Builder offers tips amid turmoil

A common-sense guide to changing market conditions

Builder offers tips amid turmoil

Sometimes, one misses the forest for the trees – especially in a fast-changing environment. Extending the metaphor, the mercurial mortgage industry is the forest while the arboreal reference alludes to key posts that would-be homeowners should be aware of amid shifts in the industry landscape.

Enter Russ Stephens, co-founder with Sky Stephens of the Association of Professional Builders. He spoke to Mortgage Professional America recently with updated tips anyone seeking to buy a home in today’s wild and wooly environment should know during the spring homebuying season.

First off, he advised, look for red flags: “It’s very important for people – anyone looking to build a new home – to be aware,” he said. “The best building companies have always been booked out in advance but right now because of the surge in demand, the best building companies are booked out about a year in advance.

“So I guess the first bit of advice I’d give to anyone looking to build is beware of the builder that has plenty of short-term availability. There could be a good valid reason for that, but it certainly raises a flag, and the question needs to be answered about availability because, as I said, the best building companies have always been booked in advance.”

In another key tip, take the difference between a quote and an estimate: “It's very misunderstood when it comes to building and that’s not just by consumers but even people in the industry seem to confuse this – the difference between and estimate and a quote,” Stephens said. “This is where some consumers might get confused, and why some builders provide free estimates and other builders charge for a quote.”

So what’s the distinction? “The difference here is just that an estimate is a rough guess,” Stephens said. “It’s a good place to start. Builders don’t charge for estimates because they’re not worth anything. Really, they’re just an indicator. But a quote is a fixed price quote that takes hours and hours of research and weeks of work to prepare,” he explained.

“Obviously the bigger the home the more complex and the more time that it takes. Really for the typical home to be quoted you’re looking at 40 to 80 hours of work for builders to do that properly, so obviously there’s no way they can just do that for free in the hopes of winning one in five jobs. It’s just not viable. And this is why residential building companies charge to produce a fixed quote which is fair and reasonable because that’s valuable information and a comprehensive document they put together, probably around 60 pages. Be very aware and don’t place too much importance on a free estimate. A lot of people end up comparing builders on that basis and think ‘this builder’s a lot cheaper.’”

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Which is not to say that an estimate isn’t a good thing to have: “[The] better the builder, to be honest, the closer they are,” Stephens said. “And a good professional builder should be able to get between 5% and 10% of a fixed price quote. So it’s a good indicator, but you just need to be aware they’re not spending too much time on this because it’s not a good investment of their time in the early stages.”

Still, consumers might be better off not making decisions purely on the price of a quote. “The days of the cheapest quote or estimates are over,” he said. “You really don’t want to be making a decision on price. It was never a good idea – these days more than ever, with everything going on in the industry. You’ve got to be very, very careful now.

“It’s all about doing your research, just like you would with any other thing. If you’re buying a new car, you look at the various models and specifications, and then you start negotiating on the price of the car. It’s exactly the same with construction.

“You can’t compare different builders because no two quotes are ever the same. If you don’t understand what you’re looking at in the details of a quote, you’re not comparing apples to apples. Research your builder first – look at reviews, look at their clients, talk to past clients if possible. What you don’t want to be doing is playing with three fixed price quotes and then trying to compare them.”

Given the changing forest – the industry, we should say – consumers now need to have access to additional cash to cover potential spikes in resources. The cost of lumber, concrete paint and other home-building needs have spiked upwards and their trajectory is difficult to predict.

“Consumers now have to be sure they have significant cash reserves in place when building to cover any of these blowouts. We’ve been living in a fantastic world for the last 20 years with very little inflation,” Stephens said.

 “With everything blowing out so quickly now, we need to learn new lessons. One of those is if you’re building a new home, there could be unexpected costs rising more than in the past. Make sure that you do have access to additional cash to cover any of those blowouts and allowances.”

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In the same vein, consumers should be aware of “rise and fall” clauses that might be inserted in their contracts and potential pauses in construction given the challenges of securing supplies and dealing with price increases. “It’s not to say those clauses are unreasonable and should be struck out,” Stephens said. “It’s just to be aware of them so you don’t get surprised by anything as the contract unfolds.”

In something of a worst-case scenario, consumers should brace themselves for builders to renegotiate in light of higher costs: “It’s probably important to be aware if the builder is delayed from starting your job due to circumstances that are out of their control – they can’t access the site, for instance, if titles haven’t been settled or maybe there’s delay in financing approval. Prices are still going up in the background, so they may need to re-price your job just because of the way prices are going up so fast.

“It’s important to be open and receptive and ready to renegotiate in those instances because it’s not their fault. What you’re seeing in the moment is builders that didn’t react and renegotiate are getting themselves in big trouble because they’ve lost so much money on those contracts.”

Stephens offered more common-sense advice that might be missed by consumers amid the potentially stressful experience of building a home. Ask questions, for example: “Don’t get blindsided by builders’ lingo or other terminologies you may not understand. If you don’t understand, do ask more questions.”

He noted builders actually enjoy sharing their knowledge, with the only drawback for a consumer asking questions is to be regaled on an hourlong treatise on, say, concrete.

Finally, don’t be afraid to ask for a job schedule. “You’re not asking for a fully detailed job schedule where every little activity is planned out,” he said. Rather, it’s just a rough outline with a timeline as to when various elements will be worked on, he suggested: “If they can’t predict that, chances are they don’t have a schedule, and that should be a red flag.”

Bottom line: Don’t be afraid of the metamorphosed forest. And don’t be afraid of the dark.