Kitchens, baths, decks and loans too

When the housing market slumps, residential contractors are among the first to feel the pinch but Sacramento-based Darius Baker is trying to improve the odds that his customers will still take on costly renovations.

Baker is one of several housing contractors around the country who are now helping to arrange financing for remodeling projects in a real estate market hampered by tightening credit terms.

"I see it as the way of the future," says Baker, whose company, D&J Kitchens & Baths Inc., has partnered with GE Money, the financing arm of General Electric Co., to offer homeowners alternatives to traditional home-related loans from the banks.

"If we really want to succeed at remodeling projects, we've got to make it easier," says Baker, who, along with his partner, manages a staff of 13 employees that focus on renovating vintage homes, some dating back to the Gold Rush years of the 1850s.

The financing products D&J offers to customers sometimes mean they're willing to spend a bit more, says Baking, adding: "The banks are just really getting to be sticklers."

With products such as revolving credit lines similar to credit cards and unsecured installment loans, GE Money is on track to log nearly $2 billion in home improvement financing this year, says Bruce Christensen, vice president and general manager for the GE unit's home improvement business. Some of that business is coming from small companies such as Baker's, who bear no financial risk themselves but must meet GE's strict partnering criteria.

"Contractors are seeing more people looking for financing through them than they have in the past several years," says Christensen. "There is less availability of home equity lines of credit due to the economics surrounding the U.S. mortgage industry and due to flat home values."

GE's terms vary by product and customers' individual credit ratings, but Christensen says interest rates for unsecured loans are running "just shy of the teens" and secured loans are "a little less than 10 percent for better customers." Depending on the product, the approval process can sometimes happen as fast as a car loan, he says.

GE Money is not alone in helping home improvement contractors offer alternatives to home equity products. Wells Fargo & Co., for one, has since October 2005, offered a VISA card program that is popular with contractors.

Terry Fuller, Wells Fargo's senior vice president of financial retail services, said the main benefit of the program is that homeowners can "buy today and pay tomorrow via deferred terms promotions" such as six months of no payments and no interest or 12 months and no interest with a low monthly payment.

"There is a huge market for these," says Fuller.

It's not entirely clear at this stage that the forays by contractors into financing are impacting the market for traditional home-related bank loans.

A spokesman for Well Fargo says it's too soon to accurately determine whether contractors are making more use of the bank's financing product because other financing options for consumers are becoming more difficult to secure.

Still, some in the industry say they're seeing increased evidence that consumers are seeking alternatives to traditional mortgage products, which still account for the bulk of home remodeling projects, as the housing slump continues.

"In general terms, there is a trend in that direction," says Gopal Ahluwalia, vice president of research for the National Association of Home Builders. "In this current climate, anecdotal evidence suggests that it's on the rise."

When D&J's Baker sits down with potential clients, he makes a point of letting them know his company can help arrange for these types of loans. Some of his firm's customers include government workers and other middle-class homeowners who have been in the same house for many years.

These customers are often loath to finance kitchen renovations, which can cost $65,000 or more in one lump payment. Yet they are increasingly reluctant to take out a second mortgage or home equity line of credit when they can't be sure the value of their home will appreciate. They're also wary of the costs and hassle of getting a fresh home appraisal, dealing with title companies, scheduling closings and the like.

As more folks look to stay put and work with what they have (new home sales plunged to their lowest level in November in more than 12 years), it's likely that more contractors will offer alternatives for financing as a way to distinguish themselves.

"I'm finding more and more of our clients are asking for this,' says Paul Zuch, a Dallas-based contractor and a vice president with National Association of the Remodeling Industry.

Zuch, whose company specializes in upscale renovations that often run $500,000 or more, recently partnered with GE Money. Soon, he said, he will offer GE's links on his Web site that will let potential customers see lending terms and apply for loans. "I think people want alternatives to conventional lending," he says.

Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com