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.