For most remodelers, the offer of financing consists of matching up the customerwith a lender, whether that lender is a big finance company or a localbank. The remodeler makes no money on the deal, but also assumes no risk. Thepayoff is in the quality and volume of work they get, as well as in happiercustomers.
But some remodelers have chosen to bring their financing activities in-house. Thesecompanies have deep enough pockets — and strong enough nerves —toassume all the risks and rewards of financing by lending their own money to customers.
Being the Bank One such company is Custom Design & Construction (CDC) in West Los Angeles, Calif. Itsowners have built up a supply of capital that enables them tofinance projects. Randy Ricciott, CDC production manager, says that his staffmakes homeowners aware of the financing option during the initial conversation, andthat 50% to 60% of them opt to take it.
CDC doesn't technically fund projects itself. Instead, the owners have formeda separate legal entity, Custom Funding. According to Custom Funding's BillSimone, the main benefit to this legal distinction is the ability to defertaxes. When CDC sells a financing contract, Custom Funding purchases thecontract at a cost that just covers the cost of construction. On paper, CDCoperates at break-even. Job profit is included in the payments that CustomFunding collects over time, as borrowers repay their loans. That means itpays taxes on the profit only as it collects the money. “The ownersaren't paying any less tax,” Simone says, “they're just deferringit.”
Although the company will write loans based on a full 30-year amortization, itusually only carries loans for a year or two. It writes the note as a secondmortgage. In the past, homeowners typically went to the bank to refinance, rollingthe first and second mortgages into a single loan. So far, hehasn't seen this changing with rising interest rates. “Psychologically, peopledon't seem to like carrying first and second mortgages,” hesays.
One advantage for customers is that CDC can give homeowners what Ricciott calls “almostinstantaneous” pre-approval, and thus can quickly closedeals before the homeowner has second thoughts. The underwriting processis also quick. “We have the wherewithal to run credit checks withall the major credit bureaus. We do a property profile, including chain oftitle. And we use our real estate expertise to do our own appraisal. Becausewe know the value of the existing residence and the value of the work, wecan confidently predict whether, at the completion of project, the improvedreal estate will carry the value of the note.” Once CDC has all theinformation in hand, it can complete the underwriting in less than an hour.
Show Me the Money Because companies like CDC loan their own money and make their own loan decisions, theycan often loan more than a traditional lender would for a givenproject. “In-house financing not only gives us the opportunity to doprojects that we wouldn't have otherwise, but also allows us to deliver aproject that completes the homeowner's vision,” Ricciott says.
The core requirement is capital — and lots of it. Assuming that you willfinance 60% of your jobs, Simone advises having three to five times yourmonthly sales volume in cash on hand. In other words, if you sell, on average, $100,000 permonth in work, it would be good to have $500,000 inthe bank. “The average life of the loans we hold is in excessof 72 months, so it's a long time on the street. It takes that much capitalto continue to sell jobs before those things pay off,” he says.
Like any smart lender, Simone advises not financing any more than the equityin the house will carry. If there is little or no equity in the house, however, andthe homeowners have high incomes and great credit, he may financethe job profit. On a $200,000 job where costs are $120,000, hewill ask for a $120,000 down and finance the rest.
