Where's the Profit?

A bonus room is a nice perk to offer, but how much happier could clients be, and more profitable builders could be, if the room was wired for conversion to a home theater? With a little planning, extra wiring and minor expense, a boring bonus room can become a showpiece for homeowners and a profit center for builders.

Home theaters contain more product and therefore more opportunity for profit than an extra bedroom, so why not lay the groundwork? Plenty of other builders are doing it, according to the National Association of Home Builders, which reports 34 percent of home builders now offer structured wiring packages as standard or optional amenities. In addition, 22 percent of U.S. residents have a home theater system in their homes, according to research firm Parks Associates.

“Home theaters and whole-house systems are the easiest sells and what everyone wants,” says Jenny Thomas, design services manager, Custer Design Group, part of Custer Homes in Harrisburg, Pa. “We stay out of the component sales part of the business, but anything else electronic that’s installed in a home, we oversee and make a profit on.”

The key to selling home technology is believing in its value, says John Cioe, who owns Lusso Homes of Distinction in Scottsdale, Ariz., with his brother Rob. “People are willing to pay for what their builder thinks is worth it. And unfortunately many builders haven’t built up their electronics subcontractors as the experts they truly are. Builders should be saying to clients, ‘Sure I could get you a cheaper technology guy, but this guy is the best; he’s an artist. In my home, he’s who I would go with and you should too.’ The reality is most clients are looking for their builder to tell them what are the most important elements in the house. So if a builder doesn’t believe in technology, the client won’t either.”

Home builders should have a working knowledge of everything going into the homes they build, Cioe says. “Builders must have sold themselves on what they’re capable of before selling themselves to others. Your job is to sell yourself as an expert, and that ‘this house will be the best if you do it this way.’ Once your customers believe you’re the expert, they’ll buy anything from you.”

Of course, clients can’t buy something if they don’t know about it, so builders must first offer technology before a homeowner will buy it. Thomas believes, “We have a responsibility to show the clients everything they can have: the best. Clients’ eyes open up when we educate them about technology that’s available to them. Then they decide what they must have and what they can live without. If we were to build their home and not offer everything, and afterward they say we never told them about something, we would not have done our jobs.”

Making the Margins

As a full-service design/build firm, Custer Homes handles everything from design through construction, and builds margins into it all, including home technology. “We try to have a certain profit margin built in no matter what the technology is,” Thomas explains.

Technology such as a simple distributed audio system provided the highest margins for Cioe as a build-to-suit builder, he says. Those profits wouldn’t exist, however, if it were not for laying structured wiring, the backbone of any home’s technology systems.

“I didn’t lose money on structured wiring; I provided that as a commodity. You just have to do it, but I didn’t make big money on it. There’s too much competition for that,” Cioe says. “So things like distributed audio, lighting control, HVAC and security, those were the value-added items I made money on. About 70 percent of clients added to the basic technology package I offered, and 100 percent of clients upgraded on electronics.”

Cioe is not only a home builder, he also owns a technology integration business, Custom Home Technology USA, which performs all his technology work. Cioe, along with Thomas and Custer’s full-service approach to home building, are two examples of builders handling technology themselves, and making money on it. However, partnering with a technology integration firm such as those that belong to the Custom Electronic Design and Installation Association (cedia.net), is the path many builders follow.

Jamie Sasser, partner, Playback Audio and Video Creations, Raleigh, N.C., runs a CEDIA member company that understands the builder needs to make a profit just like he does. “We sold a six-zone music system to a builder at about 40 percent off what we’d normally charge because we know he’ll choose it over and over again without having to sell a client on it ever again. And because it’s a whole-home system, there’s a world of upsell opportunities for us and the builder such as lighting control, expanding music capabilities and adding a home theater. We can forego making money on the basic elements because we know all sorts of options can be added either during construction or after,” Sasser says.

Making profit comes down to good communication between a technology firm and a builder. Some builders say they don’t care about making a dime, as long as the technology partner takes care of their client and doesn’t screw up the schedule, Sasser adds. “Other guys say to us, ‘Here’s my budget for low voltage, help me economize, and I’ll make sure my client will come to you for upgrades.’ Everyone needs to benefit.”

Focus on Upgrades

Builders and technology integrators agree that the margins aren’t always made on the basics of home technology; they’re made on the upgrades. Many also agree that if only one technology should be standard in every home, it should be a lighting control system. Custer Homes installs lighting control for a number of reasons, one of which is profitability. Another reason is a homeowner’s sense of security walking into a lighted house by pressing a button on their car’s sun visor.

Lusso Homes’ Cioe agrees. “A lighting control system for security is an easy sell to any homeowner. What woman wants to come home to a dark house when pressing one button on a key chain will turn on all the key lights throughout the house? It’s a no-brainer to sell lighting control. There’s no reason with pricing today that lighting controls aren’t in every house over half a million dollars.”

Cioe recently completed his own house, which includes a special upgrade not every home has — an outdoor theater (pictured on the right). “An outdoor home theater won’t be used five days a week, but when we entertain, that’s a showpiece that people will talk about. And that’s something that can differentiate and sell my home over another.”

A specialized technology Thomas included in one of her homes is a sensor that alerts the homeowners when someone drives up their driveway.

To maximize technology’s value it’s important for an appraiser to understand the value of whatever home technology is included in a home. Thomas has never encountered a situation where a bank says the technology isn’t worth what it’s worth, “But I know there are appraisers that only go by square footage. If there’s an allowance for technology and it’s built into the price of the house, we’ve never heard that an appraisal was less than the true value. Still, make sure appraisers value technology,” she says.

Install the Basics

Technology products with good margins for builders include security system prewire, a base security system, the ability to handle high-definition television throughout the house, and a prewire for distributed audio in every room and surround-sound systems in a room or two, Cioe notes. But the key to maximizing profit for a builder, and enjoyment for a homeowner, is letting the client know the home is wired for the future.

“Some builders put $2,000 of structured wiring in a home but don’t tell the homeowner it’s in there,” Sasser says. “If a builder is not going to market the fact that the wire is there, or tell anyone it’s in there, it’s a waste of time and money. A builder has got to sell what’s there.”

Sasser suggests builders focus on a home’s infrastructure, especially planning out the space during the design stage. For free, Playback will help with laying out a space so technology doesn’t become an afterthought. “When I walk into a house that was thought through and well laid out, it’s much better than having a homeowner who wants a TV on the wall but the builder didn’t plan for power nearby, and didn’t include a recessed area for the TV. It’s all the simple things that with foresight make a home look more complete and more valuable,” he says.

The fundamental element behind all home technology is structured wiring [see article pg. 44], which should be accounted for during design. On a recent tract project Sasser worked on, the builder included a single coax cable above the fireplace. “The only thing that coax cable was good for is pulling a real wire. It was worthless. If they would have worked with a technology integrator, the integrator would have put good wiring in for a few hundred dollars, and then the homeowner could do anything he wants to do without tearing up his home,” Sasser says.

A big mistake builders make is not running structured wiring, he adds. “The value in wiring is in knowing what wire to run and where to run it. Too many builders say their electricians and security contractors will do it, and we do not charge more to run speaker wires than an electrician will because it’s a commodity. The difference is, when someone buys a home we wired, the sky’s the limit for what homeowners can do.”