The home services contracting industry has experienced tremendous growth over the last few years. A record amount of fiscal stimulus and historic demand for home comfort products and services (stemming from the COVID-19 pandemic) have enabled many contractors to post their strongest financial results in years, despite significant supply chain disruptions and challenging labor market conditions for the trades. Unfortunately, the good times cannot and will not last forever. The best home services contractors recognize this and are utilizing the current environment to better position themselves for what likely is ahead.
Leasing of home comfort systems, including HVAC systems, water heaters, water purification systems, and standby generators, is a growing industry trend. Leasing capitalizes on the rapid shift in consumer purchasing behavior towards subscription-like consumption models and provides a strong value proposition to residential contractors and their customers. However, unlike traditional installment loan financing that is transactional in nature, leasing establishes a long-term (often 10+ years), tri-party relationship between contractor, homeowner, and financial partner. Therefore, contractors considering implementing leasing in their businesses should perform thorough due diligence prior to selecting a partner. Contractors should explore the following five key topics before signing on the dotted line.
1. Conflicts of Interest — Does the leasing partner compete with my contracting business? Have they been upfront about any potential conflicts of interest that may exist?
Until now, residential contractors weren’t required to consider potential conflicts of interest with their installment loan providers, as none of the major home improvement lenders engage in contracting activities themselves. The same isn’t true for leasing. A few players in the home comfort leasing space engage in residential contracting activities themselves (or through affiliated entities under common control) in areas across the U.S. Moreover, these entities have a demonstrated history of, and are actively pursuing, geographic expansion through acquisitions and/or greenfield initiatives.
This dynamic creates conflicts of interest for a few reasons. First, the leasing partner may compete directly with your contracting businesses today. Second, in the future, the leasing partner may acquire a competitor in your local market or initiate a greenfield operation that competes directly with your contracting business. Lastly, the leasing partner will have detailed information about each customer that you put on the leasing program and may have the local resources to service those customers directly. Therefore, it is important to understand the origins of a leasing partner and inquire directly about any potential conflicts of interest that may exist now or in the future.
2. Equipment Flexibility — Does the leasing partner require use of a specific brand of equipment or provide flexibility to utilize multiple brands of my choice across each of my trades?
The home services industry has experienced significant and widespread equipment shortages over the last two calendar years, and research indicates that such shortages will continue throughout 2022. A few home comfort leasing programs in the market limit use of the program to only one brand of equipment even though such equipment is used in only one trade and isn’t available in sufficient quantities to meet contractor demand. In addition, as a general matter, the best contractors avoid tying their sales process to a single brand of equipment, but instead, implement value-added programs that they can utilize across multiple brands and trades. For these reasons, it is critical to understand what equipment limitations may exist with a leasing partner.
3. OEMs & Contractor Success Groups — Does my preferred OEM or contractor success group recommend a leasing partner, and if so, do I understand the motivations behind this recommendation?
Valued added programs sponsored by OEMs and reputable contractor success groups are great tools for contractors to utilize. These programs not only deliver access to new, innovative products and services, but also allow contractors of all sizes to benefit from the scale of these organizations through rebates and/or preferred pricing arrangements. Moreover, a solid recommendation from an OEM partner or contractor success group typically carries an expectation that the vendor was vetted thoroughly and does not have conflicts of interest with the contractors that it will serve.
Unfortunately, in the home comfort leasing space, these basic expectations do not always hold true. Some OEMs and contractor success groups are promoting leasing partners that compete directly (or through affiliated entities under common control) with their contractors in markets across the U.S. In addition, the OEMs, contractor success groups, and the leasing partners aren’t being transparent about this conflict. Why would your preferred OEM or contractor success group promote the use of a leasing partner that competes with you today or is likely to in the future? Is there a business relationship they are trying to preserve or start? If so, at whose expense?
4. Value — Does the leasing partner deliver a comprehensive value proposition that is economically attractive for me, my customers, and my leasing partner?
Profitability is always important in any business decision. However, contractors often are conditioned to focus on “price” rather than “value” when making purchasing decisions, particularly with commodities like installment loan financing. Some leasing partners promote “no dealer fee,” but that is only part of the picture. Multiple inputs impact the “price” that a leasing partner sets for contractor participation, including but not limited to: The consumer’s monthly payment, the amount of annual recurring revenue paid to the contractor, and the quality of training and support resources provided to the contractor. The next time a leasing partner promotes a “no dealer fee” approach, make sure you understand what you are giving up in return. Higher monthly prices to your customers? Equipment flexibility? Inexperienced training resources and support? Risk of your leasing partner competing with you? As they say, “There’s no such thing as a free lunch!”
5. Experience — Does the leasing partner have deep experience with residential home comfort leasing? Are they the best partner to train my team for success and support my business over the long-term?
Leasing of home comfort systems is relatively new to the U.S. market. Few residential contractors have experience with these programs, including how to: Market the program, communicate with employees and customers about the program, operationally manage the program, and succeed with the program. Experienced training and consistent support are key components that drive adoption and success. Consequently, it is essential to have a detailed understanding of a leasing partner’s training program and the specific professionals who will train your team for success.
Leasing of residential home comfort systems is an attractive tool for forward-thinking contractors. It can deliver enhanced revenue and profitability, increased customer retention and loyalty, predictable and consistent recurring revenue, and greater visibility into future revenue opportunities. Despite these compelling benefits, contractors should proceed cautiously, as selecting the wrong financial partner can create unanticipated long-term consequences. Thankfully, unconflicted and experienced players, who are focused on creating win-win-win outcomes for all stakeholders, exist in the residential home comfort leasing space. It’s your opportunity to find them!