compliant because it’s a third party service performed outside the actual residential loan process!

Another way in which your residential or commercial Developer, Builder and or General Contractor clients can save money is to purchase their building materials and supplies on credit through extended terms without incurring interest charges.  No, I’m not talking about using their current credit cards and paying the full balance each month!  I’m talking about establishing a trade line of credit which will allow the residential or commercial Developer, Builder and or General Contractor to generate additional cash flow by paying for the building materials and supplies when the permanent financing is in place.  These deferred payments provide an excellent opportunity for your clients to earn interest or have the buying power for other required items.

Decrease Cost of Labor

Each and every day your residential or commercial Developer, Builder and or General Contractor clients takes to build their project is another chunk of change and an ongoing direct cost of construction.  They have payroll to meet and must pay their valuable subcontractors and or employees or lose them.  They try to schedule and economize the best way possible by keeping only those necessary on the job.  The most cost effective method of reducing direct labor costs is to simply reduce the number of days required by their subcontractors and or employees on the job.

This can be readily achieved by using time tested less labor intensive alternative methods of construction!  We have all likely heard that you can take a horse to water but can’t make them drink.  However, you can keep that same horse thirsty by feeding them salt tablets.  The salt tablets you can choose to carry in your pocket or purse is helping your residential or commercial Developer, Builder and or General Contractor clients reducing labor costs through alternative methods of construction. 

Wouldn't it be wonderful if your residential or commercial Developer, Builder and or General Contractor clients had an industry expert with 25 years experience to look over their blueprints and suggest well known, but seldom used alternative methods of construction to build more effectively and efficiently?  These alternative methods of construction will not sacrifice the integrity of the structure or the good name of your Developer, Builder and or General Contractor the quality.                  

At this juncture you probably just said to yourself, “If there are alternative construction methods available what are they and why aren’t they being readily used”?  Great question!  The character Teyve from The Fiddler on the Roof would provide a simple one word answer, ‘Tradition’.  Even though the average residential or commercial Developer, Builder and or General Contractor has likely heard about these methods for years they have simply ‘never done it that way before’ because they incorrectly believe they require a highly skilled and or experienced framing crew.  This is another fallacy and there is one national wholesale building materials and supplies company that will provide on the job training for your clients in these methods and at no cost to them. 

Some of the alternative methods of construction include wood and steel panels with insulation.  These methods combine three separate individual labor steps into one simple process that delivers pre-engineered sections to the job site for easy assembly in a fashion similar to either a large erector set, jig saw puzzle or Lego blocks.

By taking advantage of these methods your residential or commercial Developer, Builder and or General Contractor clients will have a dried in shell completed in drastically less time with less labor resulting in a healthier bottom line. 

Increase Production

Using the traditional on site stick built method of construction will produce a dried in shell for a 1500 sq ft home in approximately 6 weeks.  The certificate of occupancy will follow in another 8 to 20 weeks.  After the permit has been issued this house will be completed somewhere between 3 and 6 months.  However, using one particular alternative method of construction, even with the most inexperienced crew this very same house can be ‘dried in’, under roof, within 1 week and have a certificate of occupancy delivered in 45 to 60 days.  The total building materials package for this home including everything from the slab up to and through the roof and everything in between except for the paint and carpeting, if applicable, is approximately $40 per square foot for an entry level affordable home.

Using this alternative construction method will not only decrease the building and sales cycle, but also allows your residential or commercial Developer, Builder and or General Contractor clients to build more units with additional profitability.  This is where your clients will see the most results.  Their income will explode by a combination of reducing costs and increasing production.   They now have the ability to become the ‘Top Dog” in their area.

Now you can start originating real estate related non-mortgage business by building income through building materials!                                                             

 

Mitchell Chapman is the Executive Director of National Builders Finance, a division of National Business Finance, a business consulting services firm who provides alternative financial solutions for small businesses. 

National Builders Finance specializes in creating building material and supply programs using alternative construction methods, unsecured business lines of credit and providing residential and commercial construction financing programs.  He can be reached by telephone at        954-495-4791, or via e-mail at:  info@nationalbusinessfinance.com;

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