Value-added builder discovers welcome niche in down cycle
March 21, 2008 In a tough real estate market, it sounds almost too good to be true: a remodeling company fronts $25,000 to $35,000 to fix up a less-than-perfect home and the property’s selling price increases — all with no out-of-pocket expense for the home owner. When the house sells, the contractor recovers the initial investment and 50 percent of the proceeds in excess of the “as-is” price. The scenario is not a fairytale. In the Denver metro area, nearly 100 homes have been remodeled, upgraded, cosmetically enhanced and sold using the principle since 2004. And most have sold in a shorter time than the typical real estate listing, said Chris Hotz, co-founder of value-builders. “So far we haven’t had one deal where we and the homeowner didn’t make money,” he said. There are obviously caveats. Homeowners must move out of the property during the average 90-to 120-day remodel, and the cost of the remodel must be paid for at closing. “We have provisions in our contract that give us a secured position in the property until we are paid,” Hotz said. The contract also covers contingencies such as a homeowner deciding not to sell after all. “They may decide they like all the changes and don’t want to move,” Hotz said. “We make arrangements for that upfront.” value-builders has eight franchises in Denver and has just entered the Phoenix market. The next phase of the company’s expansion likely will be the Seattle area and the Pikes Peak region, Hotz said. “We considered going into Texas, but in some areas, the houses are just too inexpensive, which doesn’t give much upside potential,” he said. “In Colorado Springs you have plenty of properties worth less than two years ago. It’s a hard pill to swallow, but usually with a good remodel, we can get the homeowner more.” The concept is especially appealing during a down market, when home owners might be low on cash or home equity and when competition in the for-sale market is fierce. Shauna Naous, vice president of First Community Bank in Colorado Springs, supervised value-builders’ work when it remodeled two bank-owned houses in Denver. “One home was located in the old Stapleton neighborhood, probably priced in the $200s. They took a bleak-looking little home, brightened it up and turned it around,” she said. “Since the surrounding homes were in a gentrifying area, it was well worth it. We got a contract on it for $50,000 more than it would have brought without remodeling.” Naous said that since home values have dropped significantly and the market has become saturated, making it more difficult to sell distressed residential real estate, more banks should consider similar arrangements. Colorado Springs broker Michelle Blessing of ERA Shields Real Estate said she hadn’t heard about the company or the concept, but she was curious about how the business model might work. “I could definitely see a place for a business like that,” Blessing said. “Many homeowners I’m working with don’t have upfront money to remodel or to stage their house. If they don’t have the cash to get work done, they can take a big hit on the sales price.” However, Blessing expressed concerns about how properties are selected and what happens if a house doesn’t sell or if the owner is facing a short sale. So far that hasn’t been a problem, Hotz said. “We just wait until it does sell or is taken off the market,” he said. “If it’s a short sale or doesn’t close, for example, we just get paid for the work we’ve done — and no more.” Jack Weipking, a builder and past president of the Housing and Building Association of Colorado Springs, said his concern was that the remodeler was risking money upfront and would have to have access to a considerable line of credit. He also said that banks aren’t used to spending money to fix up unfinished or distressed houses. “They usually don’t want to mess with fixing it up, and are used to selling properties in ‘as is’ condition,” he said. “If an unhappy owner walks away and takes kitchen cabinets or removes a sink, it’s impossible to get an appraisal. As a result banks often look for cash buyers.” But he was impressed by value-builders’ success so far. “What’s appealing about it is the marketing aspect,” he said. “Instead of buying a yellow pages ad, waiting for the phone to ring and taking whatever job that comes along, you could actually market your service to home owners or Realtors and pick the jobs you wanted to do.” Becky.Hurley@csbj.com
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