Tuesday, February 13, 2007

A Builder's Lessons of Experience

A Builder’s Lessons of Experience

Ralph Miriello

President, Ramhart Construction Inc.

ramhart@yahoo.com ; www.ramhart.com

No More Affordable Housing?

As a long established builder in lower Fairfield County, CT. I have seen the market make its way through dramatic changes and alterations over the years. This article deals

with the present iteration of the housing market in the County as a matter of concern to buyers, fellow builders and real estate interests in general.

In the last several years I have expanded my repertoire from commercial builder, working predominantly with real estate developers, to including high-end residential homes. In making this transition, my goal was to bring to this field the urgency of completion that earmarks commercial projects, while still maintaining high quality that is to be expected in the stratospheric pricing of higher end residential construction. What I have found is that “high quality residential construction” is often a misnomer used to describe oversized, poorly conceived, shoddily executed, structures that use size and gingerbread finishes justifying the very high prices they command. The truth of the matter is that the high cost of new residential construction is driven first and foremost by the extremely high cost of the land upon which it is built. Lower Fairfield County, in recent years, has commanded land prices that often defy the imagination. Housing prices have escalated to the point where affordable options scarcely exist in this part of CT.

Land cost formula

The matter is largely determined by a formula as simple as basic grade school arithmetic. Builders commonly use a simple formula to determine whether a piece of land or an older home is the potential location for a remunerative housing project. In the past, the rule of thumb was that you paid one quarter of the price you could reasonably expect to get for the new completed building. You would then figure the cost of the design, construction, carrying costs, marketing costs and sales commission and there should be a comfortable profit margin for the investor. The profit would be sufficient to a) remunerate the capital on a competitive basis with other market oriented investment possibilities but also b) cover the risk that the final sales price would be lower or sell lower than projections. In a slower than forecast market, the cost of carrying the still unsold property may be very substantial. In addition, there are other carrying costs like, maintenance, heating fuel, landscaping, taxes and marketing that all erode the potential bottom line. There is an element of speculation in this as in any investment where the outcome stems from the uncertainty of future events.

For many years this worked pretty successfully and builders were able to provide good homes for many families and make a good living for themselves. Naturally, there were always those builders that would use inferior materials or unqualified labor and produce an inferior product. The notorious caveat emptor was never far from anyone’s mind. But in general the property owner made a reasonable return on their property, the builder made a reasonable return on his efforts, risk and capital, the banks made their interest on the builder’s loan and the ultimate consumer received a reasonable product for the money he was willing to spend. Everyone was a winner.

Home, sweet home.

The process was based on the premise that a house was a home and only secondarily and investment. People were motivated to buy because of the location, the schools, the community, the proximity to transportation, and other factors unrelated to the perceived appreciation that they could see from their investment in a short time. To be sure those very considerations would be factors in the ultimate appreciation of any prospective purchase, but the “quality of life issues” were the overriding decision making factors.

Real estate as investment opportunity! Tipping the balance.

When Real Estate and particularly residential real estate started to take off in the late nineties as an alternative to other investments, the balance shifted dramatically. Each year people were seeing large percentage increases in the price of the properties. More and more people entered the real estate market and started to use it as a speculative substitute for the recently busted stock market. Increasingly, easy liquidity and generous lending guidelines made entry into this market easier for unqualified and opportunistic people. While builders were always speculating in the real estate market as part of their normal course of business, the new fever for all things Real Estate brought a huge influx of “investor builders”, flippers (speculators who would never occupy a property but were simply banking on the increase in price from what they paid), and other organizations that looked at real estate as simply another venue to make fast money, no different than pork bellies, oil futures or hedge funds. This influx tipped the balance of the business away from an equitable arrangement where all parties were reasonably satisfied to a pursuit of the quick return with no real consideration for anything that did not value add to the bottom line. Financial considerations overpowered architectural, engineering and building technology considerations. This resulted in the buyer’s interest, a good product, being subrogated in favor of the investors’ cash flow.

No wonder, this fueled an even more accelerated increase in the price of residential real estate and sought after communities were experiencing double digit appreciation on an annual basis! Older homes that once graced streets of many towns were being torn down for their land value. In some case unprotected history was bulldozed to make way for cookie cutter “McMansions”, a legacy I as a builder dread. For older residents it became their source of an unexpected windfall to pre retirement, but for most of us it is stratifying the affordability of our neighborhoods.

Builders found themselves in competition with speculators and investors for properties Prices escalated as supply was being squeezed by demand. What happened to the time-honored formula? Land prices were now accounting for a third or more of the eventual sales price of the home and traditional profit margins for builders were being harshly squeezed. Escalating land prices meant escalating home prices. In order to justify the higher entry price builders were forced to offer more square footage and more amenities. Homes were now growing by leaps and bounds 4000 square foot homes gave way to 5000, 6000, 7000 even 10,000 square foot behemoths. While there are many stately homes of this size that we admire for their true beauty, size and quality, they are few and far between.

It became standard issue for interior finishes to become laden with multiple piece crown moldings in every room, granite countertops were de rigueur, professional ranges that were normally found in restaurants became the standard for cavernous kitchens despite the fact that many people purchasing these homes didn’t have the time or inclination to cook, except for the occasional holiday gathering. Expansive lawns, Zen Ponds, wine cellars, home theaters and the requisite weekly lawn maintenance crew became the norm. With this flurry of justification for pricing came higher building costs and the cycle started to feed onto itself. Costs per square foot soared and quality-building techniques that didn’t necessarily show to the untrained eye were taking a back seat to the glossy finishes and excess space in respect to what most people really need.

The end result is an inferior, albeit larger product that has copious amounts of room, moldings, and gimmickry in lieu of energy efficiency, well thought out design and superior execution. Then again caveat emptor!

An attempt at sanity.

What was a builder with a conscience to do? Having once plied my skills as a building manager for a major oil company’s corporate headquarters in NYC, and being mandated to squeeze every possible operating efficiency from a 2,000,000 square foot skyscraper, I felt that the trend to bigger was not necessarily better. I also felt that as the home prices in the County escalated into the millions, the buyers represented a more sophisticated breed of consumer. I assumed that at this income level, the consumer would be able to evaluate the differences between more serious metrics of comparison other than acreage, superfluous building square footage or amenities that were merely appendages to the basic structure that would be their new home. This consumer would surely be environmentally as well as economically sensitive to the excess use of energy in his own dwelling. This consumer who would rather have a state of the art boiler and HVAC system that operates at maximum efficiency throughout the year than be wowed by a four piece molding in his master bedroom. This consumer would be savvy enough to know

that a soaring foyer while impressive in its grandeur robs precious energy and serves no reason than to conspicuously announce “I have arrived” to visiting guests.

With this in mind I attempted to separate my product from the crowded field of look-a-like colonials. I worked on creating a building envelope that is 20- 30% more efficient than standard building practices demand and will continue to pay back the consumer throughout the duration of its life cycle. A building that incorporates good building placement as well as sensitivity to ancient principles like feng shui, all of which add to the overall function and harmony of the house as a home.

Feng shui and harmony in design

I started to incorporate green building techniques into my residential projects. I began by consulting with a feng shui expert to advise on placement of the house on the site. This fascinating and ancient eastern practice was first used in the construction of temples, royal palaces and later churches to ensure proper placement of the edifice in relationship to its geographical position as well as its neighboring surrounds. It incorporates good architectural practices of using sun light to maximum efficiency and making sure land features such as water and landscaping function in harmony with the proposed home. These techniques have been assimilated by classical architectural training and to some extent been westernized, but the principles remain valid today.

Energy efficiency, comfort and stability.

The architecture should be dictated by both aesthetic concerns, property considerations and current trends in taste for a given area and a given price point. In one version we used a stone and shingle house incorporating natural materials wherever possible, but also with an eye to using as many renewable resources as could be reasonably purchased. The use of wood roofs and cedar shingled siding, which can be purchased from a regulated growth manufacturer was encouraged. The stone veneer can come from local quarries. We incorporate windows and French doors with a low E glazing, low air infiltration ratings and construct the house with 2 x 6 framing members for added insulation space and structural strength. The exterior envelope is sprayed with iso “comfort” foam that creates a seal that foils most air infiltration while adding an R7 to the envelope. In addition, batt fiberglass insulation is added to the exterior cavity walls to bring the exterior rating to R26. We generally build a complete concrete foundation and seal it with an elastomeric waterproofing membrane and a 1” rigid foam drainage board. This serves the dual purpose of insulating the basement walls as well as creating a path for ground water to easily reach the footing drains, keeping all basement walls warm and dry.

On some projects we incorporate a radiant heating system below the basement concrete floor which efficiently ensures a comfort in the lower level that normally cannot achieved in any other way. Care is taken during the excavating process to prepare a porous base below the foundation slab. Adequate and positive drainage of the area from any possible ground water prevents possible build up of under ground water and ensures that the lower level space is never uncomfortably damp or wet.

A state of the art hot water boiler and burner set up is generally used; it is fired by natural gas, if available, or by fuel oil. A sophisticated outside air sensing control system that modulates boiler temperature need with the outside air temperature is another feature that we try to incorporate in our designs. The building uses structural steel, laminated beams and engineered lumber and joist systems to create a solid squeak-free structure that is less likely to shrink than normal dimensional lumber construction.

Quality not quantity.

Good architectural design can offer generous rooms with a spacious feel and great flow for ease of daily operation and enjoyment in a compact floor plan. Additional square footage can usually be recovered from walk out semi finished lower levels if the planning is done ahead of time. While these considerations do not necessarily make for a small house, they can be used effectively to create a design far smaller than some of the houses presently being marketed, using pure volume of space as a metric to justify the current pricing.

Time for a change. Learning a new metric.

I believe that if enough thought and care was brought to the table, the market would be able to discern the differences in real value prevail even when everything else around has changed. The real estate community has been using the same metrics for cost comparing houses for more than half a century. Would you say it is time to change?

Most Real Estate agents as well as buyers and even bank appraisers are still largely using outdated model to compare buildings. We all are aware that when looking at a home we use comparative sales to determine if we are asked to pay a price that is “in line”-- too low or too high to similar properties’ prices. Often, that is the tool used to determine the value of a home. The problem is that while all builders are presumed to build to a minimum standard, as gauged by passing various building department code requirements, all homes are not at all equally well conceived, designed, or constructed. Since the differences are sometimes difficult for even trained building officials to ascertain (and it is certainly not their mandate) it is even more difficult for the average agent or buyer to understand or perceive.

As an unfortunate consequence, we fall back on measuring the value of something that will have to serve us for well over our life time simply on two formal elements: the square footage of the building and the acreage of the lot. Can we really afford to do that?

Careful planning, selected orientation of the building to the site, proper drainage and grading, energy efficiency as measured by Energy Star and the more stringent LEED certification ratings, attention to detail, use of renewable resources, all would get lost if agents and buyers would ultimately rely on old guideline. Education on quality factors of the places where we live is useful to the private individual as well as of interest to the public and to the real estate sales community. A bigger house is not necessarily a better house. The choice requires a selective appreciation of many other factors than the current price of “apparently” similar dwellings or the yardstick.

Marketing, Staging and standing out from the crowd.


An important key to success in selling your product is marketing. As the plethora of new homes on the market has increased, potential buyers have found the choices to be overwhelming. What distinguishes one large empty colonial from every other one on the market? This dilemma has been exacerbated recently as the backlog of unsold homes increases. With so many choices, buyers find themselves going from home to home in search of the best deal. Often, after a day of multiple visits, they come home unable to remember the differences from one house to another. What can you do to separate yourself in the buyers mind. The use of staging the home with furniture and other furnishings done in a professional and tasteful manner can be the difference between a sale and another month on the market. It becomes painfully apparent that most buyers cannot envision what a house will look like furnished. Many question the size of rooms and cannot determine how the house will fit their specific needs. Large tract builders have for many years seen the value of lavishly furnishing a model home so that potential buyers could better envision themselves in one of their homes. It now appears that single homes could benefit from this approach. Professional home stagers are ready willing and able to design, furnish and rent to builders a completely or partially staged home for several months at a time. The idea is to distinguish your product from all the other empty boxes that potential buyers see in their searches. What is more appealing an empty house or a furnished one where your client can potentially sit down and see themselves living there ? From my initial exposure to these relatively new and growing phenomena , I believe it increases the potential for a sale of the property. This is somewhat counterintuitive to one who hopes that the buying public would be more interested in substance than gloss, but it does support the current trend in how people buy houses and so it should not be downplayed or ignored.

After all is said and done, we as builders must find a happy medium in which to create and sell our products so that we can produce intelligent and worthy homes , still catering to what the public demands, while at the same time educating and perhaps influencing the future trends in an environmentally sound and conscientious way.

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