A few weeks ago, I was contacted by Jiyan Wei, The co-founder of BuildZoom. Jiyan and I go back a few years, and we’ve kept in touch occasionally to talk about the marketplace and potentially working together on a few things. If you’ve never heard of the company, BuildZoom helps homeowners find contractors to work with on their home improvement projects. Sound familiar? Well, BuildZoom does it a bit different. BuildZoom is a Y Combinator-backed startup that has raised a couple million bucks to sift through lots of big data to create a scoring system that gives consumers a “general idea of a contractor’s trustworthiness and ability.”
BuildZoom has one simple purpose: To help you find the perfect contractor. How we do this is more complicated. BuildZoom is a database of every licensed contractor in the United States. We work hard to figure out who the great contractors are, and who the bad contractors are. BuildZoom combines license information on 3.5 million contractors with 70 million building permits, and over a million reviews from homeowners and the Better Business Bureau.
Jiyan reached out to me to ask if I would be interested in sharing information with my readers from a recent study BuildZoom conducted measuring the impact state licensing has on consumer satisfaction scores. Below are some questions we kicked around about the survey (my questions in bold), with the full results available here:
Why did you guys decide to investigate how each state approaches contractor licensing?
Well, there are two types of public data that play an important role on BuildZoom: building permits and contractor licenses. The building permits provide us with insight into what is happening around the country; the license info tells us who is doing the work. Both of these are important signals that help us route consumer leads to the right place.
Initially, we took a pretty binary approach to licenses: either a contractor had one or they didn’t. Over time, we just became aware of certain patterns when analyzing consumer feedback on BuildZoom from a regional standpoint. This prompted us to pay closer attention to regional differences in licensing standards.
Why should consumers care about licensing?
For most consumers unfamiliar with the contracting industry, a license is a pretty abstract concept. They intuitively know it is a good thing but they don’t necessarily know what it implies.
For example if you were to ask 10 random people how much they care about the contractor’s license, 6 or 7 will probably say it is important to them. On the other hand, if you were to ask 10 random people how much they care if a contractor has a surety bond that is sitting there for their protection, 10 out of 10 would care. Well, maintaining a surety bond is a licensing requirement in several states but your typical layperson doesn’t make the connection between these things.
Our goal is to make the various attributes of a license, more explicit to consumers looking to hire through BuildZoom and this required us to do a lot of homework.
Why did you decide to compare licensing requirements to consumer feedback?
Every quarter or so, we take a look at consumer feedback gathered on BuildZoom for internal purposes. These days, we’re getting a good amount of traffic: in the last month, over 800k unique visitors came to the site and a significant portion of these people provided feedback on contractors.
These days, we go through a relatively strict process before approving a review. Before a moderator ever looks at a review, it has already passed a text filter; an IP check (to make sure we’re not getting multiple reviews from the same device); and user verification through e-mail or sms. We’ve gotten to a point where we feel good enough about the overall quality and quantity of consumer feedback, to share some of our insights with the industry. After researching each license board, it was pretty simple to then compare each state’s licensing standards with the consumer feedback gathered through the site.
Across the US, we saw a meaningful pattern in which states with high licensing standards for general contractors, typically had a lower rate of negative reviews. A couple things to note here: one, we focused specifically on licensing for general contractors. There were several states that license specialty contractors and we didn’t factor these into this particular research initiative. Second, there are some states that defer licensing to their counties or incorporated cities. Half of the New York State’s population is in New York City, which does have licensing requirements for GC’s but we didn’t drill-down beyond the state level at this point.
Based on this analysis, would you say that you’re pro-regulation?
I recently read a piece by Steven Greenhunt in the San Diego Union-Tribune on licensing where he quotes Chuck DeVore, who is now an executive at public policy foundation in Texas:
“Occupational licensing denies or makes it more difficult for the working poor to get on the rungs of the ladder of success. . .There’s no evidence these licensing schemes do anything other than drive up the cost of labor by restricting the supply.”
Based on our data, 36.4% of the reviews we’ve published over the past two years in Texas were negative, which is one of the worst scores in the country. Compare this to a state like California, which has some of the strictest licensing requirements in the country: in California, only 23.76% of the reviews were negative, which was one of the highest marks in the country.
We haven’t done enough research to draw a firm conclusion about causality. There are all sorts of economic factors that need to be considered, which are beyond the scope of our specific research. Montana for example, has pretty light regulations but one of the highest percentages of positive reviews in the country.
So there isn’t a simple answer. I would say that for states with large, diverse populations, the presence of a centralized regulatory agency, composed of people who understand the industry and their state, does seem to have a positive impact on consumer satisfaction.
What are BuildZoom’s plans for the research moving forward?
In the near-term, we are going to use the findings from our research into licensing to better educate consumers who are hiring through BuildZoom. It also has provided us with a guide on what we need to do on a state-by-state basis, to ensure a consistently great consumer experience.
What are some of the obvious (and not so obvious) benefits to operating in markets that are more regulated than others?
Generally speaking, you are going to encounter some form of licensing regulation if you want to work in larger US markets. New York and Illinois may not handle it on the state level but New York City and Chicago have licensing requirements for general contractors.
For the most part, states with higher licensing requirements are states where you’d want to be if you had the flexibility to choose. Compared to the market opportunities in states like California or Florida, the cost to get licensed just doesn’t seem like a terribly significant handicap.
Texas seems to have an interesting combination of high growth and low regulation, which are ingredients that seem to foster business growth. What I’m not entirely sure about is how sustainable this particular market is and whether it primarily benefits home builders or remodeling-focused contractors as well.
What does it say about individual states that don’t enforce stricter controls on home improvement do you feel those that do are just trying to reach for higher fees or do they have the public interest in mind?
Without more context, it is a little tricky to speculate on each state’s motivation. I’d say that state regulation is generally more of a reactive thing. I doubt whether a state would create a regulatory agency to just increase revenue; most times, they are probably just responding to their constituencies. That’s not to say that a state with an established board might not look for ways of increasing revenue after it has been set-up, particularly if their market is looking bullish.