A Custom Approach

Farina and Sons Inc. in Orlando, Fla., specializes in whole-house renovations and new custom homes, which make up about 20 percent of the business. Second-generation president Victor Farina employs three people in the office and six lead carpenters. Joe Gradison, vice president of Gradison Building Corporation in Indianapolis, owns the 19-year-old business with his brother, Mark. In the early 1990s, they began adding high-end remodeling work to their business, which also includes a siding division. Jud Motsenbocker talks to them about the challenges of moving between the worlds of new and existing homes.

Jud: Is custom home building a good diversification option for a remodeler?

Victor: 100 percent, yes it is. Years ago I learned that it was good if you could keep your subcontractors busy as well as your employees. A lot of times on the renovation side, I'll be doing 4 to 6 large jobs at one time. If you can supplement these with a home, it is added work for your subcontractors. You start using the same crews each and every time. It's a little variety. It keeps you getting good prices.

Joe: I'd hate to recommend to a kitchen and bath guy or a smaller style remodeler that building a spec home is a good move. They may not have a full understanding of the exposure involved in what the market might think of a spec home. Now, if they have somebody that wants them to do a contract, there's a little less risk there.

Jud: Is there a type of remodeler who might be more successful at building homes?

Joe: The larger the remodels, the more likely that the remodeler would be proficient at scheduling multiple trades as opposed to self-performing. Most custom homes are going to be built with the majority of work subcontracted. It's a different mentality, a different approach. The size of the company does matter in that somebody needs to be strategic and analytical, not the hands-on doer of all things. If they're going to begin to get their feet wet, a contract style of building a home or custom home is less risk than spec-building one.

Victor: If you have more infrastructure, more administrative people at the office, you'll be in a better position to do a new pre-sold custom home, 5,000 square feet and above. I don't think there's any question about that, versus the man who still has the office in his house and really is a one-man operation, even if he has a couple of guys working for him.

Jud: Is it possible to switch between remodeling and home building depending on the market, or is it better to have regular business on both sides?

Joe: I don't believe you ever want to leave your market unattended. I don't think you should take yourself out of one side or the other. You have to maintain a presence in both and you take what's coming at you, and there lies the value in being in both arenas at the same time. The market will let you know what they want you to do. Hopefully you can be flexible enough that one year it might be 70/30 remodel to new, and a few years later it could be a 30/70 split. You need to not approach the building of houses as just something you might do on occasion. You need to be in the business or not in the business. You need to be focused and understand it well enough and be proficient, or don't do it at all.

Victor: I don't think you better forget what got you to the table. If remodeling gets a little bit slow, it's either going to be economic or something is not working with your company. If it's an economic thing, I can assure you that the new custom home market will not be thriving either.

Jud: In order for it to work, do you have to have a separate division?

Joe: If you have the luxury to have a complete and separate division where only one or two people are doing it and three people to keep track of it, hey, that's great. But most of us don't. We have multi-task people in the office and that's how we get it done. You need to be prepared to consider them separate entities even if they are not technically a separate entity. You need to view them differently, treat them differently.

Jud: Is it harder to go from building to remodeling or from remodeling to building? I believe that it's easier for a remodeler to build a house than it is for a home builder to do an extensive remodel.

Victor: I agree with that comment because of the complexity of a remodel project, although a very custom special home is extremely difficult and has a lot of ups and downs. Custom building to me is about the easiest thing I can do. The scheduling is a little bit easier. I have less supervision on each and every job. My remodels can be as much or more than some of the custom homes. In our business, it's just not a big difference in what we do. Now, if we're talking about the guys who do the 30, 40, $50,000 deals or just kitchens or bathrooms, they're going to have some trouble. They are venturing into something that they normally would not do, and the product they would put out may not be what it should be.

Joe: If a home builder comes over to the remodeling side and is having a tough go of it, the customer knows. On the new home side, you don't have as much interaction and you might be able to get it figured out before the customer's on to you.

Joe: I believe that a remodeler in his mindset is one that really likes challenges and is comfortable with making a plan but being willing and able to adjust his plan multiple times a day based on what comes at him. That is a little bit different than the very methodic plotting process and strategic new home coordination. You have to be pretty unflappable in the construction business and even more so on the remodeler side.

Jud: If a remodeler is going to build a home, does he use the same contractors that he would use in the remodeling side?

Victor: There may be one or two that really won't overlap, but because most of my remodels are good sized, my roofer will do both. I do carry two different plumbers: one that will do what I call the more refined, not as big jobs, and one that will do a much larger job that has a lot more plumbers working for him that he can manage. Some subcontractors may not want to do a much larger home and be tied up in such a way.

Joe: I would say that the new home trades are more resistant to remodeling than the remodeling trades are resistant to new homes. The framer who's doing medium sized remodeling will and can go do a new home. The transfer is easier from remodeling to new homes. Building houses, trades get into this routine. The routine is out the window on the remodel side.

Jud: In remodeling, somebody's home everyday and the dog and the cat and the kids are running around and you can't play the radio as loud and you can't speak some words.

Joe: Our start was on the new. Getting over to the remodel side, it definitely was a school of hard knocks for a number of years. We're still learning everyday. It's a more difficult business model day in and day out, than the new home construction business is. There's just that more comes at you in a day.

Victor: That is why when I do the new construction it's a breather compared to the renovations.

Jud: When a remodeler is trying to go out and build a new house, is the markup going to be the same as his markup on his remodeling project?

Victor: No. I don't think he's going to be able to sell it. I don't think he can get the contract. I know he can't down here. On the new construction side you're going to have to stay competitive, and the market will not allow you to do that.

Joe: Unless he's charging something terribly low on the remodel side, he won't be able to get that same margin on the new side. It's just a little bit easier for the customer to recognize what they can get for their money on the new.

Jud: Why do we need more money on the remodel side?

Joe: Supervision is substantially more on the remodel side, as well as just the extra time and effort to debug problems. Everybody's head has to be in it, answering different types of questions coming up. There's more problem solving and more ways of doing things differently than you anticipated. The new home is a little more straightforward and it can go with fewer man-hours. If you have more time per dollar spent on the remodel side you need to charge a higher margin.

Victor: Exactly. You have to get more on a renovation; I don't care if it's a small one or a large one. The supervision, the labor, the administration, the office time, the accounting time is so much more than any new construction. A remodel, a homeowner is living in it or had to move out but is around to visit the house. It's very personal versus the new home. It's a different mode of work, and you can't do as much volume on the renovation side if you do not have all this infrastructure.

Jud: Do I need more money to back doing custom homes than I do in the remodeling business?

Joe: You need to understand the draw schedule with the particular lender you are going to have. The lender typically will have a schedule that they like to use. You will need to have some money in the deal if you want to take advantage of quick pay discounts. If you aren't going to take advantage of quick pay, the draw and the inspection process should catch enough to pay the bills.

Jud: In other words, we may have to tell our subs and/or suppliers we have a little different pay schedule than normal. Is that a fair statement?

Joe: Absolutely. It will not be every week writing checks.

Victor: The remodeler better have money in the bank or it's just not going to work. The way the banks want their draws, down here in Florida you have to have lien releases, etcetera — by the time you gather all that up, when you are ready for the draw and lien releases to show proof that you actually paid a subcontractor, you're going to have to have actual funds in the bank before you start that house to be able to man it. If you use some of the same subcontractors, they're going to understand if the draws get stretched out a little bit. But for the most part, I already know that even if I get a few percent extra down to start the contract, you have to have monies in there before the draw starts to flow. There's much more of a time lapse with a whole lot more work per sub out there.

Joe: I guess I'll put my new home hat on and say don't just jump right in just because you think it's easy money, less supervision. Watch out because the scope is bigger. There are a few hidden things that you don't encounter in remodel. You underestimate the sewer hook-up charges, a mailbox and trees, and there's $5,000 associated with it.

Jud: Certainly it's a bigger schedule because it takes longer.

Joe: Absolutely. But the other side of the coin for me is the remodel is substantially different because you have a customer that's underneath your feet most of the time. It's a relationship that operates at a little higher level than the new home does just because of the constant interaction.

Jud: What are the advantages of doing both? Why not just stick with one?

Victor: The variety, there's something to be said for that. I believe it keeps the sub honest in giving and receiving good prices. One other thing is that if you get yourself in a niche, sometimes your name will not be thrown around for the new custom home, and it's something that you might want to do and if you don't get involved in it, then the only alternative is to try to do a spec. So, for us, I like it. It seems to work well for what we do.

Joe: You have to be a whole-house renovator for it to be a good fit.

Victor: When most of your remodels go between about $600,000 to $1 million and you're working on homes that are from 1905 to only 4 years old, it's not for the faint of heart, so anytime you get thrown a new construction from $1 million $1.5 million, it's not that big of a deal. It's just not that big of a deal. You just don't sweat.

For audio clips of their conversation, visit www.HousingZone.com/HZRadio

For many remodelers, building custom homes is a profitable side business.