By Jerry Deschane
I recently wrapped up a series of interviews with successful homebuilders around Wisconsin as research for a book on the business of building.
The book will target new builders, and I’m writing it because there is a general feeling in the industry that new builders are, as a group, generally good craftspeople but lousy businesspeople.
Along with a lot of wisdom from this panel of distinguished free-market capitalists, there emerged a rather surprising opinion from a few: It’s too easy to get into the building business. Somehow, whether by government action or market forces, it should be harder for people to start a business in this industry.
For speaking such heresy, I’ve probably just lost my spot on several conservative cocktail party circuits, and my picture of Ronald Reagan just fell off the wall. I understand the argument: In order for a free-market economy to function, it has to welcome new entrepreneurs and let them rise or fall based on their skills and hard work. The fewer artificial barriers, the better.
No one questions that the homebuilding industry brings in its share of startups.
According to the Ewing Marion Kauffman Foundation, in 2011 a homebuilding or remodeling company was the No. 1 new business startup in the country. One of the reasons housing leads the country out of recessions is that it always has been a flexible and resilient industry that reacts quickly when economic winds change direction.
But there’s a dark side to those statistics.
There are many housing startups, and you had better believe there are a lot of failures. Dun & Bradstreet reported that in 2012, homebuilding businesses had the second-highest failure rate among all new businesses, with one in eight new builders going out of business every year.
If a coffee shop closes, it’s an inconvenience. When a homebuilding company goes broke, it can take down homeowners in the form of unfinished houses or liens for unpaid bills from suppliers.
Most of the successful builders I know are eager to help new entrants to the industry. In part, it’s because of their generous natures and the interconnectedness of an industry where as often as not, you learned the business from someone who’s now a competitor or a supplier.
The other reason for that willingness to help, though, is self-preservation. Builders want newbies to learn how to run their businesses properly because that includes not ignorantly bidding a house below the cost of your own labor or overhead.
In our bargain-seeking culture, customers still flock to a deal that’s too good to be true, even when it’s their own house and life savings on the line. Reputable builders suffer at the hands of new builders who don’t know any better.
So, should homebuilding require a master’s in business and a $1 million performance bond? No.
The craft of homebuilding still is best learned in the field, and the men and women who are drawn to that craft typically are not interested in spending six years behind ivy-covered academic walls. But there is undoubtedly a place for some practical business knowledge and business training.
The message needs to be shared with new builders that there’s more to the business of building than swinging a hammer.