The multi-million dollar, one-of-a-kind "residential construction project" that Gloria and Larry Manchester and their people have been building for the past few years has just about reached the point of completion. The final piece is one they tout as revolutionary.
The completion of the "construction project" already has hooked one large, New York Stock Exchange-listed bank. And the Manchesters, mother and son, expect more banks and other mortgage lenders will quickly follow.
That’s because the project consists of the building of a business, with field service headquarters in Kenosha, that aims to help lenders boost their residential and small commercial construction loan business, cut their costs, erase their risk on construction loans, and make more profits.
Doing business under the new name of ConstructSure, the firm will be the first anywhere to offer construction lenders a Construction Completion Surety Bond that would eliminate lender risk on the $875 billion per year of residential and small commercial construction loans in the US, a portfolio with three times the charge-off rate of standard mortgages. Charge-offs from the construction loan portfolio in the four quarters ending last September amounted to 0.174%, a deceivingly small slice that resulted in about $1.5 billion in losses for construction lenders. Those statistics come from the U.S. Office of Thrift Supervision.
And those numbers don’t even address the thousands and thousands of construction loans that end up in some kind of dispute and costly resolution without going all the way to being charged off.
"Up to 20% of projects under construction nationally end up in some degree of contractor conflict or distress, often requiring expensive mediation," Larry Manchester announced during the entrepreneurial Two-Minute Forum at a recent meeting in Milwaukee of the Wisconsin Venture Network.
"We’ve been able to get a first-class insurance carrier to agree to underwrite our revolutionary bonds because of the experience we have, the technology we’ve built and are continuing to build, and the whole system that we’ve put together. We don’t think anybody else will be able to easily replicate, or replicate at all, what we’ve developed," he explained in a follow-up interview.
ConstructSure expects to complete final details with its first surety underwriter in the next week or so and be on the market with their completion bonds immediately thereafter to lenders. Discussions also are under way with other underwriters.
"Once underwriters understand how well we work, they become interested in working with us in doing the bonds," Larry said.
Such bonds are often used for gigantic public-sector construction projects, but not as ConstructSure has planned for its markets.
The ConstructSure bonds and the ConstructSure processes and technology underlying the bonds allow construction lenders to offer more loans, and loans that are larger than they would have otherwise. They also will allow lenders to cut costs for in-house or contracted staff which Manchester claims are inefficiently and incompletely dealing with fund control and disbursement. For example, instead of the weeks it takes those staffs typically to disburse checks, often without inspections, the ConstructSure fund-control process always makes inspections before disbursing and pays general contractors, their subcontractors, developers, and suppliers in 72 hours, electronically if they want. Finally, using ConstructSure bonds allows lenders to eliminate charge-offs.
"The phone’s already ringing off the hook. We’re really chomping at the bit for the bond to be ready to go," said Larry, 36. "We think this is really going to take off."
That may be why he and Gloria are expecting ConstructSure’s revenues to top $100 million in 2006. Even more interesting, they project pre-tax profits then of nearly $35 million. All this based on a bond premium of 1.5% of a project, a fund control fee of one percent, and $120 per inspection, with a project typically needing three inspections. ConstructSure simply expects those costs will be passed through by lenders to their borrowers.
While the development of the new bond has been in progress, it’s not as if Larry and Gloria and their people have been sitting around only thinking about turning business plan blueprints into reality.
In just less than a year, even without being able to offer their bonds and with limited investment capital, ConstructSure is closing in on a $1 million per year revenue run rate, has hit close or beyond its important one-year goals, and has landed such clients as Fidelity National Title Company, Cendant, Merrill Lynch Credit Corp., Harris Trust and Savings Bank, Banco Popular, and IndyMac Bank. Marketing partnerships also are in the works with the American Community Banker’s Association, General Acceptance Corp., Builders First (a national service provider for contractors), and other organizations.
Fidelity National, a New York Stock Exchange listed company and the largest title company in the US, and ConstructSure have a mutually beneficial joint-operating agreement.
IndyMac, headquartered in Pasadena, Calif., and also a New York Stock Exchange-listed company, holds about $1.4 billion in construction loan assets. It also has a charge-off rate on that portfolio of 0.38%, more than twice as high as the national average. And it has problem loans that total about 12 times the number of charged-off loans.
"They’ve told us when the bond is ready to go, they want us to call them first," Gloria said from ConstructSure’s corporate and technology headquarters in Burlingame, Calif.
How have the Manchesters and their people built this?
First, the foundation of their building project was to put together a national network of building inspectors covering every state. ConstructSure, which had been doing business as the National Inspection Service, has more than 800 licensed and company-trained inspectors it calls upon. In 2001, they did more than 3,800 ConstructSure inspections and recently are averaging close to 700 per month. Larry said a new client deal in the works would double that rate.
"They love our products because of how thorough and fast we are and how easy our reports are to work with, being computerized and on-line 24/7 in an enterprise system," he explained.
The inspection business also is how the Midwest came to be home for Larry and his wife, Bonnie, who on April 4 gave birth to their first child, a nine-pound-plus son, Nathaniel David.
"We needed a central location for organizational purposes and to save operating expenses," he said. So, field headquarters were planted in the Chicago area, but then moved into Kenosha last year under a more favorable lease that included the building owner taking equity in ConstructSure. Manchester expects the Kenosha office to add at least a dozen employees in the next year or so.
The second part of the building of the business has been to process engineer and computerize the development and record-keeping of thousands of open files encompassing the statistics, the narratives, the reports, and the photos and other graphic elements of construction projects. The services offered by ConstructSure include:
* Cost Feasibility Review: This analyzes the project cost breakdown completed by the builder, in order to effectively eliminate the possibility of underbidding or front-loading, two common causes of future problems in project completion. Front-loading is when a contractor allocates more costs up front than he incurs, to pull cash out of the project faster than he earns it. The local material and labor costs are verified for accuracy and the overall feasibility of the project is measured against the proposed loan proceeds.
* Contractor Background Checks: Using access to a state-by-state network of licensing and permitting laws, this verifies contractors’ licensing and projects’ permit requirements as well as performing industry credit verifications, to ensure the quality of each contractor.
* Inspections: Each project is closely monitored when funds are requested against work completed through physical inspections performed by the CS nationwide network of 800-plus certified inspectors who are trained and operating on ConstructSure’s proprietary inspection scheduling and tracking platform. The inspection and financial reports, with photos of the progress of work, are posted on a secure ConstructSure website for access by the lender. This service is also offered on a stand-alone basis.
* Change Order Management: This tightly controls the change order process, which is another leading cause of project completion issues. If a borrower requests a change in the project, ConstructSure will not recommend disbursement for such a change until the borrower has deposited into the escrow any additional funds required to cover any additional costs associated with the change. This insures that the contractor will have the necessary funds to complete the project, and the lender will not end up with a defaulted and unfinished property.
* Pay Voucher/Direct Payments & Lien Waiver Administration: ConstructSure receives and supervises requests for payments and recommends disbursements, which are subsequently authorized by the lender. Subcontractors and suppliers are paid directly and lien waivers are acquired in order to insure a lien-free project. Funds are held in a trust account with Fidelity National Title – Escrow Division until payments are authorized. ConstructSure coordinates date-downs (recorded lien rights) with title and acquires a final Notice of Completion for title to record with each subject county.
While great effort and expense have gone into computerizing much of those processes, Larry admits considerable computer system work remains to be done, including cutting over to Sequel database management to scale up, upgrading software to complete the firm’s internet capability, and building a web site.
"And I won’t think we’re there until every inspector has a wireless palm computer with digital camera," he laughs, but not without intent.
And then there’s expanding the firm’s inspector network, cultivating new prospects, refining selling strategies, and producing sales and training materials.
And continuing to build management and a board of directors, which includes Wisconsin’s John Seramur. In the 1980s he pioneered the initial public offering of mutual savings associations, building it into $6 billion First Financial Corp. before selling it to Associated Bank Corp. His Illinois cohort, Thomas Kinst, who also took his firm, Land of Lincoln Savings & Loan, public, got Seramur involved in ConstructSure.
And then there’s finding time for their other new baby, the one Larry’s wife delivered just days ago. The baby, Gloria’s first grandchild, was a week overdue.
Looking at the progress Larry and Gloria have made already, it appears Manchesters don’t make a habit of being overdue.
April 12, 2002 Small Business Times, Milwaukee
