Top 5 Challenges for 2008

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As the calendar rolls over from 2007 to 2008, the likelihood 2008 will be a challenging year for remodelers increases with each passing day. Rising interest rates, declining home values and more coverage of the soft real-estate market by media have changed remodeling market dynamics in many ways.

January 01, 2008

As the calendar rolls over from 2007 to 2008, the likelihood 2008 will be a challenging year for remodelers increases with each passing day.

Rising interest rates, declining home values and more coverage of the soft real-estate market by media have changed remodeling market dynamics in many ways. Depending upon the market you serve, your company, too, may experience one or all of the following conditions this year. With a little foresight and planning, however, you can overcome all of these challenges and keep your business alive and well.

1. FEWER LEADS

Every sale starts with a lead, so when leads begin to decline, you can bet that sales are going to start dropping as well. When sales volume declines, the obvious solution for most remodelers is to start cutting costs. Try to avoid the temptation to cut your marketing and advertising budget as a cost control measure, however, as that will only further dry up the flow of leads into your company.

"Companies need to market much more aggressively to offset these effects or it could be a real killer," said Vince Butler, president of 44-year-old company Butler Brothers Corp. in Clifton, Va., and past national chair of the NAHB Remodelers.

The best place to look for more leads is through your base of past customers and satisfied clients. Marketing more aggressively to them via a company newsletter or direct mail campaign can pay dividends during slowdowns. Creating a rewards program to provide an incentive for referrals also works.

"You have all their information. Go back three or four years," says Mat Vivona, president of Father & Son Construction in Troy, Mich. (see Vivona's ideas for how to sell in a down market on page 18). "Mr. Jones had a kitchen done; has he got an interest in remodeling his bathroom? Go through and develop a list and send them a direct mail piece. It does work."

If you're seeing a decline in large additions and major renovations in favor of smaller scale jobs (see challenge No. 4), consider creating a marketing message that speaks to the prospect for these smaller jobs.

2. TENTATIVE HOMEOWNERS

Second on our list of evils that could befall your company this year are the tire-kicking, slow-moving, hesitant, reluctant or just plain scared prospects. They contact you to inquire about a project, then either flat-out disappear or just drag their feet when it comes to committing with a signed contract.

Consumer media coverage of the downturn in new home construction and the real-estate market has put a damper on consumer confidence in the home as an investment. This has had a trickle-down effect on remodeling, including lower closing ratios; glutted pipelines between design and construction; and fewer leads overall.

"It is my opinion that those [homeowners] that are reluctant are weeding themselves out before they even make it to us," says Neil Kristianson of Crimson Design & Construction in Naperville, Illinois. "I think that this stems from the media's portrayal of the financing market and real-estate pricing in general. People are scared that they will not see their money again if they invest in their homes. Therefore, I believe that they take themselves out of the market long before they get to us. It all comes down to one word: fear."

Try to avoid the temptation to drop your prices or sacrifice profit margin for volume. This can create a downward financial spiral that can turn a short-term challenge into a long-term problem.

3. FINANCING ISSUES

So, let's assume you've avoided being affected by the first two challenges. You have plenty of leads flowing in from customers who are ready and willing to do business with you. But are they able? Challenge No. 3 for 2008 will be finding ways for your prospects to finance their projects.

With interest rates increasing, home equity decreasing and most lending institutions raising their qualification standards, the availability of money for remodeling projects has dwindled. Contact your lender or multiple lenders in your area to see if they will work with your clients to provide financing. It's a win-win for both of you.

"Currently we are trading referrals [with our bank]," says Allen Griffin of Gryphon Builders in Houston. "I used to stay out of the funding aspects because my clients always had their own resources. But, I've found this to be very beneficial in how it reflects on us. Having deep resources, we become the champion."

Griffin has seen financing become a great challenge for many of his clients. Even one client who was able to secure financing presented a minor cash flow challenge because the lender wouldn't release startup funds.

"We fronted the startup but then made a larger first draw," says Griffin. "It was really a matter of policy with the bank. We did a little bit of work, and they were happy. I do see this becoming more of a trend and smart business for the banks. I don't like it, but we will need to adjust."

4. SMALLER JOBS

How is your average job size these days? If you're like most remodelers we've talked to, it's shrinking. If you're like some, the drop has been dramatic compared to 2006 levels.

"This is the area that really sums it all up," says Kristianson. "Job size is way down. We haven't had anyone interested in a substantial addition in almost a year. We normally build three or four projects a year that are over $300,000. This year, we didn't do any. The largest jobs have been in the $100,000–$120,000 range."

This issue is most likely related to the above challenges of dealing with the reluctant homeowner and difficulty finding financing for large projects, says Kristianson.

"It goes back to the fear of housing values and the ability to get money from the bank," he says. "I think it mostly stems from fear, because our client base is well enough off that they could finance [a large project] if they wanted to. We have been able to maintain our gross profit margin, but the lower sales volume means that the gross profit dollars are down dramatically. This has led to some cost cutting and putting off some long-term plans to increase staff levels and capital."

Potential strategies include selling change orders at an increased margin over the original contract margin and targeting smaller jobs with your marketing and sales efforts to keep overall volume as high as possible.

5. COMPETITION FROM BUILDERS

In a down market for new home construction, what do home builders do? They turn to remodeling. Builders across the country are looking for ways to keep their crews busy and keep cash coming in. With home starts and sales both suffering dramatically, it's the best way they can think to keep from shuttering the business.

Because builders are marketing their remodeling services to those who bought homes from them, they have the advantage of the past relationship, just as you do with your past clients versus your competitors.

"The builders have a distinct advantage if their customer liked the building experience," says Craig Deimler, vice president of Deimler & Sons Construction in Harrisburg, Pa. "Why call a remodeler when they have a track record with the builder. Construction is construction, right? Little do they realize that building and remodeling an occupied home are vastly different."

Because builders know very little about how to price a remodeling job compared to new construction, pricing on competitive bids can become skewed. Try to avoid the temptation, as we mentioned above, to lower your margins to compete with builders and subcontractors who are now your competitors. Deimler has had builders bid as much as 50 percent lower than him to get a job, but he hasn't succumbed to the pressure.

"The key is to keep pricing and service high so that you don't slaughter your reputation or the experience for the client," he says. "Find the savings for the bottom line in other areas. That's what we have done."

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