Red Tape Rising
Remodelers will have more regulation issues to deal with in the coming year. Here are four that are certain to attract their fair share of attention. Sub vs. Employee
Many companies that laid off employees during the recession are reluctant to start rehiring. Instead, they are subcontracting labor as they need it. That may make sense in the short run, but many states are making it more difficult for contractors to prove that independent contractors are not employees. “The growth of so-called ‘anti-1099 labor’ legislation will continue well into 2012,” says D.S. Berenson, Washington, D.C., managing partner of Johanson Berenson LLP. “We now have such laws targeting the remodeling industry in 16 states, and the trend will continue.”
Contractors currently flying under the radar are taking a big risk. Negligent noncompliance can result in stiff fines, and intentional violation may bring criminal penalties. And if the Internal Revenue Service reclassifies a sub as an employee, the negligent business will pay not only fines but all back payroll taxes plus any accumulated interest.
More 1099s?
The 2010 health reform law contains a new requirement for filing form 1099, which contractors are currently required to issue to companies paid more than $600 in a given year. The new provision removes two exemptions: beginning Jan. 1, 2012, payments to a corporation must be included, as well as money spent to purchase merchandise. “The good news,” Berenson says, “is that … there is strong support for repealing … the so-called ‘form 1099 headache.’” However, because the new requirement is expected to raise tax revenue from underreported business income, it is conceivable that states looking to replenish depleted budgets may introduce similar legislation at the local level.
$511: Value of one year’s energy savings for an average home that is 30% more energy efficient (accounts for loan payment to pay for energy improvements) Source: ACEEE.org
New Energy Code
In October 2010, state and local code officials adopted the 2012 International Energy Conservation Code (IECC), the national energy code that serves as the model for more than 80% of state and local building codes. Also known as the “30% solution” because of the energy savings it is expected to achieve versus the 2006 code, the new code introduces measures to improve air tightness; increase window and skylight efficiency; boost insulation levels; improve lighting efficiency; and reduce energy losses from hot water storage and piping and from HVAC equipment and ducts. Building officials also voted to replace the International Residential Code’s energy chapter with the IECC, according to the Institute for Market Transformation.
For more information, check the website of the American Council for an Energy-Efficient Economy, which includes an interactive map showing state energy efficiency policy.
Whistle-Blowing
Although remodelers constantly complain about fly-by-night contractors and an underground remodeling economy, most are reluctant to report competitors who work without permits or the required licensing and insurance. Though there is no legal reason not to report these kinds of violations, “the concept is distasteful to everyone,” Berenson says. “But the world is changing, and many contractors are running so far under the radar, ignoring many laws and regulations that everyone else has to deal with, that the playing field is unfairly tilted away from the legitimate contractor to a degree we have not seen before.”
PAY PALS
It has always been challenging to run a remodeling company. But the new challenge is helping fence-sitters and those with little liquidity make a decision and find creative ways to fund their remodeling projects. Pay as You Go
Remodelers who relied on clients borrowing have not only had to bone up on other options but have also had to change their business strategies. The future calls for making connections with bankers, mortgage lenders, and real estate agents and educating yourself and your staff about the various financial products available, including things like 203(k) loans, reverse mortgages, revolving credit, and The Energy Loan (see “Cashing In,” for more about financing options.)
To be successful, you must have your own house in order since many project-funding options require you to float job costs. “You need to have a healthy cash flow balance sheet,” says Dino Andreakos, whose Bullfrog Builders, in Queens, N.Y., has developed a niche doing 203(k) loan-funded projects; the smallest one for this year is $240,000. “You’re always laying out money until you hit your profit margins,” Andreakos says.
Cashing In
Long a funding source for residential remodels, cash-out refinances reached their lowest level since analysis began in 1985. By contrast, cash-in refinances, in which homeowners paid down their mortgage, reached record highs twice during the last 12 months.
Bullfrog Builders offers several financing options and has two full-time people devoted to financing who understand the products and process, educate the company’s salespeople, and review homeowners’ credit histories.
Bullfrog’s salespeople use a Microsoft PowerPoint presentation to discuss financing at the first client meeting. “We offer it the same way the clerk at the register at Macy’s asks if you want to open a Macy’s card. It’s part of the process,” Andreakos says.
Funding Fit
As funding slowly loosens up, it will help to know what options you can offer your clients.
Credit card: Though convenient, especially for small repairs, Kathy Shertzer, office manager and gatekeeper at DuKate Fine Remodeling, in Franklin, Ind., warns remodelers to be wary. Fees tied to mileage and other perks add up fast. “When we reviewed our overhead, it was easy to see we didn’t need to be accepting credit cards,” Shertzer says.
Unsecured/revolving credit: Offered by GE Money and Wells Fargo, this type of financing has been widely used by replacement contractors for amounts up to $25,000. In exchange for fees for administration and promotion, qualified contractors can offer 24-month no-interest loans and other options. The lender vets the consumer’s credit and pays the contractor at project completion.
Construction loan: Consumers typically need credit scores of 720 to 750 to qualify for a loan that replaces the existing mortgage, covering up to 80% of the estimated post-construction property value. The lender requires plans, specs, and a construction budget, and parcels out payments to the contractor based on a completion schedule.
Second mortgage: While a traditional second mortgage is based on current property value, a “home improvement second mortgage” bases the loan amount on the value of the home after the work has been done. Paid in a lump sum, the loan becomes a second lien on the property.
Home equity loan: This is a one-time loan borrowed against the equity that consumers have in their home. A Home Equity Line of Credit (HELOC) is a revolving line of credit with an adjustable interest rate. It’s more difficult to get lines of credit now because of the recent drop in home values in many markets.
203(k) rehab loan: Backed by the Federal Housing Administration, this loan goes toward the cost of purchasing (or refinancing) and remodeling an existing home. The loan amount is tied to the value of the property after renovation and the loan-to-value ratio, traditionally 80%, may go as high as 110%. Although luxury products are not covered, many types of improvements qualify.
The consumer must hire a certified consultant, chosen from an official list, to check the contractor’s work. The contractor is paid in several draws tied to progress. Although remodelers have complained about slow payment, payment always comes.
Reverse mortgage: Available to homeowners age 62 and older, this FHA-backed mortgage makes payments to the homeowner, and the loan amount is added to a property lien. The loan is repaid from proceeds on the sale of the home when the homeowner dies or sells or leaves the property.
Andreakos, of Bullfrog Builders, has worked with clients using this type of financing and cautions that “It’s a tough pitch. You know, the owners have to talk to the whole family.”
The Energy Loan: This unsecured installment-based loan from Fannie Mae ranges from $2,500 to $20,000. Many projects are eligible, provided at least $1,000 worth of work is for energy improvements.
Fannie Mae–approved contractors send homeowner applications to one of three approved lenders — ViewTech Financials (Calif.), AMC First (Pa.), and WECC (Wis.) — to get underwriting approval. When the customer signs a completion certificate, the lender pays the contractor. Lenders are paid fixed transaction fees by Fannie Mae, not by the contractor.
Energy Improvement Mortgage: A type of energy-efficient mortgage, an Energy Improvement Mortgage (EIM) is used to include the cost of energy improvements in the mortgage for an existing home without increasing the down payment.
The additional amount is based on a home energy rating that ties the value of the energy-efficiency measures to estimated monthly energy savings. EIMs are offered by federally insured FHA and Veterans Affairs programs. (Click here for more information.)