Exclusive research: Financing challenges slowing remodeling recovery

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The dearth of financing for remodeling projects continues to be a major problem for remodelers and most don’t expect it to get any better this year.

January 04, 2011

The dearth of financing for remodeling projects continues to be a major problem for remodelers and most don’t expect it to get any better this year.
That’s according to the latest Professional Remodeler research, which found that nearly every remodeler is feeling an impact from tightened lending standards.

Major project problems
Financing plays a major role for most remodelers, with 82 percent saying at least some of their clients finance their projects. Of those, only 5 percent have been unaffected by problems with financing.
“It’s really messed up the marketplace,” said one remodeler. “We’ve bid several (foreclosures) that need repairs and banks won’t even consider financing under ridiculous loan circumstances.”
Projects are getting smaller, getting delayed or simply getting cancelled because of lack of financing. Two-thirds of remodelers that finance projects report that clients are reducing project size, while 59 percent say that they’ve had clients cancel projects altogether. More than 30 percent said that projects are taking longer to put together and complete.
The average remodeler is seeing an even split between projects that are financed and those that aren’t — 50 percent of clients pay from cash or personal savings, 45 percent obtain their own financing and 5 percent get financing arranged through the remodeler. That last number may go up, though, as many remodelers said they are working on setting up financing options for their clients.
“We’re teaming with a smaller hometown bank for loans for customers,” said one remodeler.
“In-house financing is a bigger part of our advertising,” said another. “Financing is addressed early in the design and sales process. There isn’t a client, even if they tell us that they have their own source of funds, that isn’t educated on using us to carry the project financing.”
The impact financing challenges are having on business varies, but 35 percent of respondents to our survey said more than half of their projects have been affected by financing challenges – and 15 percent have had 75 percent or more of their projects impacted. Another 26 percent had problems with 25 to 50 percent of their projects and 39 percent said it had affected less than a quarter of projects.
There were slight regional difference. Clients in the Northeast seemed to have the easiest time obtaining financing, with half of remodelers there saying that less than 25 percent of their projects were affected by financing issues. Remodelers in the South are seeing the biggest impact, with 22 percent saying more than three-quarters of their projects are being affected, compared with 15 percent in the West, 13 percent in the Midwest and 11 percent in the Northeast.
As a whole, remodelers are not optimistic the climate will get any better this year. In fact, 45 percent expect it to be more difficult to get funding than in 2010. Forty-three percent expect no change and only 12 percent think it will get easier.

Challenging operations
The lack of money in the marketplace is also hurting some remodelers operations, as 47 report having trouble getting the financing they need to run their companies.
“Even though we are profitable, banks shy away because we are in the construction business,” said one remodeler. “How will the industry ever recover if the banks are unwilling to lend?”
“The banks consider my business high-risk since we are associated with home building,” said another. “They do not want to talk to me about any loans or financing.”
Remodelers in the Northeast are the least likely to report any problems with financing, with only 35 percent having trouble getting the money they need to run their businesses. Remodelers in the Midwest (53 percent), South (49 percent) and West (48 percent) are much more likely to report problems.
The most common problem caused by the lack of financing has been companies reducing head count – 49 percent of companies have done that. Forty-six percent said it has affected their ability to market effectively, while 45 percent said they have delayed purchasing equipment and 38 percent said they have put off acquiring property.
“We’ve laid off all employees, cancelled some of our insurance and parked equipment,” said one remodeler. “Cut out a lot of our personal expenses including our own health insurance, etc.”

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