Your Builder’s Business Model Matters
Your Builder's Business Model Matters
Selecting the right builder is extremely important. There are far too many stories where the decision to go with one builder over another was based on the wrong factors, and the building experience was less than desirable. We have actually ‘rescued’ a number of families from these situations. These stories are not meant to create fear, but to convey the importance of selecting the right builder for you. When selecting your builder, we believe there are five main areas for consideration. We suggest rating each of these five areas from 1-10, for each builder you are considering, in order to help you select the right builder for you. This article will address the first two of these categories, the experience, and longevity of the business and the business acumen.
1. Experience & Longevity
When you are considering building a custom home, we cannot devote enough time or words to the importance of the builder’s experience and longevity in business and in the construction industry. The home building industry, much like the real estate market, has seen its fair share of ups and downs. In 2008 alone, it is estimated that nearly half of the home builders or contractors in business in Maryland went out of business. Unfortunately, many of these builders went out of business with the bank or their clients’ money.
The number of years your builder has been in business is a testament in and of itself. It shows that they have weathered a variety of market conditions and understand how to start, run, and maintain a business. Experience also provides the best classroom for typical building challenges. An experienced builder will learn something from every home built. That kind of experience is immeasurable.
Technical skills are required to oversee handcrafted construction processes, materials, and methods, specifically for complex and luxury homes. Timelines and schedules will quickly fall behind if the builder is not adept at coordinating long-lead-time special orders, incorporating special one-of-a-kind pieces, and incorporating these considerations into the overall timeline. Not every builder has these skills and resources or understands the complexities involved in scheduling a custom home build.
Since the market is cyclical, there are a variety of vendor, supplier, and trade issues that impact the home building industry. A builder with longevity has typically established reliable partnerships that can withstand market fluctuations. In addition, they will likely be up to speed on local, national, and global supply issues that may impact the pricing or availability of certain materials. These issues can also impact whether or not your home can be built on the schedule required and for the budget allocated.
Some builders have a good understanding of how to run a business but do not possess the experience or technical know-how and vice-versa. This can often manifest itself in projects that are not executed effectively. The quality of a home’s construction can be impacted by these deficiencies. Projects may also be over budget, delayed, and eventually have significant cost-overruns. Either way, an experienced builder will possess both the technical know-how as well as the business insight to successfully complete a custom home project.
The experience and longevity of the builder are also good indicators of their business know-how.
2. The B-Myth (Business Acumen)
The business acumen of your builder directly correlates to your overall home building experience. Why? Perhaps you’ve heard of Michael Gerber, a best-selling author who wrote the world-renowned book entitled “The e-Myth”. The book is a must-read for entrepreneurs or start-ups because it describes, in detail, the three essential components a business needs to survive and the mistakes and pitfalls that must be avoided for every successful growing business. In the construction industry, it’s very common for builders to enter the construction industry with common misconceptions about what it takes to actually run the business. We refer to builders without a strong business acumen as the B-Myth.
The B-myth is a relatively easy business model to spot. Typically, a carpenter or foreman decides to start up their own building or construction company with no skills or knowledge about how to actually run a successful business. Everybody’s got to start somewhere right? But, perhaps you’d prefer they learn on someone else’s home?
There are many clues as to a builder that is operating under the B-Myth. They likely have no administrative or support personnel, taking care of the necessary paperwork required to run a successful business. They may not possess the critical ability to manage cash flow, accounts payables, and long-term business planning strategies.
The consequences of this lack of experience can have a big impact on your project. They may be behind in their Accounts Payables to vendors, suppliers, and sub-contractors. They may not understand the importance or have the capability, to segregate funds by projects. This is an important detail that can lead to many other problems because homeowner’s funds are co-mingled and one project’s surplus is helping to sustain the next one. They may only have enough cash flow for one project at a time, which can cause delays with the resources needed to run two or more simultaneous projects. This can create a domino scenario where supplies are late, sub-contractors aren’t showing up, and suppliers won’t ship products because they are owed money.
The builder operating under the B-Myth is a very risky situation for the prospective homeowner. Unfortunately, we have witnessed first-hand the consequences when this model fails. In one such case, the builder did not have the business experience and processes to properly maintain the business. So, while the home was under construction, the builder went out of business. The home was half-way built, with significant draws already made on the construction loan, and insufficient funds to complete the home.
This is not to say that start-ups don’t have the capabilities to build a luxury home, but as a homeowner, you will want to carefully evaluate the level of business acumen your builder possesses to ensure that your investment is secure.
It is also important to note that a builder’s business model is very different than a remodeler’s business model. All of the processes and financial aspects of a custom home build are vastly different than a remodeling project approach. We strongly suggest that you only consider builders who have a strong business acumen for the entire custom home building approach.
If you are thinking about building your once-in-a-lifetime custom luxury home, be sure to download our FREE ebook: “Designing & Building Your Custom Dream Home: How to Create an Experience You’ll Love to Remember” or visit our website at MuellerHomes.com
Ready to get started? Contact Mueller Homes today, and let’s talk!