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Lending has been part of the Custom Design & Construction business model since its inception in 1986. A big part, in fact — not only do the majority of the Los Angeles firm's clients finance their projects, 70 percent of them do so through the residential remodeling company's in-house financing arm, Custom Funding.
"Most have some cash or a home equity loan," explains company president Bill Simone, CGR, CAPS. "It's just not big enough."
With a view of the Hollywood Hills, Joel Becker's 1926, 870-square-foot home located in West Hollywood near the Beverly Center and the Pacific Design Center had good bones but needed a makeover.
Becker, a psychologist and trained gourmet chef, sought a true cook's kitchen, a media room and more space for him and his partner to entertain friends. The design Simone created left the footprint of the single-story home the same, but added a 628-square-foot second floor. The plan relocated the master suite upstairs, converted the existing master bedroom into a media room and office, then removed the powder room and study to expand the kitchen and add a breakfast nook.
Two walls of the media room feature a built-in desk and bookshelves. It also includes a wall-mounted, 60-inch plasma television; controls for the zoned whole-house sound system are located in the pantry.
Ricciotti served as project manager on the house and subcontracted all the labor, as he does on every job. This approach makes the company more flexible and adaptable as project sizes grow. It also means he has to maintain relationships with a wide range of tradespeople.
"Every day now we're putting in granites and products I've never even heard of," he says. "It really is as simple as matching the right craftsman with the right project." He has to make sure subs take the time to read installation instructions. In addition, he adds, sometimes he must hire factory-certified installers for the warranty to remain valid.
Only one "surprise" emerged — the house had undersized framing and had to be bolted to the foundation because of current seismic requirements.
Besides creating space for a fully loaded kitchen, the remodel converted the former master bedroom into a media room, a sitting area into a stairwell and the study into a breakfast nook.Simone and Ricciotti believe in home-improvement lending so much that in addition to co-owning Custom Design & Construction, they are two of five partners in a national lending firm, HomePlus Finance Corporation. As Simone's involvement in that business grows, he sees Custom Funding as a stream of income that will continue even after Custom Design closes its doors. Does that mean it's a retirement plan in and of itself?
"At the end of the day most people are going to refinance," Ricciotti acknowledges. Some clients, however, don't seem to have any intention of doing so.
"You can end up with a portfolio of notes that are secured by valuable real estate that is work that you have done," Ricciotti says. "You've got credit-worthy clients who are paying these mortgages. You're forgoing your profit this year, but you're taking it in payments. It continues to pay you in interest rates."The Financials
Custom Funding, the financing arm of Custom Design & Construction, offers its customers loans ranging from 12 months to 30 years. According to Randy Ricciotti, many clients take out a second mortgage, then refinance their home in a year or two and pay off the Custom Funding loan.
Lending: This client had $275,000 cash and needed a loan for $200,000. "This was pretty standard financing, 8.9 percent for 28 years," says Ricciotti. "Higher than what a new first would be, but this was a second mortgage." Based on a red-hot housing market, a prime West Hollywood location and the scope of the planned remodel, the clients felt the loan was a smart investment. They were right: A post-project appraisal showed the home's value had increased by nearly $1 million. A bank might not have been willing to take this risk, but a contracting firm that knows the market and stands behind its own work was.
"Here's a guy who had magnificent taste and clear-cut ideas, but did not have the cash to accomplish his objectives," explains Ricciotti. "It was much easier for him to come to us so he did not have to worry about the loan-to-value ratio. He was able to get all of the things he wanted in this project now. He was able to take advantage of a reasonable rate; the payments were affordable. At the end of the day, he was able to increase the value of his home, refinance and get to a rate on the first that was even lower than the second."
Cash flow: The design fee depends on the scale of the project and is not applied against construction costs. By California law, down payment cannot exceed $1,000. Ricciotti ties cash draws to about 10 project milestones, with payments that match the size of the expense. "When we're financing, you can look at it as we're always well ahead or well behind," he comments.
No products included: With the huge range of products available in the metro area and the percentage of their clients who enjoy shopping for product, "we let people go outside to buy product," says Ricciotti. Their contracts don't include tile, stone, appliances, plumbing or surface-mount lighting fixtures. Clients are responsible for product delivery; Custom Design's job warranty covers installation and fabrication only.
| Design agreement | $9,800 |
| Price of job | $475,000 |
| Change orders | $15,000–$20,000 |
| Budgeted gross profit | 45% |
| Actual gross profit | 43% |
Bill Simone , CGR, CAPS Custom Design & Construction
Location: Los Angeles
Type of company: Full-service design/build residential remodeling
Staff model: 5 full time, 1 part time
Sales history:
2003 $3,100,000
2004 $3,700,000
Annual jobs: 15–20
Software: American Contractor, AutoCAD, Chief Architect, Microsoft Office and Project
Contact: www.remodelwithus.com