The changing face of residential HVAC

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It started with water heaters, but now all equipment may be part of a rental program.

It started with water heaters, but now all equipment may be part of a rental program.

Rental mechanical rooms a new challenge for  contractors

By Glenn Mellors

There is a major shift in the residential new construction (RNC) industry that has nothing to do with new equipment changes, energy efficiency upgrades or even the carbon foot print.

The storm I speak about is the shift to mechanical rooms with rental equipment in today’s new housing. Rental water heaters are not new, but in much of today’s housing every HVAC component is a rental unit. This will change the future of our companies and the ability to attract and retain future service, maintenance and replacement business for decades.

What happened?

Let me take you for a journey that set the stage for the significant changes we are witnessing. We need to act now to prepare ourselves for the future.

In the 1960s in Ontario – earlier or later in other provinces and sometimes not at all – natural gas lines began to make it down the streets of highly populated suburbia. At that time, coal, oil and wood were regarded as the “affordable” energy for heating while natural gas was feared. I even recall slogans such as “go gas, go boom!” being used to keep homeowners from taking the leap and we, as contractors, were biting off our nose to spite our face to avoid learning a new trade.

The utilities had infrastructure to pay for and the only way to turn expenditures to revenue was to sell gas. When existing homes were hesitant to switch, incentives to builders were introduced. Free water heaters and cash payouts were the norm and before you know it everyone was in line to get a free hot water heater – all you had to do was install and use natural gas. Soon water heaters that were free became a monthly source of revenue for energy suppliers. Little did anyone think that a free water heater would lead the utilities to own the basement, to have direct access to everything that can be installed in the basement.

Utilities unload rental business

Now to fast forward to 1990-2000; in Ontario the utilities were forced to de-regulate or, in layman’s terms, could no longer fund equipment sales through the profits of the gas. This led the utilities to shed off the equipment sales and installation departments. These were eventually sold to business venture capitalists that focused on monthly re-occurring highly profitable businesses.

Alberta was soon to be brought into the re-occurring monthly revenue advantages in the HVAC industry, joining Ontario in capturing homes with rental and leasing of the mechanical rooms. Not only water heaters and water softeners, but furnaces, boilers, air conditioners and mini splits, rather than being owned by the homeowner, were now rented.

Incentives throughout the last 20 years have help push over 65 percent of Ontario homes into renting a portion of their mechanical needs (the basement). Remove and replace (re and re) contractors have become labour brokers to these venture capitalists!

Pressure on the consumer

As Canadians, we carry the heaviest debt load of almost all first world countries. This limits credit access dramatically and affects the real estate market. Couple this with new Canadian Real Estate Association (CREA) rules and laws about listings and bidding strategies that add further barriers to home ownership.

These changes, from a consumer perspective, mean the industry may have to reinvent itself; the quest is to make housing affordable and reduce construction costs.

Home builders are always looking for ways to make their houses sell faster and for less money while making a profit. Faced with these challenges, the pressure pushes out to the trades to lower their prices. The struggle is real and painful for those in the industry.

So how do you help the builder lower his out-of-pocket building cost and still make money? How about helping the builder lower his selling price by $10,000, 20, 30 or even 50 thousand dollars AND make better margins, provide better support and offer higher quality products and services? Well some companies are doing that! Let’s look at some ‘new’ products and services to help you achieve those goals.

Renting the mechanical room

Some large RNC contractors have entered the rental mechanical room business and are enjoying the benefits of change.

The process leads to a lower selling price of the homes and adds profits back into the mix. Instead of the builder paying for you to install the furnace, air conditioner, water heater and water softener, they set up the new home buyer in a rental contract that they pay a monthly fee for the equipment and installation, thus lowering the builder’s capital layout. This allows the builder to advertise a lower price on the house without lowering their profit.

The contractor in return can charge a reasonable price for their work and the finance company that owns the rental equipment pays you at time of completion. The finance company/rental/lease company then collects from the new home buyer over a typical 7 to 15-year monthly plan. The idea is to increase profits and sell more jobs.

Imagine that, your total bill is zero to the builder. The builder lowers the street price by what they have just saved, making their product seem like a much better purchase. The builder receives a bounty from the financier for every home they sell, the contractor gets paid in full, the home owner adopts a monthly fee that comes with a warranty for the term of the agreement.

The builder is happy because the consumer is protected for the rental term for all repairs, they sell more affordable houses and they make more profits.

The RNC contractor is happy because they make more money, sell more product and have the option of doing the repairs and maintenance without losing any money.

Those of us with a little snow on the roof can recall the days when the water heater had similar bounties and I am told that those days are back, only this time the whole mechanical room is rented.

It sells itself

These types of rental programs are available from a few companies now; they are not just limited finance companies. Manufactures and wholesalers have also jumped on board. They have developed programs to support you so that you can maintain your builder/contractor relationship. These companies have highly trained and professional representatives that will go with you or alone to sell the program to your builder client.

They can and will offer solutions that include builder rebates, bounties and spin-offs much like the ones offered by the utilities in previous decades. They will represent your company with all the back-office support to deliver a seamless transition with builder and future homeowner, hence we use the term ‘sells itself’.

So, if we could think about your wish list as an RNC contractor, we would imagine a day of offering premium products and installations, profitably, get paid for our work within 24-48 hours of job completion!  Impossible you say, but think again and talk to your suppliers!

Do your research! There are several suppliers of this type of program; some are good, and some are not, like any new product you investigate, let your conscience be your guide. These programs are not for every builder, but it is up to you to educate your builder on all their options.

That is how we make satisfied customers give us a five-star rating!

I must admit that I have mixed feelings about this, but it is our duty to talk about new trends in the marketplace. As we see RNC mechanical systems gobbled up by large companies offering rental HVAC/R equipment, the market is shrinking for independent mechanical contractors, a trend that is likely to continue. It may be time to become involved and/or look at partnering with companies already in this market.

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