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Residential construction is the business of building and selling individual and multi-family dewellings. The market fragments into single-unit, manufactured, duplex, quad-plex, and apartments and condominiums. Manufactured housing further divides into mobile homes and pre-built houses. The business varies primarily in the size and scale of the operations. In the simplist form, a builder buys a peice of land, develops the land by clearing and grading it, and constructing roads, sidewalks, drainage, waste removal, electrical and water supplies. Then the builder offers to build either custom homes or pre-designed homes, or pre-manufactured homes, depending on the market he is attempting to serve. In certain instance the builder may build one or more homes on speculation or “spec” meaning that he builds the home without having a ready buyer on the hope that once the house is built, a buyer will appear.
The Residential Construction Environment
Each builder has to run something like a factory where the flow of product is fairly steady. Translated into builder’s terms this means that the builder needs a ready supply of developed land, a pool of ready and available skilled and semi-skilled laborers, reliable suppliers who provide materials at competitive prices, working capital to cover labor, supply, and living expenses while the homes are under construction, and an approach to marketing his products. The more successful builders are able to keep at least one construction crew busy on a continuous basis. This means that at any given time three to six homes will be under construction. That way the foundation, framing, plumbing, wiring, HVAC, drywalling, cabinet making, trim carpentry, brick laying, painting, and cleaning crews can simply move from one house to the next. Builders who are unable to keep a complete collection of crews busy are forced to spend time trying to coordinate and schedule notoriously unreliable independent crews. Inevitably delays ensue either causing costs to creep up as a result of overtime, or overall delay of project completion.
Financing can also be a serious stumbling block. The housing industry is extremely cyclical. As a result,interest rates fluxuate, but so do lender’s willingness to provide the interim financing a builder needs to stay in business. The ability to be realistic and forecast trends in interest rates and housing demand is a crucial skill if the builder is to avoid being stuck with a growing inventory of completed homes and consequential pressures from the bank.
Some builders gain flexibilty by building custom homes where the margins are greater. In this market, a few days delay, or a few cost overruns do not usually result in the builder taking a loss. Others gain flexibily by using uncommon materials and components. Sometimes these can result in higher costs but produce savings over time for the homeowner as in the case of better than normal installation. Or using new, lighter construction materials for roadways, for example.
Other builders move into remodeling and/or medical accomdation construction in periods of slackning demand.
Overlaying all of this are building codes established by towns, cities, and counties. Typically building inspections are fully paid for by the builder in permit fees that can run 3 to 4 percent of the price of the home. Inspectors seem to have thier own timetables on getting out to approve sites so success often depends on building good relationshiops with the inspectors or developing political influence.
Keys to Success
Successful builders are those who can keep a steady stream of residences under construction. This allows for more predictability in the quality and availability of the needed labor. It also means that discounts can be obtained from suppliers who learn that they can count on a certain volume of business. Similarly, banks and lending institutions enjoy working with builders who are predictable in making their payments. As a result they are more willing to extend credit when it is needed. And successful builders build delays into their plans and schedules. They don’t know if sickness or the weather will cause the delays but for sure something almost always does. Those who do it well also manage the expectations of their custoemrs. setting unrealistic expectations for completion can result in some very unpleasant consequences for buyer and builder alike. Quality is another key to success that should not be overlooked. Those who do it right the first time don’t have to take money out of their profits to make things right. Maybe, in the final analysis, the residential home builder is the great communicator: needing to keep everyone up-to-date on the project status including, workers, sub-contractors, customers, banks, and building inspectors.