In December 2010, while working on Builder’s 2012 State of the Industry report, Ted Cushman spoke on the phone with Mike and Abbie Andersen, a husband and wife team who own and run Andersen Homes in Gig Harbor, Washington.
Ted first interviewed Abbie Andersen back in the fall of 2008, after she filled out the 2009 State of the Industry online survey. This year, we wanted to hear how things have been going for the Andersens since then. What follows is a largely unedited transcript of that interview — this time, with husband Mike on the line too.
Ted: So I had to get you off the job site, Mike. What are you working on?
Mike: Right now we’ve got a project in Manchester. It’ll be a 5000-square-foot home with a beautiful view.
Ted: You’re building a new house?
Mike: Yes. Not for myself, for a client.
Ted: Right. Well, a couple of years ago when I talked to Abbie, you had gone from building six or eight houses a year to you as a solo remodeler and you had laid off four people. In some ways it sounded like life was simpler. But in other ways it wasn’t, because you still had two spec houses on the market and you had some lots on your hands. And you were into a back-and-forth with the banks at that point.
Mike: Yes, that’s correct.
Ted: So it’s good to hear that you’re building new houses instead of remodeling. I mean, I guess that’s good.
Mike: Yes, it is good. It is good. It was bleak for a while there, for sure. It was like the bottom fell out. And basically you’re just going “Wow — how could it switch gears so fast?” But it seems to have slowly started recovering. Some of the projects that we are working on have been a year and a half or two years in the making; and there are also some more enquiries from people about wanting to build new homes. It seems to be getting a little better.
Ted: So are you still doing remodels?
Mike: Yes we are. And we are also still doing insurance work.
Ted: Well, that’s new. I don’t think you mentioned that last time. Did you have to do some things in order to get qualified for that insurance work?
Mike: Be very reputable; start out with the small jobs, and get good reports on the small jobs. Every client that you do insurance work for, does give their insurance company a report on how you did — the management and the effectiveness of the builder, and their experience, whether it was good or bad.
Ted: So you’re not still working alone, I guess.
Mike: No, we have hired one. He has basically taken up a lot of the slack, helping me manage the jobs we have going, big and small, in all different areas, whether it’s remodeling or new construction.
Ted: So he’s like a lead carpenter or project manager when you’re not there, and the rest of the work is done by subs?
Mike: That’s correct.
Ted: Well, when I talked to Abbie last time, it was a followup call for the Builder online survey. But I don’t think you filled out Builder’s survey this year, so I’d like to run some of those same kinds of questions past you now. For instance, how do the general conditions look for you in the market — are things around you worse, better, the same as before — and then, how are the prospects for your own company looking now (worse, better, or the same)?
Abbie: I think I’ll connect some of the dots for you from our last conversation, which was a couple of years ago. You know, at that point in time, we had two spec homes that we couldn’t get rid of. We had three lots that we were sitting on — a couple of those were permitted, but we decided not to go forward with building spec homes on those. So that was at the beginning of 2009, and I thought 2009 was going to be really bad, and it was bad; 2010 was worse. By the middle of 2010, we had pretty much completed some major remodels and additions that we had in the works, and really the second half of 2010 was basically, you know, chasing after leads. And we’re building right now — we’re under contract for five custom homes, and three of them are already in progress. One of them, we’re just having some excavation done. So we are in construction on three, full bore, and the other two, which we are under contract for, will be underway within eight weeks.
So, it’s the first time in really a couple of years that we have had new custom homes to build instead of just remodeling. So we feel very fortunate that we’re not — you know, that we have some work. But the difference, though, is that there is still not a feeling of stability in our area yet. Things haven’t recovered across the board — I mean, at all. I still get calls every day and resumes every day from a lot of people that are out of work. And when I talk to people, I’m like, so — especially with subcontractors, I’m like, “So — you know, you feel like it’s getting better? You’ve got more leads, you’ve got more proposals going out there?” And sometimes the answer that I get back is, you know, no. They think it’s getting worse.
So I’m trying to figure out if we’re just lucky right now? Are we really fortunate, or is this truly the beginning of a recovery? And I don’t think we have the confidence to say either way. Because there are still too many people around here that aren’t working; property values are still declining; half of all the houses on the market are either short sales or foreclosures … especially the ones that actually close are either foreclosures or short sales. And truly until that really goes away, I don’t think we’ll really have a recovery here.
We do think things are stabilizing. There are a couple banks in the area that want to do construction loans for custom homes now, and they’re going after that business aggressively, where a year ago, two years ago, they would run — they didn’t even want to talk to you, when you said you had a custom home client that needs a loan. So that’s getting better.
A lot of it was just hanging on. Those two spec homes that we couldn’t get rid of, we ended up leasing them for a year. And then in 2010, we ended up, after the leases matured, we sold both of those; and we wrote checks, you know, at closing. We had to write checks to close them, but we were fortunate enough that we had saved money and we were able to do that.
For all of 2010, we didn’t have any employees. And then four of five months ago, like Mike mentioned, we hired a project manager to work with Mike for our projects. And we’re interviewing for another one; we’re contemplating that in the next four months, if things continue at this pace, we’ll hire back one more. But that’s kind of yet to be seen — because again, we’re not sure if this is just a blip on the radar screen, or if this is the beginning of a recovery. And the news is still so bad, every day.
Ted: I talked to you briefly at some point in between our last interview and today, and you mentioned something about struggling with the banks, trying to change the financing for your completed houses that you were going to rent out and the lots you were holding. They had you in some tough terms.
Abbie: Oh, yeah. Yeah, it was awful.
Ted: So how did you thrash through that?
Abbie: Well I kind of got to the point where I was like, you know, “We’re making our payments every month. So, do what you gotta do. If you want them back, they’re yours.” And once we drew that hard line with them, they wanted to work it out with us. Instead of me chasing after them saying “We’re trying, we’re paying our bills, we can service these loans, but we need more time.” They were like “You don’t have more time,” or they would say “We’ll give you an extension,” but they weren’t veryt gracious about it. So finally I was like, “Well I really don’t care. Whatever. If you want to give me some bad terms, I’ll just mail you the keys.” I was at the point where I really didn’t care. I said, “You guys work with us, or not.” We still have rock solid credit; never late for a payment ever on anything; and so, you know, they did work with us. But their first choice was not to work with us. Their first choice was to push you up against the wall, and see how much you were going to give them.
Ted: A lot of people in the survey — there’s one question that asks, “What has to change in order for homebuilding to recover?” … and lots and lots of people this year talked about banks. And they all said, “These people have to lend this money. Lending is so tight that there are a lot of opportunities out there that you just can’t get financing for because they are being so conservative.”
Abbie: Oh, they’re being so conservative. We have clients who are professionals, who have very good income, who are very creditworthy, and yet we have had two banks turn away a loan. And yet, he’s a cardiologist, rock solid credit, great income — but it took three banks to get his custom-home construction loan written.
Ted: So now at least you can find a bank who will finance a project. Before there were none, now there might be one or two.
Abbie: Right. Or the terms were just ridiculous — absolutely ridiculous. It made people not want to build a house. And right — absolutely — the banks have to work with people who are creditworthy. They need to. Otherwise there is not going to be any growth.
Ted: So Mike, does it feel better to be back on new construction instead of remodeling? It’s kind of two different worlds.
Mike: Um, yeah, but the thing is, any part of the industry now, they fine-line you. Customers that are out there, they’re smart, they’re educated, they know the conditions of the market today, and basically, new construction even more than a remodel, you’re going in there with bare bones. You’ve gotta work hard to make a living at it. And what I mean by that is, everybody’s being challenged on their prices; materials being challenged constantly; the internet is a challenge for anything that you were to buy at Home Depot or anywhere else. There’s constant chewing at the budget. So that part of it has changed drastically on new construction, and also remodeling. Remodeling is a little different world because the process is a little different — you’re tearing something apart first and then rebuilding it. But new construction is a lot different now than it was five years ago. You’re scrutinized a lot more. So it’s harder. Besides the banks, as a builder, you’re scrutinized from the customer, through the pricing, through competitive bids that come in. It’s a much more complicated process than it used to be, that’s for sure. You have to work a lot harder.
Ted: That makes it sound more like the insurance work. Insurance work is that way — you have to know how to charge for every nail or you don’t get to make any money. It doesn’t sound like fun, but you must be getting pretty good at keeping your pencil sharp.
Mike: Yeah. It’s a daily practice. You don’t turn an eye away for a second, because you’ll be challenged.
Abbie: And the other thing is, the homes that we’re building are custom homes. We don’t have one home that is under $700,000. And we’re talking about every single light-bulb, the price of it is scrutinized.
Ted: Yeah, when they start talking to you about the trim tile, and whether you could get it cheaper from Mexico...
Abbie: Yeah. And the margins — I mean, the contractors, you feel bad for them, because they are — like, the siding guy will be doing this amazing job with all the bells and whistles on the outside of the house, but yet he’s getting paid as if it was a slam-bam spec home or something. So yeah, pricing has become very cut-throat. Because they know that the industry is bad, so they want really good deals on everything. And they kind of expect it. And that’s a challenge.
Mike: It is a challenge, and it also takes a lot longer than the normal process of building a home. Because you’re getting multiple bids constantly, and when you bring them to the plate, they’re turning them down, saying “Well let’s see if we can do better here.” So you’re constantly spending a lot of time re-pricing, and re-pricing, and re-pricing. And you know, a lot of these people who are building, especially these high-end homes, a lot of them are out of their own pocket. They’re not even using banks. Some are, but some of them are just opening their wallets wider and taking advantage of the down economy.
Abbie: You know, we absolutely understand that side of the fence, because you know, they’re building a house for $700,000 that is really only worth $500,000. So every penny counts. And so we absolutely have to be — that pencil has to be as sharp as it can, because who’s going to feel good about building a $700,000 house that’s only worth $500,000? So, yeah, everything is scrutinized also because of that — because at the end of the day, at the end of the project, it’s probably not going to appraise for what they have in it.
And I totally understand. Last year, we took advantage of it being slow and we did our own house. And I was very cautious about every dollar that was spent too, because at the end of the project, it’s not worth what we have in it.
Ted: You’re not going to break even on time and materials.
Abbie: Absolutely not. And the people that are building now, they know that. They know that. Everybody knows that. So … you just do the best you can. But it has changed the dynamics of everything, you know. It’s harder. You want a glass of champagne, but you want to pay what a beer costs. It’s tough. It’s really hard.
Ted: Well, I’m wondering how you manage the interactions with customers who are continually challenging every cost. How do you cope with the extra work and effort, and how do you come out of it successfully?
Abbie: Well, we’re accepting it as the new normal. It’s difficult, though.
Mike: Before you become a builder, you need a degree in psychology. You deal with some people who are very detail-oriented, and being very involved with the project, making sure it’s absolutely a piece of art. And it’s time-consuming. We’ve spent more time on one custom than we would on three specs, easily. When specs were here, they were a breeze compared to one custom home. You have to be by their side, seven days a week. When they call, you answer. You don’t ignore them, you don’t allot them so much time … you are basically part of their family until that house is done. And like it or don’t like it, that’s the way it is.
Ted: But you’re building three of these at once now. How can you do that?
Mike: Well, very little sleep. Very little sleep.
Abbie. We are working all the time.
Mike: We do. We work seven days a week. We have clients come over on the weekends, we integrate them right with our kids, and basically, “This is a great time to have a meeting, so let’s have it.” And so far, everybody has been up for it. And it has worked out quite well so far.
Abbie: We have to be available for them when they’re not at work. So that means nights, weekends …
Ted: Doctors work hard for their money too, I know that. They have long days, they have to take calls at night … it seems like Americans generally are working crazy hours these days, the ones who have jobs.
Abbie: It’s harder for the small business owner, because you don’t have a staff to handle everything. You really have to wear a lot of hats, and you have to multitask. There’s no money any more to hire somebody to micro-manage small areas of the business. So you just have to do everything, and that just means long days and weekends and nights and whatever. We’re just grateful to have work.
Mike: I just know if they make — if anybody higher up makes any bad move right now, we’re going to have a real problem. Because we still are walking on the tightrope, and if they start raising interest rates, if they start hiccupping the equation right now in any way shape or form, it’s going to go nothing but down. We live day to day, only because we don’t know what they’re going to do to us tomorrow. Or what the economy is going to do, I should say. Or interest rates. But we can be hopeful. I’m starting to get the feeling that certain banks — each bank, whether they’ve been TARP funded or haven’t gotten TARP funded, have their own scenarios on how much they’re going to lend and what risk they are going to take. And there are some banks, it seems, that are working harder to get your business than in probably six years.
Ted: It’s interesting what you say about people building out of their own pockets. What I’m hearing and reading tells me that that is where the money is these days — people with the wealth to buy without having to borrow. The kind of people who do well in good times or bad, and in bad times they have the opportunity to get really good deals. That independent wealth is driving a lot of things, but like you’re saying, they’re being very careful about how they spend it.
Abbie: Yeah. True. And right now they might have chosen to build because they can build now cheaper than they could when things were busy. Or saying, "I better build now while labor bids are real aggressive, and two years down the road, if there’s a recovery, people aren’t going to be as aggressive with their pricing.”
You know, even the big banks — getting back to the bank thing — we bank at a big bank, Bank of America, and they’ve been good with us the last year or so. We have a business line of credit with them that I felt sure they would pull the plug on a couple years ago, and they didn’t — they kept renewing it. That was a pleasant surprise that I wasn’t really expecting. With everything we were reading, I was quite surprised. I don’t know if they just overlooked us … but you know, they touch base with two or three times a year — just “How’s it going, are things stabilizing, is there anything we can do for you?” … you know, that kind of thing. And they could have taken the line of credit away, but they didn’t.
Ted: Another question that we ask in the survey is, “What has to change in order for homebuilding to come back?” and people talk about various things. Mike just said that he hopes the powers that be don’t do anything wrong, or bad. Is there something that you think would help that you wish the government would do or that you wish would change?
Abbie. People need jobs.
Ted: Jobs. Yeah. Right …
Abbie: They need to get people back to work. There has to be consumer confidence again. It’s just so fragile right now that anything could tip the scales at this point. Even though we’re feeling more solid, and we have several really nice projects, you still don’t feel good because you have people calling you every day that aren’t working, that haven’t been working, that are desperate for work. So, yeah — something has to change where people have jobs again, the banks need to start lending … things have gotta change.
Mike: One of the things I’ve noticed that seems to be very popular right now is the energy credits. Especially on remodels. People need incentives. People that have money need a reason to spend their money, and the only way to do that is to have incentives, whether it’s interest rates, whether it’s rebates, or a bigger writeoff, anything — they’re looking for it. I’ve noticed on the last four or five projects that they are all about the energy credits. We’re doing more geothermal houses than we ever have, just because of tax credits. We did three in a row, back to back.
Ted: That is some serious money. The ground loop for those systems are expensive.
Abbie: Sixty thousand.
Mike: One of them was $65,000, and one of them was $48,000.
Abbie: Those rebates and tax credits are motivating factors for people. We need more of those things that are going to motivate people that have the money to spend it. We can’t take those away. The government’s gotta have a lot of those carrots out there to keep the money flowing through the hands of everybody. They start taking that stuff away, then people are losing motivation and there is no incentive.
Ted: Well, I know how busy you are, and I think it’s time to let you get back to work. But I want to thank you for taking the time to talk to me.
Abbie: You’re welcome, and if you have any more questions or you think of something later, just give us a call.
Ted: I will, and good luck to you both.
Mike: Thank you.
Abbie: Thanks, Ted, bye bye.