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.

Sad Houses and a Service Mindset

I still try to live by the words of cultural icon and personal hero John Lennon, who said, “There are no problems, only solutions.” Photo by: Unknown

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-09.

Hermit House Redevelopment approaches every unique situation with a service mindset. We ask the question, “How can we help,” and we put our mission statement out there on everything we do:

We buy sad houses and make them happy again.

What does that mean? Or as one of our private money lenders put it, “Lee, what the hell is a sad house?”

A sad house is one that is not living up to its true potential. As with people, lots of things can make a house sad. Between the four of us on the Hermit Haus leadership team, we’ve probably seen them all at least once.

It all comes down to how you look at things. There are no opportunities without problems. You can focus on the problem or the solution. Granted, sometimes the solutions require more resources than you have. That’s where we come in. At Hermit Haus Redevelopment, we specialize in finding the resources that enable us to provide solutions.

Without going into too many details, here are a few examples:

Neglect

A couple of our recent projects involved deferred maintenance—repairs that were put off so long that their volume became overwhelming. One house stood vacant for more than a decade. Another was ignored by its owner until there was more wrong with it than he cared to address, even though he had the money to renovate it before he sold it.

In both of these cases, we gave the owners what they wanted: a quick sale without having to go through the trouble of dealing with contractors and hoping they would get the money the spent on renovation back out of the house.

Changing needs

We are currently acquiring a beautiful house, one that I would be happy to move into without doing any renovation whatsoever. The owners tried to sell it once before, but couldn’t get any traction in a down market. Now their needs have changed. and they don’t have time to wait for it to sell, and they were leery of trying given their previous experience.

What the owners of this house wanted most was to be out from under it. Even though we couldn’t give them what the house was worth (at least in their eyes), we could free them from a crushing two-hour commute to work after a job chance and the worry of another failed attempt to sell the house.

From personal experience, I know that if someone I’ve talked to loses their house to foreclosure, I have failed them.

Financial problems and foreclosure

As Carol and I have both mentioned, foreclosure is only the start of a nightmare that can last more than seven years. The consequences of foreclosure can sometimes return decades after the event.

Although we’ve purchased bank-owned houses, we haven’t been as successful in helping people avoid foreclosure as we want. After hearing the saddest sentence in the English language too many times, I’ve made it my mission to help as many people as will let me help them. If someone I’ve talked to loses their house to foreclosure, I have failed them. I obviously haven’t explained how I can help well enough.

Probate

We bought a house Sue Ann and I plan to homestead after it had been tied up in an estate for more than 20 years, vacant for much, if not all, of that time. During all those years, the estate had paid almost $10K each year in real estate taxes and more than $200 each month in HOA fees. I have no idea how much the insurance on the house ran. Luckily, the house was owned free and clear, so the estate didn’t have to make mortgage payments on an empty house. Even so, the estate spent almost $250K maintaining a house nobody wanted to live in. To be fair, there was an easement encroachment that scared off many potential buyers and their banks.

We freed the estate from future expenses on this house and paid cash for the house. In fact, we got the house even though our offer wasn’t the highest because the estate’s attorney realized we would be less likely to back out of the deal than buyers without our experience. Since then, we spent more than a year working with the City of Austin to resolve the easement issue and are in the process of finalizing the renovation so we can move into the house. I know the people moving into this house will be proud of it because they are us and we are proud of all the work.

Sometimes you have to tear something down to make it right again.

Poor workmanship

Another of our current projects involves an almost complete teardown and rebuild. The original owners did things on the cheap without regard to quality. We had to completely jackhammer the foundation and start from scratch. In the process of demolition, we found only three pieces of rebar in the original foundation. We also found electrical runs that were spliced together with electrician’s tape in the walls—a fire waiting to happen.

We bought this house from an estate, thinking that we were helping the heirs divest themselves of a property nobody wanted to manage. Instead, our primary service turns out to be making the house safe for anyone who lives there in the future.

Some people have said it sounds like we’re preying on other people whose problems have gotten the better of them. We’re not, but there are those in this industry who do. We don’t want to be vultures picking at the corpse of failure. We really do approach every deal with a service mindset. There is no Kobayashi Maru. We will buy your house or help you find some other solution. We want you to be as thrilled with the solution you choose as we are.

Construction Update: The Value of a Dumpster

The nanny suite has been skinned with hardiplank, but its emerging beauty is hidden by debris. Thanks to the dumpster, Blue Ridge looks inviting, even in the middle of the renovation.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-01-18.

This post started out to be a quick update on the two renovation projects we currently have running, but you know me: I can’t resist wagging my tongue when something finally sinks in. So, I’m going to preach (probably to the choir) about dumpsters first, and give a short update at the end.

Many rehabbers use dumpsters at their projects—certainly all of the ones you see on television. But others let the refuse pile up or pile it onto trailers to take to the dump when they are ready. The GC I have used for the last eight years falls into the later camp. “Why pay the money for a dumpster when I can haul stuff away much cheaper?” he asked the first time I suggested getting one. Not being intimate with that part of the business, his logic swayed me. He is handling the Villa Park project.

We decided to use a dumpster at the Blue Ridge project as we brought on a new GC who actually preferred renting a dumpster. The photos at the right show the difference between the two projects, both run by professional contractors who are very good at what they do.

I won’t compare overall costs, because the two projects are radically different and have produce dramatically differing qualities of debris. But priced by the yard, the dumpster method seems to win out, even in cost. Thirty yards of debris cost roughly $500 to dispose of at Blue Ridge. The same amount of debris cost about $450 to dispose of at Villa Park. So I saved $50 by having my GC haul off the waste. But take another look at the two pictures.

Now here are some hidden costs of having your GC dispose of the construction debris:

Lost work

Your crews aren’t making progress on your project when they are at the dump.

Neighborhood respect

While I haven’t received a single complaint about the debris at Villa Park, I haven’t had a single neighbor inquire about what we do and if we can help them. We have had a stream of neighbors at Blue Ridge wanting to see the project, and several talked about friends whom we might be able to help.

Workplace safety and productivity.

None of the crew on any of my projects has ever reported an injury. That said, I can’t help but believe piles of trash around a project have to decrease productivity as workers carefully negotiate the paths they have left.

Pride

While I am proud of the work we’re doing at both projects, and I know I will be extremely proud of the final products, I am ashamed of going to the Villa Park project now that I have seen a well maintained workplace at Blue Ridge. I believe the workplace conditions will also affect the pride of craftsmanship in the workers, too.

I am now an advocate. We are ordering dumpsters for the Villa Park project, and I have made a convincing economic argument to that contractor in favor of them.

Villa Park Update

We have now passed all inspections and are moving forward with finishing out the walls. The skylight has been removed and roofed over. It wasn’t leaking, but they eventually do.

Blue Ridge Update

All walls inside the house have been refloated after removing the popcorn. We lost a day because someone turned off the heat, and the drywall compound didn’t dry overnight. We should be ready to paint early next week, and the flooring will go in shortly thereafter.

Villa Park Nanny Suite Update

It's almost a house again.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-23.

Those windows look so much better than what was there before. This won't even REMOTELY resemble its before state!

-Suna

The Villa Park nanny suite is starting to look like a building again. As of this morning, it is officially dried in. Our GC will finish wrapping the building in Tyvek (or a similar plastic) to prevent any damage to the OSB siding. Then the city inspectors will give us the go-ahead to continue building the structure. What a wonderful Christmas present that will be.

If all goes well, the nanny suite will be on the rental market by the end of January.

Raising the Roof

That gap shows how much the house was raised.

That’s one of the big old beams poking out!

Foundation in process

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-15. This is Sue Ann’s post. I’m including it here because it talks about one of our personal projects, and I wish I had written it.

Between (among?) all of us, we’ve done a fair number of remodels and rehabs. However, the one we are currently working on, Villa Park, has to be unique. We are literally having to raise the roof on this house!

We knew all about the drainage issues (see our post on November 25), so we knew we’d have to do something. Turns out we have had to completely remove the foundation, which was crumbling, and put in a nice, new up-to-code one. And for that to happen, the house had to be 8 inches taller! Take that, poor drainage!

This required some engineering consultation and careful planning. They literally had to cut the house horizontally and prop it up, then reinforce it so that it will be stable (and meet code, cause we’re in Austin and they care! We also don’t want it falling down on people.) The gap in the photo at left shows how much higher the house is now. The one at right shows the beam, and what has to be repaired on the exterior for it to look like a real dwelling again.

Once the house was all stable and the right height, a great deal of work was done to create a new, stable foundation. All the pipes for the plumbing were put in first. Road base and other material was placed at the bottom, plus lots of rebar. The third photo shows that in progress. The vapor barrier has been placed over half of the foundation. Now it’s all covered.

I hear the concrete was poured already, or is being poured as we speak.

The foundation is poured. This is a step.

EDIT: Yes we have a foundation. I’ll put that picture at the end. FINALLY we can turn the shell of a building into a really nice 3 bedroom, two bath dwelling! This is definitely not a rehab that is quick and easy! But, it will last and last, and most importantly cash flow!

PS: Lee or one of the contractors would have a lot more technical detail to add to this. Also, thanks to Tony G. for the photos.

Villa Park Progress

Still only slow progress on the foundation.
The exterior walls are still all temporary, but we’re making progress on preparing the footing to receive the permanent ones.

The site looks good—from a distance. When you get up close, you see what a mess it is.
Brody doesn’t like being in the back. He’d rather ride in my lap, but that’s not happening.

Work continues on the Villa Park foundation. The piers are mostly done, and the exterior footings are down. That means we were able to set the building down.

It’s a relief not to have the building floating in the sky—even if we don’t have the “real walls” in place.

 

Always Pay Attention to Your Inspector

You can see the three pieces of undersized rebar that supported the foundation in the two-story duplex.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-11-25.

We bought the Villa Park property almost two years ago because there was a nice house and a duplex behind it for a total of three rental units. It was one of the last properties Sue Ann and I bought before forming Hermit Haus with Carol and Russell.

At first blush, it was going to cash flow really nicely. The previous owner had done a bunch of cosmetic work to make the property more presentable. Curb appeal was absolutely gorgeous.

I hired my friend, Bob Smith, to do the home inspection. I’ve worked with Bob on several other houses, and I’ve even walked away from deals based on his recommendation. This time I didn’t listen, and it bit me in the butt.

There was a seemingly innocuous line about the duplex in the inspection report. It said something like, “Have a foundation professional inspect the foundation.” I thought, “Yeah, I know the foundation is bad. No problem will just have it leveled.”

Well, the first time it rained we had water coming up through the foundation into the duplex. Luckily we hadn’t rented it yet because we wanted to level it first. When we ripped up the carpet, we found that the foundation was not just unlevel; it was crumbling. That lead to our first experience with the Wall of Dis. I mean trying to get permits in Austin.

But this post is about the foundation.

To dismantle and repour the foundation, we had to lift the building off of it. When we started demolition, we found out that none of the electrical work in the duplex was to code. We found bare wires spliced with electrical tape inside the walls and numerous other problems that could have caused a fire at any time.

Thank God we had a bad foundation.

With the second round of permits in hand—the first having been “erroneously issued”—we begin demolishing the original foundation. It turns out there were only three pieces of rebar in the entire slab. (Rebar is the thin metal poles that run through concrete to give it its strength.) No wonder our foundation crumbled. There was nothing to hold it together.

We’re finally back on track. The trenches are dug, and we will pour the beams that will support the main slab. Once that’s done we can reattach the building to the foundation.

The moral of the story remains, “Always listen to what your inspector tells you.” If I had brought in the foundation company before closing on the house, I could’ve saved around $150,000 in rebuilding the duplex. I might have at least been able to negotiate the purchase price down a little. Maybe not, there were three backup offers on the property.

When we’re done we will have a three-bedroom home instead of a duplex behind the main house at Villa Park. It will take about 10 years of rental income to recoup the expense.

I’ve learned an expensive lesson. But it’s one I’m glad to share with you.

Villa Park Update

The panoramic feature of the iPhone makes for some interesting distortions. I would love it if Villa Park B were really curved.

Rain, rain, go away

Come again some other day

The rain has finally let up enough to allow work to resume on Villa Park B. The problem was the trenches for the new foundation. They filled with water, and we had to wait for it to drain.

There was also a concern that the ground would be soft enough to cause the entire unit, which is supported on temporary footings and walls, to fall. It didn’t.

• Every day construction is delayed costs me tons of money.
• Taxes continue to accrue.
• The mortgage has to be paid.
• Financing costs for the renovation mount.

All that while neither unit is bringing in any income. I can’t rent the main house while the back unit is in such a precarious stage of renovation. #FirstWorldProblems.

At least, we’re making a little progress now.