A prospect is excited about his or her plans for a dream remodel. Impressed with a certain remodeler’s references, the potential client proceeds to ask for a bid or cost estimate. But, after the remodeler presents a proposal for a quality job at a fair price, the customer gets sticker shock. Since the estimate is higher than expected, the customer now starts to look at cost reduction. At this point, the remodeler either loses the sale to a cut-rate bidder or loses the profit margin if he or she tries to accommodate the client.
For many remodelers, this chain of events is all too familiar. To circumvent this frustrating cycle, remodelers may want to try a new approach and learn to focus on helping customers understand what type of remodel will increase the value of their home. In other words, sell the job’s value rather than the cost. By discussing value versus cost, the remodeler helps customers view the job bid as an investment rather than just an expenditure –and the resulting jobs are usually larger and more profitable.
Do it like a developer
Remodelers who want to help prospects look at their jobs as equity builders first need to help homeowners understand that remodeling is real estate development.
To begin with, professional developers or spec builders don’t pay for complete plans, engineering and permits without first knowing the job cost, what value it will add, and how they’re going to pay for it. Homeowners, on the other hand, do this every day. Some sign contracts and begin construction with half the funds required to complete the job. Moreover, surveys of architects suggest half the plans they draw for homeowners never get built, are scaled down, restructured to go in phases, or are completely delayed. This is because most of these customers have neglected the financial aspects when they began their planning.
Leading remodelers are learning that by understanding the basic principles of real estate development, and applying it to each job, the customers’ equity can become their most powerful sales tool. Here are some tips to start:
* Qualifying the Property for Highest and Best Use. A real estate developer planning a project takes certain steps to determine feasibility before proceeding. By applying an appraisal principle called “highest and best use,” a developer seeks the level of improvement to a property that offers the greatest return on his money. A professional developer reviews local ordinances and deed restrictions to find out the permitted uses of the property before spending any money on design. Then, a market or feasibility study of the property is conducted to determine the cost versus “value added” for various plans.
For example, a remodeler should go to the first scheduled appointment armed with public-record information on the customer’s property. For instance, the remodeler reads the customer’s property profile and finds the customer purchased their home in January 1995 for $300,000, and had an adjustable loan for $240,000. Upon further research, comparable neighborhood home sales show that larger remodeled homes have sold for $700,000 or $175 per square foot. A complete teardown, more than doubling the size of the home, would approximately cost under $300,000. So, the remodeler can now go to this appointment knowing that the job can cost $100,000 less than the $400,000 it will add to the home’s value.
* Qualifying a Prospect for Financing. Just as a job can be limited by the property value, it’s also dependent upon the prospects’ financial status. This includes available cash, income and credit. It doesn’t matter how good a deal is if the homeowner can’t afford it.
Before working on plans or bids, it’s a good idea to qualify the buyer’s purchasing power. A homeowner, however, may feel more comfortable talking about financing with a lender rather than a contractor. A good lender is able to answer all of the prospect’s questions regarding the financial aspects of remodeling, and can help homeowners feel more comfortable with both the proposed job and the contractor.
To go back a step, the remodeler needs to find a qualified lender. A lender that finances construction is familiar with real estate development principles. Ask if the lender offers construction loans based on the completed value of the job. If they draw a blank stare, keep looking.
* Preliminary Design. When project feasibility is complete and the customer can afford the job, it’s time for a preliminary design. However, remodelers should be aware that most customers are inexperienced in real estate development, and what they ask for may not always be in their best interest. Design experience adds great value to the remodeled house and allows the remodeler to differentiate himself or herself from the competition. And while good design is cost effective, it doesn’t mean that the job must cost less. A successful remodeling design results from the art of compromise – striking a balance between style and efficiency. The objective is to make efficient use of the existing structure while designing a job that doesn’t look like a remodel.
Remodelers should keep in mind they are designing to a targeted value. If the job is to be valued similar to larger custom homes in the neighborhood, it must contain the same features. The kitchen and bathroom fixtures are easy to reproduce, but what about the overall flow of the plan? If the custom homes have 10′ ceilings downstairs, what can be done with a 30-year-old tract home with 8′ cottage-cheese ceilings? While a second-story addition that preserves the downstairs will save money, the penalty on value may be greater. In other words, to save money, many homeowners wind up approving plans with design compromises that can be devastating on resale value.
Contractors are good at cutting costs, but few seem to recognize opportunities to increase value. By taking advantage of cheap square footage, such as creating a bonus room instead of an attic, a contractor can ad substantial value for little cost. In the right neighborhood, $10,000 in increased costs can sometimes add over $40,000 to the value. In some California neighborhoods, for instance, makeovers that emphasize good design are selling for over $150,000 more than remodels of equal square footage with poor design.
Just as design/build is essential for a developer, it is for a remodeler, also. The designer should report to the remodeler, not the customer. A cooperative team approach in design allows remodelers to keep a constant eye on the budget and, by always being involved in the design meetings, can prove their expertise, thus developing a personal relationship with the client.
* The Preliminary Cost Estimate. Once a preliminary design has been agreed upon, it’s time to go over the wish list. Remodelers should have the homeowners specify the quality of the components they want to include. Now that the remodeler knows the true budget, he or she can advise the customer on the fixtures and finishes that they can afford while still adding the necessary value. With a preliminary plan and specifications in hand, most remodelers can produce an estimate that is accurate within %-10%.
This is also a good time for a value check. Most appraisers can perform an appraisal with a preliminary floor plan, elevations and a detailed description of materials. If there is going to be a value problem, it is wise to find out now, before paying for engineering and working drawings. If changes in specifications or the plan must be made to fit the budget or support the value, now is the time to make them.
Once the value has been confirmed, the homeowner and remodeler can confidently proceed with working drawings. And, because the homeowners know how their cost relates to value, they usually are comfortable proceeding with a final contract.
Example: A home was purchased three years ago for $330,000. Current value is $295,000 to $300,000. Homes with simple room additions are plentiful and attract budget-conscious buyers. Added value is less than cost to build. Comparable sales of major remodels range from $508,000 for a remodeled 2,600-sq.-ft. home ($195 sales price per foot) to $720,000 for an architect-designed custom 4,200-sq.-ft. home ($171 per foot). The only homes that have sold in the 3,000- to 3,300-sq.-ft. range have been remodels with design deficiencies resulting in much lower prices than the larger custom homes. Homes that are remodeled can be compared to the 4,000-sq.-ft. custom homes provided they are well designed to provide similar quality and modern floor plans.
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