Making the switch from homebuilding to remodeling? Many have tried and succeeded.

The meltdown of the nation’s homebuilding and banking industries has prompted many spec and custom homebuilders to turn to remodeling and other alternative strategies to stay competitive.

The difficulty in finding loans combined with an increase in the number of people choosing to rent or remodel instead of buy is making it more attractive than ever to remodel existing homes, or to buy properties cheaply in foreclosure and turn them into rentals that generate ongoing profits. These and other alternatives to traditional building models are helping innovative homebuilders across the country stay in the green at a time when many are hanging up their hardhats to get real jobs.

Third-generation homebuilder Scott Donogh, owner of Renton, WA-based Donogh Homes, saw the writing on the wall in 2008 and began targeting the remodeling and small custom home market at the beginning of 2009, after more than five years as a successful spec builder. Since making the decision, his business has continued growing steadily while many other Seattle-area builders have closed shop.

“When we saw a lot of the other builders around us losing their companies because they were sitting on spec homes that weren’t selling, we decided to get proactive and we spent most of a year targeting the remodeling market. The response was really strong, so it seemed like a better way to go than trying to get loans to do spec homes in this market,” says Donogh.

The lack of loans and other key factors—including a drop in the cost of labor and materials—are driving many homeowners to remodel instead of move to a new home.

“Sometimes you get clients who want to upgrade their existing homes on a limited budget, and other times you have people who want the very finest materials and workmanship available. So you need to be able to adapt to any situation and then sub things out as necessary,” says Donogh.

While making the switch to remodeling can be the right call for many builders, Donogh emphasizes that it’s not for everyone.

“A lot of spec builders don’t want to switch to remodels because there’s a lot more work involved for less money and you need to be comfortable working one-on-one with your clients. But the advantages are that the work is steadier and, when you get a job, it’s a sure thing. You don’t have to wait months for the house to sell. But it’s certainly not as lucrative as spec building was two or three years ago,” he says.

No matter what part of the country you’re in, the key to survival is being adaptable. While Donogh currently focuses on remodeling and small custom builds, he also finds frequent work remodeling homes for investors who buy them in foreclosure and flip them. This is a model that also works for Chicago-based Mack Industries, which specializes in buying and revitalizing existing homes to turn them into rentals or sell to investors. The company, which now has more than 300 rental properties, releases a newly refurbished home every two to three days.

“I’d like to say it was a stroke of genius, but really it was more of the perfect economic storm for us. There’s ample supply of inexpensive homes to choose from right now, and, because of our location in working-class Chicago, there are a lot of people looking to rent. As a result, we have a waiting list for all of our homes,” says James McClelland, CEO EO of Mack Industries.

Mack Industries, which has more than 80 employees, puts every home it acquires through two stages of rehabilitation in less than a month. In the first two weeks, a mechanical and engineering team brings all the HVAC, electrical, plumbing and structural elements up to 2009 codes. Once the backbone is complete, a cosmetic crew upgrades all finishes—including new kitchens, bathrooms, tile and painting throughout.

“Our only continuing challenge has been banking. Because of the volume we do and the small number of banks that are stable enough to offer loans, it’s critical that we keep developing new banking relationships but, so far, it’s working out great,” says Mack.

5 keys to making the switch from buildin to remodeling

1. Get your blog on. Since a majority of remodeling work comes from word of mouth, Facebook, blogs and regularly updated websites with before and after images can help keep you in a steady stream of work.
2. Get your schmooze on. Develop relationships with real estate agents who can connect you with existing homebuyers and sellers who need remodeling.
3. Be flexible. Successful remodelers focus on higher-end products and finishes, but are willing to do whatever comes along.
4. Be open. In stark contrast to spec building, it’s critical to establish constant feedback and communication with the client to make sure the job is being done right.
5. Set high standards. Choose clients carefully and don’t underbid projects just to get the job. Lots of people are looking for remodeling work, but they’re not always willing to have it done right. As a result, it’s a good idea to ask for a high percentage down.