If It Were Easy….

Even when you have an established relationship, just getting contractors to show up in a hot market can be a challenge.

Weather has a way of overcoming your systems. It has been one of our biggest uncontrollable expenses this year.

When squatters, vandals, or thieves break into a project, the best you can hope for is to replace a broken window or two. When you’re working to turn a neighborhood around, break-ins will happen.

The discovery of knob and tube wiring at St. John’s cost us more than 100% of our contingency to rewire the house and bring it up to code.

Brody reminds us that the first rule of investing is vigilance. Keep an eye on everything.

This post originally appeared on the Hermit Haus blog on 2016-08-20.

If it was easy everyone would do it

If it was easy everyone would be in Clover

If it was easy I'd be the first to do it

If it was easy I'd gladly go back through it

—Lynn Anderson, Ed Bruce

This year, most of our redevelopment projects have run way over schedule. Running long is a bad thing because it always involves extra costs that eat into your schedule—if nothing else, your holding costs mount up. So I wanted to take a look at the reasons why we’re taking longer to complete projects than we thought we would. I also wanted to figure out what, if anything we could do about them. Here’s some of what I found:

Contractor Work Load

The projects that have run longest have all been in hot markets. When a market is hot, it can afford more redevelopment/remodeling work than softer, cooler markets. Contractors, even those with whom you have established long-term relationships, have more work than they can handle, and they often prioritize higher paying retail jobs over maintaining a close relationship with investors, who typically negotiate lower prices than retail customers. Even if you enforce schedule penalties in your contracts, your contractors may decide paying them—or walking off a project—is better for their short-term financial picture than meeting your deadlines.

Unfortunately, the only alternative I see is simply to plan for longer projects up front. If you plan for a six month project that completes in five, you are in much better shape than if you plan for a three month project that completes in five. The net result of your projections being tighter is that you will probably do fewer projects because you have to buy them at lower prices.

Weather

I’m not going to complain about all the rain delays we’ve had this year—not after the drought and wildfires of previous years. But we’ve had plumbing inspections on the Villa Park project delayed by months and leveling St. John’s house put delayed by weeks because of standing water. So far this year, I estimate the rain delays have cost us more than $10,000.

As Charles Dudley Warner famously said, “Everybody talks about the weather, but nobody does anything about it.” All you can hope is that you have large enough reserves to survive the short term so you can reap the long term benefit. You also need to insure your projects with builders’ risk policies that cover any storm damage that may occur, especially if your project is in a flood zone.

Vandalism and Theft

When a redevelopment site sits vacant, unsavory people eventually notice, especially if you’re working on a property that has been vacant for a while before you start your project. We’ve encountered vandalism on the St. John’s house where people broke into the house to party and sleep it off over a holiday weekend. I also mentioned the dumpster full of engine oil there. And finally, one of our contractors had all of their tools and 30 gallons of paint stolen from the Villa Park project back in February. All of these events took time and money to repair.

The good news is that our insurance covered at least part of the costs we incurred here. Our contractor’s insurance replaced most of their tools. The jury is still out on whether the insurance will cover any of the oil disposal costs. When you encounter vandalism and theft (and you will if you’re in this business long enough), insurance can be the difference between making an losing money.

Unplanned Repairs

“You never know what you’ll find when you open a wall” is a truism in this business. Here are some of the things we’ve found in walls, in ceilings, and under floors this year:

• Knob and tube electrical wiring 
• Illegal electrical splices 
• Undisclosed WDI damage 
• Broken pipes 
• Inadequate sewer ventilation 
• Inadequate engineering

Luckily, with all of that we haven’t found mold or asbestos.

But these things are why we always have a contingency built into every reconstruction budget. Our contingency is usually about 10-15% of the overall reconstruction budget. On houses built before 1970, we can include as much as 10% of the purchase price. So far, we have never failed to use at least 100% of our contingency on any project.

The Bottom Line

The bottom line for all of this is that redeveloping, renovating, or whatever the scope of your project is a risky business. Like farming, many of the factors that affect your economic survival are far beyond your control. You can’t even know about a lot of them when you commit to a project, but we have a duty to provide a safe home for our buyers. We place people first (above profits), and so should you. If all you want is the money, you’ll develop a reputation that will make it unattainable.

Dumpsters: Lessons Learned #2

Yes, there is an uncovered dumpster in front of St. John’s house again—and another lesson learned.

A covered dumpster can pay for the difference in price over the cost of an uncovered dumpster by deterring theft of services. If you own an uncovered dumpster, DumpsterGard can help. Photo source: Dumpstergard

This post originally appeared on the Hermit Haus Redevelopment website on 2016-08-18.

I haven’t written much about St. John’s house, primarily because we are fairly passive in that deal. Our friend Larry is managing that project through his San Antonio GC, Abigail. Overall, I am very satisfied with the progress, even though we are now way behind schedule, but that is the topic for another post. Today I want to talk about a lesson we learned the hard way.

Back in January, I talked about the value of using a dumpster to organize a construction site, keeping it neater and safer. We learned another valuable lesson about dumpsters thanks to the St. John’s project.

There are two basic varieties of metal roll-off dumpster: covered and uncovered. Dumpster covers can be hard shell or tarp. Either way, covering the dumpster securely can make it harder to get into when left on an empty job site.

Why is that important?

A covered dumpster can pay for the difference in price over the cost of an uncovered dumpster by deterring theft of services. If you own an uncovered dumpster, DumpsterGard can help.

Even though we are beyond demolition on St. John’s project, there was enough landscaping debris and scrap from an unplanned upgrade to the house that we decided to bring in another dumpster as we wound down. The waste removal company delivered the dumpster near the end of the shift, and the construction crew had them place it where it would be accessible then left for the day.

Overnight, someone came by and completely filled the dumpster with paint cans and other containers full of used motor oil. My guess, based on the volume of oil, is that someone had been paid to cleanup another site and dispose of the oil legally. But when they saw a convenient empty dumpster, they decided their profit margin would be considerably enhanced by not paying for a legal disposal. They simply filled our dumpster with their hazardous waste and called the job done. Even though theft of services is a crime—in this case a felony because of the economic value of the theft—there were no witnesses to the crime and not enough clues for the police to investigate. The problem is made worse because motor oil can’t legally be disposed of in a dumpster. Duh!

Now the burden and expense of legal disposal falls on us.

Would covering the dumpster have absolutely prevented this kind of theft? No, but it would have made the process more difficult and slower. Criminals tend to look for easy prey, like an uncovered, unattended dumpster. The more difficult you make committing a crime, the less likely you are to be victim of one.

In short, rent a covered dumpster and make sure your crews secure it every night before leaving the site.

Construction Management Academy

JD Esajian explains all the steps involved to permit a house his team is renovating in La Jolla.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-08-03.

As Sue Ann mentioned the other day, I spent the weekend in San Diego at a class called the Construction Management Academy. It was two full days under the tutelage of JD Esajian, formerly of Flip That House and one of the founders of CT Homes and Pacific Builders.

There were a lot of details to pick up on, but we didn’t spend as much time on management systems as I would have preferred. Instead, JD used several of their current projects to call out the things you have to be aware of in a construction project, many of them unique to projects that sell for more than a million dollars in California.

Here are a few of the chestnuts I brought home for the Hermit Haus team:

Here I am on a rooftop deck of a $3.2M renovation that turned a 2K square foot home into a 4K.

• It is cheaper to fix problems uncovered in planning than in construction. Spend the time needed to thoroughly plan every project instead of trying to minimize the time between closing on the purchase and the start of demolition.
• Some neighborhoods have lengthy delays for permitting. (We know this is also true of Austin, where two of our projects have taken more than a year to permit.) That’s okay so long as you know it going into the project and take the appropriate steps:
  • Factor the extra holding costs into your purchasing decision. Usually, this means negotiating a lower purchase price, but it may mean leasing the property out for a year while you work on getting the permits.
  • Make sure your financing plan takes the lag into account. You don’t want to have to repay the purchase and renovation loan(s) before your have started your project. Also, you probably don’t want to be paying high private- or hard-money interest rates for a year before you start work.

I’m going to have signs like this one made to post at all of our job sites. Not all adults behave as such.

• You can’t count on appreciation to help you out if you buy wrong. Run your numbers many times before you fork over the cash.
• There has to be a transparent, workable system to facilitate communication and accountability among all team members, including yourself, contractors, lenders, and anyone else involved in the project.
• Always have a contingency in place. There is a truism that you never know what you’ll find when you open a wall. Or a floor, for that matter.
• You’re not alone in this business. Network with your peers. Chances are someone else has already solved the problem that has you stumped.
• Every company should have a mission statement and a code of conduct. Make sure yours are prominently displayed on every job site.

Siri Dictation

Shouldn’t that be, “…a short list of subs”? Oh, Siri!

Here’s something you won’t find on my business blogs where I have to be more … businessy.

For those of you using screen readers, here’s a transcript of the Messages screenshot. And it makes it look like I put more effort into his post.

Them: Do you use big name foundation companies for slab work?

Me: [Basically, once].

Them: I have a carpenter … and a shirt lust if dubs.

Me: Siri dictation?