Home Quality In The Wave Of Small-Scale Developers

The other day, I found myself at a private apartment complex watching NFL Football at the pool bar (why is a whole other story). During the game, I met a guy named Joe (that really was his name). Joe was staying in the apartment complex for six months while his 5-year-old, new construction, $2M+ home was being re-renovated and structurally repaired.

His boutique builder finished on the cheap, slapped some siding over what should have been water sealed, and a few years later mold was spreading onto the sheetrock.

In managing tens of thousands of real estate transactions, I’ve heard this type of story and situation a lot. It even happened to me in my 20s after buying a new construction home in the city. I had a night I’ll never forget, emptying buckets of water every 45 minutes from my guest bedroom while it poured rain. It took me 2+ years to learn about balloon frames and water runoff to realize that my house had a design flaw and couldn’t be fixed without major rebuilding.

Often it’s water related, always it’s a result of the quality and care of the builder.

The Changing Tides

The current wave of economic and real estate growth has – more than I’ve ever seen before – spawned an explosion in small scale real estate scouting, trading, and development.

Wholesalers have sprouted like a chia pet.

In prior cycles, real estate development was an industry that looked like most others: a few huge players at the top that were responsible for most of the production and a long tail of small businesses.

In the 1980s and ‘90s, a lot of residential development took place in the suburbs. Suburban subdivisions tend to be larger: 5, 10, 25+ homes. Land development, storm water, sewer, utilities and infrastructure are expensive so those projects are usually larger and more capital intensive.

Now, the action is in cities. Infrastructure is already there and redevelopment or rehab is a lot of the volume. Anyone can buy a single lot or house and develop something new in its place. There are way more small players in this market and the trend of industry roll-up has reversed.

And anyone is doing it. Everyone is doing it. If you’ve purchased a new construction or rehabbed home in a city like Philadelphia, Baltimore or Nashville in the past five years, chances are your developer sells less than one hundred homes a year. There’s a good chance he or she sells less than ten homes a year.

You Get What You Pay For

I’m not saying homes built by big developers don’t also have problems. And I’m not saying all small developers do.

Quality of workmanship in building trades is not a commodity. A great electrician who really knows what he/she is doing and takes time and care to do things properly is a world away from an electrician who doesn’t. When you flip the switch and the lights go on, you can’t tell the difference. Same with plumbing, carpentry, roofing, design, and just about everything else.

The difference is that the Pulte’s and D.R. Horton’s of the world have a brand to protect and you have recourse if something goes wrong. Infrastructure for training and management is bigger. The odds are a bit more in your favor.

Remember that movie ‘The Money Pit?’ Dream houses aren’t that far away from becoming nightmares.

The fact is that these days, builders are busy and you tend to get what you pay for in general.

Lesson Learned

If I were buying a home from a developer again, I’d do a ton of homework on the developer and builder. I’d also do multiple inspections with an engineer and trade experts as the house is being built, walls still open. If you do your research and your home’s builders measure twice and cut once, you won’t be in for a surprise a few years down the road.

Don’t let me scare you too much, most of the time there aren’t major problems. Wouldn’t you rather avoid learning those lessons the hard way though?

The forecast says this tide of small-scale developers isn’t going away in the foreseeable future. There are a lot of positives that have washed up with it, but there are new – and avoidable – risks. All you have to do is follow that age-old adage: Be prepared.