Bolster launches to de-risk home remodeling (for real), borrows an idea its founder incubated in Mexico
Human behavior is a funny thing. Sometimes, the only thing we need to behave in a certain way is the proper incentive. Bolster is a startup based on this simple principle that is looking to bring change to the home remodeling industry. More specifically, the New York City-based company is looking to reverse the trend of projects coming in late and over budget. The company’s secret weapon: insurance-based financial guarantees for contractors.
Bolster offers more than an insurance policy. The company has created a software platform designed to evaluate contractor risk based on their performance track record, on their financial solvency, and the results of personal background check. Thus not all contractors will qualify for the “Bolster Guarantee” – in fact, Bolster CEO and founder Fraser Patterson estimates that about 25 percent of US contractors would qualify if they applied.
Applying to be “Bolstered” is entirely at the option of the contractor, but you could imagine the benefit of doing so if two otherwise equal contractors bid for the same project. The company actually charges homeowners a fee – typically 2 to 5 percent of a project’s cost, depending on their risk profile – to guarantee the outcome of a project against any adverse outcome (unjustified price increases, shoddy workmanship, and delays). But it's the contractor who's ass is on the line if things don't go according to plan.
Bolster is launching today in the New York metropolitan area and plans to expand nationwide in the very near future. But this is not a new and untested concept. Patterson actually executed the business once before – in Mexico.
As a former contractor himself, Patterson, who’s Scottish, took a position lecturing on design, business, and entrepreneurship at Mexico's CENTRO University of Design, Cinema and Television. There he partnered with an economics professor in submitting the winning proposal in a federal contest in partnership with lending giant Infonavit to create the first home remodeling mortgage product in the country, beating out Home Depot and others in the process. The government then funded this product by adding a mortgage tax against everyone in the country’s income.
The keys securing these mortgages in Mexico’s otherwise unreliable contractor market proved to be the foundation for what would eventually become Bolster in the US. These provisions were: 100 percent of the money must go toward a remodeling project; the homeowner must guarantee that the contractor is paid; and the contractor must guarantee that the project is completed to budget and quality. HSBC was brought in to administer the program, which was later named OnisVida.
The program worked, with the first 100-plus Mexican projects completed to on time, and to budget and quality, Patterson says. Now he’s hoping to replicate this success in the United States. The company already has several million dollars worth of successful remodels completed in Manhattan as part of its beta test.
Bolster (US) will follow a similar procedure, except rather than paying out mortgage loans, the company will simply guarantee the work of their contractors. The official term for the guarantee is a “remodeling insurance is a custom bid, performance, payment and warranty bond.” The contractor, however, must pass the company’s vetting process and sign a personal guarantee against their performance.
Good contractors already spend a ton of time convincing homeowners that they’re telling the truth, capable etc. Homeowners really have no means of effectively comparing a $70,000 vs $100,000 bid for the same project. Typically they end up choosing a middle or low bid, but ultimately end up paying more when things don’t go according to plan. For contractor, being “bolstered” means that they’ve puts their money where their mouth is and signs personal guarantee with insurer. The insurer will come to collect if they don’t deliver. What we’ve really created is a risk transfer mechanism.
It’s not just contractor incompetence that is a risk for homeowners. Financial solvency is a major issue as well. There were roughly 92,000 contractor bankruptcies in the US last year, Patterson says, taking between $4 to $5 billion of homeowner capital with them. This is out of a total of $150 billion spent with professional contractors on home remodeling projects (excluding DIY).
Given the obvious risk in the category, one area where Bolsters is likely to have a major impact is in homeowner’s ability to obtain financing for remodeling projects – something that can be far more difficult than purchase mortgages.
Bolster promises to resolve all disputes in a maximum of 60 days in the most complex of cases, but anticipates moving much quicker, Patterson says. In the event that a Bolstered contractor fails to perform, the company will provide a replacement contractor to finish the project. Homeowners can also add additional coverage at any time or modify the existing scope of work.
Today, the platform is setup such that the homeowner typically brings their contractor with them. But in the future, Patterson envisions operating a marketplace where pre-Bolstered contractors are listed on the site and can be browsed by consumers. In this way, it’s like a competency and solvency-focused alternative to the aesthetic-driven Houzz online home remodeling marketplace. If nothing else, “contractors want tailored, high quality lead-gen,” Patterson says.
Bolster also offers homeowners and contractors both a Web and mobile app that provides project management tools, as well as remodeling advice and best practices. The app also supports the contractor onboarding process and allows homeowners to submit claims.
Patterson has teamed up with the American Institute of Architects (AIA) as a marketing and business development partner. No money is changing hands in the arrangement, but both parties stand to benefit – the AIA’s 81,000 member architects because more of their projects will be funded and built, and Bolster because it gets a source of qualified and highly motivated potential customers. The company will look to enter other similar partnerships as a means of acquiring customers, Patterson says, with potential partners being real estate brokers, financial institutions, and contractor trade groups.
Boltser has a team of seven employees and and has raised $2 million in angel funding to date from industry insiders including Marsh Global Risk Management Leader Tim Gardner, AGB Investments, Credit Suisse Managing Director Neal Pomroy, and others.
This is fundamentally a unique opportunity in an underserved market. Bolster brings a lot of much needed process and technology to a transaction that had been without it for a long time. Like many of the most successful products out there, it’s compelling for all parties, which in this case are the contractor, the architect, and the home owner. Best of all, the scale of this market is incredibly attractive and Fraser has his Mexico track record to fall back on to prove that it works.
One area where Bolster differentiates itself from most startups is by having a revenue model from day one. The company even generated revenue during its beta period, Patterson ads. The company works with third-party insurance companies – including at launch National Financial Partners (broker) and Capitol Insurance Companies (underwriter) – who assume the risk, while itself acting as a risk assessment intermediary and a customer acquisition platform. Longer term, there would appear to be an opportunity to create a captive insurance company within Bolster, but that not part of the company’s initial plan.
The big risk facing Bolster, beyond simply the difficulty of executing this business on a national scale, is that of copycats. There is very little that is patentable here and the company will largely rely on first mover advantage and brand value to combat this threat, according to Gardner. Patterson’s biggest advantage when dealing with insurers, contractors, and other partners will be the credibility of having done it before in Mexico.There's little arguing, however, that Bolster melded technology and traditional finance to create a compelling solution to a very real problem.
“Remodeling is like marriage – finding a great contractor is just the beginning,” Patterson, says. “The real challenge begins once the project actually starts.”
[Image via WA Green]