Austin Construction Update
June 24, 2010 08:32 Filed in: Construction Law | Real Estate
At last, the Austin residential construction market is showing signs of life. But that means falling contractor profits.
I'm finally getting calls to review residential construction contracts again. I went almost a year with no such requests -- that tells you about the construction market since the mortgage bomb!
Most of the construction-related work I got last year was collections and disputes. I'm usually in the position of flogging a dead horse, since no one has anything to pay off a judgment. There are lots of vacant lots and half-built houses owned by the banks, and many appear to be in limbo. Banks aren't moving to foreclose since there's no hope of recovering more than about half the loan value. They appear to be waiting out the market. Meanwhile, the builders and developers technically still "own" these properties but have long since given up trying to do anything with them. In the best circumstances, these builders' firms are insolvent but the personal assets are still safe (that's a decent outcome from the builder's perspective, and it should remind everyone to form an LLC and don't sign personal guaranties on loans).
On the residential side, it's not realistic to expect a builder to agree to 10% contractual retainage. It's more realistic to expect retainage as a percentage of the builder's P&O (profit and overhead), or even just a percentage of the P.
I am aware, from discussions with contractors, that competitive bidding is highly advised for homeowners. Very good people have cut their prices to get good jobs. In the case of cost+ contracts (which I favor), it is possible to find good builders willing to take less than 15% for P&O. When I was actively building my projects, I NEVER took less than 25% to act as GC.
In sum, the market in Austin has done what you would expect: adjusted to conform to new realities. Homeowners, build on! Contractors, price it to sell!
Most of the construction-related work I got last year was collections and disputes. I'm usually in the position of flogging a dead horse, since no one has anything to pay off a judgment. There are lots of vacant lots and half-built houses owned by the banks, and many appear to be in limbo. Banks aren't moving to foreclose since there's no hope of recovering more than about half the loan value. They appear to be waiting out the market. Meanwhile, the builders and developers technically still "own" these properties but have long since given up trying to do anything with them. In the best circumstances, these builders' firms are insolvent but the personal assets are still safe (that's a decent outcome from the builder's perspective, and it should remind everyone to form an LLC and don't sign personal guaranties on loans).
On the residential side, it's not realistic to expect a builder to agree to 10% contractual retainage. It's more realistic to expect retainage as a percentage of the builder's P&O (profit and overhead), or even just a percentage of the P.
I am aware, from discussions with contractors, that competitive bidding is highly advised for homeowners. Very good people have cut their prices to get good jobs. In the case of cost+ contracts (which I favor), it is possible to find good builders willing to take less than 15% for P&O. When I was actively building my projects, I NEVER took less than 25% to act as GC.
In sum, the market in Austin has done what you would expect: adjusted to conform to new realities. Homeowners, build on! Contractors, price it to sell!