INSIDE REAL ESTATE: Tug-of-war between builders and subs produces price pressure
Alaska requires homebuilders to have a general contractor’s license plus a residential endorsement. They are also required to be licensed, bonded and insured.
However, a new homebuyer isn’t likely to find one of them wearing a carpenter’s belt and working on the job site. According a study by the National Association of Home Builders, it takes 22 subcontractors to build the average home.
Those particular jobs include carpet installation, HVAC, electrical wiring, plumbing, technology (Cat 5 wiring, etc.), foundations, drywall, masonry work, concrete flatwork, roofing, kitchen countertops, ceramic tiles, insulation, painting and sheetrock, kitchen cabinets, exterior doors and windows, framing. exterior siding and finished carpentry.
Additional subcontractors may also include security system providers, landscapers and fencing subcontractors. Alaskan homebuilders do not generally like to include landscaping and fences in the price of a new home due to the required one-year warranty on new homes.
So what role does the homebuilder play if the subcontractors build 70 percent to 77 percent of the home? Generally speaking, they’re the risk takers and managers.
Whether they are a lone homebuilder with a pick-up truck and a cell phone or an organization with managers, accountants, estimators, receptionists, field superintendents, et cetera, they assume the financial risk for one house or 100.
The homebuilder decides when, where and what to build. They take the risk that the house being built will fulfill a homebuyer’s dream. In most cases, they must personally sign and guarantee any indebtedness to the lending institution for their commercial line of credit.
They invest capital, either upfront or on the backend, to build and complete the home because lenders require equity injections. They buy builder’s risk insurance during construction and guarantee title when the home transfers to the buyer.
All this adds up to the cost of the new home along with the builder’s potential profit. When I ask real estate professionals what they think a builder’s profit margin is most will say 20 percent.
In reality, that profit margin is more like 6 percent to 7 percent according to national reports and may be even less in Alaska where every item of a new home must be imported from the Lower 48.
As an example of how a new home with all its imported parts actually gets priced out and completed, let’s follow the trail of a fancy kitchen faucet.
In Alaska, we have plumbing wholesalers with show rooms where a buyer shops for fixtures. However, the wholesaler will not give you a price for the faucet. Imagine the frustration when shopping for a new pair of shoes without a price tag!
Instead, the wholesaler gives a price to the plumber selected for the job by the homebuilder and the plumber in turn gives his price to the homebuilder who turns around and gives the final price to the homebuyer.
Along the way, the wholesaler has his import mark-up, the plumber has his mark-up and the homebuilder is left to explain to his buyer why that faucet costs so much more than the one he/she can buy from Amazon Prime or Lowe’s. All these third party transactions leaves a buyer confused and upset and leaves the builder no choice but to waive any final mark-up for overhead and profit.
Subcontractors are in short supply in Alaska and their mark-ups reflect that lack of competition. Ultimately, however, they may find themselves at odds with their customers (builders) and be forced to reconcile their pricing structure more in keeping with today’s economic climate.