All posts for the month October, 2008
Posted by jetsetrnv8r on October 30, 2008
October 27 2008 Real estate has always been cyclical and we’ve been in what looked like a routine down cycle since mid-2006. Real estate has also been the engine of the greater economy with new homeowners buying appliances, furniture, building materials and more – boosting production and creating jobs. So it’s never been surprising when a slow real estate market slows everything down. But how in the world did this real estate bust ever bring down the biggest Wall Street firms and lead to the global economic disaster we’re in today? And why hasn’t this ever happened before? And what are all these new terms we’re hearing like “sub-prime mortgages”, “mortgage-backed securities” and “credit default swaps”? It can all seem mind-boggling, but it’s really quite simple.
In the good ol’ days, your local bank gave you a mortgage for your home and you paid that very same bank back over the next 30-odd years. You may have done all your banking with this particular bank and you and your wife may have even played bridge or tennis with your banker and his wife. Beaver and Opie lived down the street, Donna Reed greeted you at the door in a crisp shirtdress and pearls, Hazel cooked and cleaned while doling-out sassy back-talk, and Father always Knew Best.
For better or worse, those days are long gone. The Republican revolution of the 1980s led by Ronald Reagan followed by Newt Gingrich’s “Contract With America” ushered in a new wave of “small government” and pro-business thinking in Washington. Deregulation became the magic elixir and Wall Street embraced the mantra of “greed is good”. One of the things this new deregulation did was allow banks to sell their mortgages to larger banks, who in turn packaged them together and sold portfolios of these mortgages to investors in financial instruments called “mortgage backed securities”. Some of these portfolios were made up of better quality mortgages, and some of lower quality mortgages and they were rated according to risk. This new packaging of bad loans with good loans made it easier for banks to issue riskier loans to less qualified consumers – and with more people flooding into the housing market, house prices shot up like a rocket. Throughout the 1990s, people who had previously been shut out of the American Dream of home ownership were now welcomed with open arms. Those who wondered how they would ever make the payments when their adjustable rate mortgages actually adjusted were reassured that rising home values would enable them to refinance before their payments increased. Why, they could even take money out of a refi and still lower their payments! Houses became giant ATMs – never mind you were simply giving up equity. There were actually financial experts advising people to never pay off a mortgage – that that was “old-fashioned”, “unsophisticated” thinking!
Before I go any further, let’s take a step back further in time – back to the turn of the last century. The “gilded age” of the 1890s was a decade of rising affluence as cities and municipalities grew rapidly to absorb the mushrooming population of immigrants from the previous 20 years, many of whom were now beginning to prosper. As the industrial revolution took hold, a new wave of manufacturing and service industries grew, and so did the stock market. Investing in stocks became available to the working classes for the first time and with the increase in investors, new investment vehicles sprouted like weeds in a garden. One of these popular new investments was side bets made on the performance of a stock. Without actually buying a stock, you could place a bet that that stock would go up or down. These side bets became known as “derivatives” and they were bought, sold and traded in betting parlors all over the city called “bucket shops”. Since these bucket shops fell outside the scope of federal regulators, nobody was checking to see if the so-called “banks” selling these derivatives had the cash reserves needed to pay off these bets. As the stock market reached a fever pitch in 1907, these derivatives added to the hysteria that led to panic resulting in a stock market crash. So in 1908, this kind of gambling on stocks was made illegal and the bucket shops disappeared. During the depression, even tighter regulation was established by the Securities Exchange Act of 1934.
Now fast-forward to the year 2000. Bill Clinton is a lame-duck President with a Republican-dominated congress. Deregulation is still the mantra and Clinton, a centrist Democrat eager to co-opt the Republican agenda whenever he could, along with his Chairman of the Federal Reserve, Alan Greenspan, enthusiastically signed into law the Commodities Futures Modernization Act of 2000. This not only overturned the 1908 law, but most significantly it removed the trading of derivatives around these new mortgage-backed securities from Federal oversight. Savvy investors could bet that some of these mortgage backed securities would fail as homeowners defaulted on their mortgages. These bets, called “credit default swaps”, were invented by JPMorgan in 1994 as a sort of insurance against outstanding corporate loans and to free-up cash to offset the huge cash reserves they were required to keep against those loans. Hedge fund managers trading them had become the new Masters of the Universe. Now credit default swaps could be traded against mortgage backed securities with no federal oversight – meaning no requirement to keep cash reserves to pay them off, unlike credit default swaps against corporate loans and other investments. Real estate was the new lawless wild west town. This further stimulated a market for ever more risky mortgages, throwing more gasoline on the bonfire. By 2006, the housing bubble began to plateau as prices simply became unsustainable. Homeowners who were counting on refinancing before their mortgages became unaffordable suddenly found themselves “upside-down” (owing more on their house than it was worth). Foreclosures started to mount, swelling to a tidal wave that crashed on the beach in September 2008, wiping out everything in its path, including the giant Wall Street firms who had taken to mortgage-backed securities like a junkie on smack. Without the cash reserves they would have been required to hold had they not been deregulated, they were wiped out.
The problem, as Alan Greenspan now points out, is that he and the others in charge had too much faith in the executives running the banking industry. They believed bankers would be responsible to their shareholders and self-regulate. Instead, these executives paid little attention to the details and took delight in paying themselves enormous bonuses – often in excess of $100 million. Now that a conservative Republican, pro-business/small government administration has (ironically) federalized the banking system, we, the taxpayers, will all be paying for that party for decades to come. Will the bailout work? It’s too soon to tell, but the fact that it’s being administered by the very same Wall Street executives who created the mess doesn’t give JetSetRnv8r much faith.
Update: Days after writing this post, it was revealed that the first thing the Wall Street firms did with their federal bail-out money was set aside billions of dollars for executive bonuses. Surprised?
Posted by jetsetrnv8r on October 27, 2008
My “Real or Fake” series on vintage furniture is, by far, the most popular draw to the JetSetRnv8r site. I’ve received lots of emails asking about other pieces, but none more than Ludwig Mies van der Rohe’s iconic Barcelona Chair, also known as the MR90 so here it is.
Like the other pieces in my series so far, Corbusier’s LC chair, Eames’ Lounge 670 and Ottoman 671 and Noguchi’s coffee table, the Barcelona Chair is one of the most popularly knocked-off pieces of mid-century modern furniture. It’s familiar to everyone because there’s a version of it in nearly every furniture store in the world.
As with many modernist pieces, its simplicity makes it easy to duplicate. Many copies are of exceptionally high quality – some would argue even better than the real thing. This is a case where you can get a good quality knock-off at substantial savings, but, as always, if you’re buying for investment value, only the real thing will do.
The Barcelona chair was designed in collaboration between Ludwig Mies van der Rohe and his partner and companion Lilly Reich in 1929 for the German Pavilion at the Barcelona International Exhibition. Two of these chairs and two matching ottomans were the only pieces of furniture in the pavilion. The chairs were created as thrones for the visiting King and Queen of Spain, and the ottomans were for their attendants.
Soon after the closing of the pavilion, the chair went into production at the Bamberg Metal workshop in Berlin. Although the modernist ethos was to build furniture cheaply for the masses, the Barcelona chair was extremely difficult to manufacture and was fabulously expensive from the start. The earliest versions were made from welding low-grade steel plates in a flat finish – not chromed as they are today – upholstered in white kid leather. Thonet took over production in 1932 until 1948 when Hans Knoll’s wife, designer Florence Knoll, purchased the licensing rights to most of Mies’ furniture and Knoll began manufacturing the chair, which they still do to this day. The chair was such a big seller that Knoll created a whole line of Barcelona furniture inspired by the chairs including Barcelona stools, the Barcelona Daybed, Barcelona Benches, Barcelona sofas, Barcelona coffee table and the Barcelona side table. Many of these pieces are mistakenly attributed to Mies by people who should know better (hear that, DWR catalogue?) but he did not design them.
Although stainless steel had been around since the turn of the century, it did not come into popular use until the 1950s when Mies redesigned the chair to be made from this superior material. Today, the chair is available in a choice of two finishes – chrome plated and polished stainless steel. The two are nearly undistinguishable to the untrained eye, but if you saw them side-by-side, the polished version has a more “liquid” finish. And there is a significant difference in cost – Knoll charges $4,083 for the chrome plated model and a staggering $6,235 for the polished stainless. The matching ottomans are an additional $1,930 and $3,608, respectively.
So the next time you see a stately pair of Barcelona chairs and ottomans in a sleek modernist home, you can appreciate the fact you’re looking at nearly $20,000.
Unless, that is, you’re being deceived by clever fakes. The chair is easy to copy and passable versions are available for as little as $329 online, or $635 including an ottoman. Good quality reproductions can be had for $800 and up. The real deal is made in the U.S.A. but fakes come from Italy, Brazil, China, India, Korea, Vietnam, Russia and Romania. You’ll often see them called “Pavilion Chairs” to avoid trademark infringement.
The first give-away is the proportions. Many cheaper fakes are visibly smaller or appear to stand taller than they are wide – Knoll’s version appears wider than tall. The cushions are often straight and stiff. The leather cheap and shiny. Whereas the Knoll version is upholstered with twenty individual panels, cut and hand-welted and tufted with matching buttons, cheaper copies are simply one piece and pleated. Knoll ottomans stand slightly taller than the edge of the chair seat – many copies have a lower (and more comfortable) ottoman.
So if you’re buying vintage, how do you know if you’re getting the real thing? First look for the Knoll Studio logo and Mies’ signature stamped onto the frame. Without that, it’s a fake. If it has the stamp but you think it may be counterfeit, double-check the dimensions of the chair. Then look at the quality of the leather and make sure it’s not a single pleated piece. Check the quality of the leather straps – if they’re vinyl or nylon, walk away.
But if you insist on buying new, buy from an authorized Knoll dealer or reseller like Design Within Reach. If it hurts to write that check, you can comfort yourself with the knowledge that Knoll pays a royalty on each chair to the Museum of Modern Art who now owns the design rights. They should throw in a free museum membership for life with each chair.
Posted by jetsetrnv8r on October 26, 2008
Up till now, I’ve been a flipper of high-end properties. That may change given the upheavals in our economy and it’s possible I may move into the foreclosure market. These properties are also called “bank owned property” or “REO” for “real estate owned”. You’ve probably been hearing a lot about “short sales” too, but that’s something different and I’ll get into that in a separate posting.
In the interest of full disclosure, I have not yet bought a foreclosed property but it’s not for lack of trying. I’ve been shut out of six offers in recent months because I didn’t know the nuances of the game. Here’s what I’ve since learned:
Banks are dispassionate
When buying from an owner, there is lots of emotion that guides the strategy of the offer and the subsequent negotiations. When buying from a bank, the property is just a number on a very long list and the bank has no emotional ties to the house whatsoever. Your offer is reviewed by a bank employee who is following strict policies and procedures. Your offer either falls within their acceptable parameters and the deal kicks into gear, or it doesn’t and your offer is ignored. There’s no negotiation so any efforts to try to outsmart the bank are wasted.
Understand how the price was determined
Banks are overwhelmed with properties and it’s getting worse by the day. They do not have the wherewithal to inspect each property or the money to spend $400 or more for a proper appraisal on each and every one. Instead, they often outsource to a real estate broker for what’s called a “BPO” – a Broker’s Pricing Opinion. This broker may or may not visit the property – they may establish the price merely by doing some quick desk research and going by gut feel. (As a former appraiser, I can tell you they also called me for an opinion.) Since the property is one in a very large portfolio, nobody cares enough to re-think or second-guess the BPO. I know from having worked with real estate agents and brokers, they will do everything they can to prop up the prices so they will generally come in high – higher than a certified appraiser would. Even though the banks know this, they’d still rather start on the high side than leave money on the table, so the high estimate is accepted.
Know when the price starts to move downward
I made a lowball offer on a foreclosed house while it was within 30 days on market and my offer was ignored. About 90 days later, it sold for much less than my offer. What happened? I was aggressive too soon. When a foreclosed house is first listed, the bank will be the least flexible on the price. Once the listing hits 30 to 60 days on market, the bank may start accepting offers that are within 10-15% of the asking price. At 90 days, they may lower the price and accept offers within a wider margin. So pay attention to how many days the house has been listed by watching the “Days On Market” or “DOM” on the MLS listing. And be sure to check the listing price daily – if it drops, it’s time to make your move.
Know your market to spot the bargains
Frequent readers of JetSetRnv8r know that my Golden Rule is to buy where you know – know the prices, know the buyers, know the trends, etc. If you’re an expert on the area, you’ll know if the price on a new listing is high, reasonable or low. In their rush to get the house listed, the bank may have accepted a BPO which is too low and that should set-off alarm bells in your head.
If at first you don’t succeed, try, try again
If the bank doesn’t respond to your first offer within a week at most, don’t wait, they are not going to respond. Like I said earlier, they do not negotiate so no response is a clear “no thanks”. Raise your offer a few points and repeat every four to five days until you have a deal.
Look for more postings to follow as I wade deeper into the foreclosure pool. And I invite my readers to contribute their experiences in this burgeoning new market.
Posted by jetsetrnv8r on October 25, 2008
October 15 2008 With the capital markets frozen and the world economy in crisis, everyone is looking for someone to blame. The airwaves are full of politicians and pundits lashing out at this party or that party. The Obama-Biden team blames runaway de-regulation dating back to the Reagan administration. John McCain blames the rampant “greed and corruption on Wall Street” while his running mate likes to wave her school-marm finger at the “predatory lenders”. Some conservative talk radio hosts blame consumers for not taking “personal responsibility” while more liberal commentators lay the blame squarely at the Bush administration.
We’re all swayed by our own reality and frame of reference. But I can tell you one thing, I’ve worked inside the system and I could see things unraveling years ago. The system is broken and has been rotting from the inside-out for many years.
When I got into real estate investing full time, the first thing I did was get my appraiser’s license as I felt that was the best way to learn the fundamentals of the industry. I freelanced for two appraisal companies (more on the life of an appraiser in a separate posting) and had a handful of my own clients who were mortgage brokers. Banks worked only with the most senior, experienced appraisers who might sub-contract the work to less-experienced appraisers such as myself. But mortgage brokers preyed on new appraisers who they knew were the most desperate for the work and would do whatever it takes to deliver the desired outcome. Banks paid their appraisers within days – mortgage brokers paid whenever they felt like it, if at all. And if pressed for payment, they’d drop you for another new appraiser.
I can attest first-hand that appraisers have been under tremendous pressure to “hit the number” – that is, bring the appraisal in at the value needed by all parties – sellers, buyers, agents, mortgage brokers and bankers – for the deal to go through.
What does this mean? OK, think back to the go-go years of 2003, 2004, 2005. Values are rising up to 20% per year. An aggressive seller prices his house high. An eager buyer, convinced by his agent and financial advisors that values are rising fast, agrees to the price – or offers an even higher price to best any competitive bids – and applies for a mortgage. Both the buyer’s and seller’s real estate agents as well as the mortgage broker and bank all have an incentive for that price to be as high as possible as everyone along the chain is earning a commission on that sale price. The mortgage broker – or the bank – hires the appraiser and seeks the one who they know will turn the appraisal around the fastest (2-3 days) with the fewest problems.
The appraisal must be based on “comps” – or the actual sales of comparable homes in the neighborhood during the past few months. Not listings, not pending sales, not sales that fell out of escrow but actual closed sales. There are tight guidelines for what kinds of sales are appropriate comps – they must be in the immediate neighborhood – across a busy road or higher up a hill should not be used as neighborhoods can change within a block or two. Houses larger or smaller by a factor of 20% should not be used. Houses of similar condition are sought – if the “subject property” (the house being appraised) is a fixer or newly renovated, than the comps should also be fixers or recently renovated. Amenities such as room counts, bathroom counts, fireplaces, pools, views and number of garage spaces are all considered. The appraiser finds anywhere from eight, nine, ten or more potential comps and narrows the choice down to three to five for the appraisal report. Adjustments are made to each comp – adding or deducting value to account for differences from the subject property. It is three parts science and one part art and requires sound judgment, in-depth knowledge of the area and experience. The appraiser has the most at stake here as any mistakes or the slightest appearance of fraud can lead to loss of work or worse – lawsuits or loss of their license.
Aggressive seller’s agents often meet the appraiser with stacks of “comps” they’ve pulled. They do this under the guise of being helpful but their real motive is to try to ensure that the appraiser uses the best comps – the highest sales – for their reports. These comps, however, are rarely useful and the appraiser is discouraged from accepting them. They pull from better neighborhoods or larger homes in better condition. Since refusing them will raise red-flags with the agent, the savvy appraiser accepts them with a smile then throws them away.
During the recent real estate boom, mortgage brokers (like my clients) would call and say “I need this house to come in at $X”. Right off the bat, this is a violation of the ethics rules as they are not supposed to pressure the appraiser or influence the outcome. It wasn’t unusual for the mortgage broker to call two or three appraisers and ask each one for a verbal confirmation on that phone call that they could “hit it” before they’d be hired – also a violation. If the appraiser couldn’t meet that number, this could kill the sale which would incur the wrath of all parties so that appraisal would be thrown away and a new appraiser hired until they got the results they wanted. When this happened, everyone accused the appraiser of incompetence and that appraiser would not only not get paid for his work (anywhere from $350 to $1,200) but would be black-balled from any future work from all parties involved in that deal. It only took one or two such instances to kill a career. Appraisers who cooperated were highly sought-after and got lots of work from strong referrals throughout the industry.
So who’s to blame for the current crisis? I blame the legislators who created a system that motivated and rewarded inflated values if not outright fraud. The consumer is the hapless victim and is the last person who should be blamed. The consumer was just following the advice of experts they relied on and the government who encouraged them through tax incentives and a steady drumbeat of homeownership as “The American Dream”.
Posted by jetsetrnv8r on October 15, 2008
CHICAGO, October 7, 2008. Like the orchestra playing on the deck as the Titanic made its final descent, Wright Auctions of Chicago gamely held their Modern Design auction of mid to late twentieth century furnishings and art in the midst of the global economic tsunami that’s engulfing us all. (Dow down 500 that day!) With even the rich feeling the pain of evaporating investments, some diehard collectors practiced retail therapy by opening their thinning wallets to pry loose their last few dollars. (Brother, can you spare an Eames LCW chair?)
After a quick analysis of the 417 lots by such stalwarts as Charles and Ray Eames, George Nelson, Isamu Noguchi, Norman Cherner, Florence Knoll, George Nakashima, Edward Wormley, Hans Wegner, Milo Baughman, Jean Prouve and others, here’s how the results broke down:
117 lots sold within their projected ranges (28%)
157 lots did not meet their reserve (37%)
49 lots sold below their ranges (12%)
94 lots sold above their projected ranges (23%)
Of the 157 lots that did not sell, many were assorted tables and chairs by George Nelson, George Nakashima, Vladimir Kagan, Hugh Newell Jacobsen, Florence Knoll, Finn Juhl, Gio Ponti and, surprisingly, various pairs of Mies van der Rohe’s Barcelona chairs reasonably priced between $5,000 and $7,000.
A Swan Chair by Arne Jacobsen estimated between $4,000 and $6,000 sold for a conservative $4,800 – considerably less than prices as high as $7,200 I’ve seen in recent years.
Of the 94 that sold above their projected ranges, there were a few notable pieces that hit it way out of the ballpark:
And the surprise of the evening was a 1937 bakelite radio by Isamu Noguchi for Zenith that was expected to get $3-5,000 and instead sold for an eye-popping $22,800! (And it doesn’t even play FM! What’s that about?!?)
Readers of my posts on the Eames Lounge 670 and Ottoman 671 will be interested to know that a vintage rosewood model by Herman Miller sold for $3,120 – within its projected range of $3,000-$4,000 but way below its historic high of $7,000. And an early Noguchi coffee table in ebony with a rare green-glass top was a bargain at $1,920, a bit shy of it’s projected range of $2,000-$3,000 and far less than the $6,600 the same table got at the same auction last year – perhaps a sign of the times.
So how does this compare to years past? There are too many variables to make a definitive apples-to-apples comparison but Wright’s October 2007 Modern auction raked in $3.9 million (an average of $7,876 per lot) to this year’s $2.1 million ($5,155 per lot) – a stunning 45% drop. And whereas 37% of the lots sold for above the projected range in 2007, only 23% did so in 2008. Unsold lots increased from 21% to 37%.
Of special note, Barcelona chairs that sold above estimates for $7,200 a pair in 2007 had no takers at all in 2008 despite a minimum reserve of only $5,000. An Edward Wormley 6329 sofa that sold for three times its estimate for $14,400 in 2007 got only $4,800 in 2008. And a Comprehensive Storage System by George Nelson that sold for a whopping $36,750 in 2007 (estimated at $5-7,000) got a mere $8,400 in 2008. Ouch! On the other hand, anything Eames such as assorted DCW, LCW and RAR chairs all increased in value by up to 450% from last year’s prices.
A logical conclusion one could draw from these results is that with so many of the lots by Charles and Ray Eames selling for far above estimates this year and for far higher prices than a year ago, anything by Eames has been a stellar investment for those lucky sellers. Nakashima, Nelson and Kagan collectors? Not so much. But times change and tastes shift so better luck next time. To see the entire results for yourself, visit the Wright20 site here.
Posted by jetsetrnv8r on October 7, 2008
There are few midcentury modern pieces more graceful than the free-form Noguchi coffee table. First designed in 1939 as a commission from the President of New York’s Museum of Modern Art, it was refined in 1944 to accompany an article entitled “How to Make a Table” by designer George Nelson and has endured the test of time to become more popular today than ever. It’s also one of the most commonly knocked-off pieces with unlicensed copies at every price point flooding the market. Like the Eames 670 Lounge and 671 Ottoman, and the Barcelona Chair by Mies van der Rohe, there isn’t a furniture store in the world that doesn’t sell a version of this table.
It’s easy to make – anyone with basement workshop and a saw could knock one out in a few hours. But then you could also copy the Mona Lisa with a few crayons and scrap paper but I don’t think it would come any closer to replicating the real thing.
Isamu Noguchi believed that there is art in the everyday products we surround ourselves with – in his words: “everything is sculpture”. In that spirit, he crafted two pieces of solid wood, curved and interlocking to create a tripod topped by a gently curving, biomorphic shaped piece of glass. The authentic version from U.S. licensee Herman Miller is offered in cherry, walnut, or ebonized walnut with a top of ¾” plate glass – clear – with flat polished edges, not beveled. Early versions included a solid birch option and used a less expensive green glass top. The licensed version measures 16” high by 36” by 50” and carries Noguchi’s signature etched into the edge of the glass top. There’s also a manufacturer’s plate on the bottom that covers his engraved initials.
Herman Miller’s price is $1,594 but shop around as a number of retailers sell the Herman Miller version for as low as $1,145. An early model in ebony with a green glass top is expected to get $2,000 to $3,000 in this month’s auction at Wright Auctions of Chicago. (UPDATE: It sold for only $1,920! A bargain – and obviously a sign of the times given the world economic crisis. A similar table got $6,600 in Wright’s 2007 auction. Read more about it here.)
One of the most popular knock-offs, and one that some consider to be of superior quality because it uses a thicker glass for the top, is made by Modernica and retails for $799. To avoid trademark infringement, the overall dimensions differ from the original by a quarter-inch here and a half-inch there. Other, cheaper, knock-offs can be had as low as $499 new – or $50 or less at a garage sale.
This is a piece that’s so simple in its design that it could be difficult to tell the real thing from a fake at a glance. But beneath the surface, the Herman Miller version is superior in many ways:
Solid hardwoods vs. cheaper woods or particle-board and veneer.
Labor-intensive hand-rubbed stain rather than cheaper thin coat of spray-on stain that shows scratches and blemishes more readily.
Proportioned for perfect balance with a designed-in counterweight vs. cheap copies that are more tipsy.
Better quality ¾” clear plate glass with a polished square edge – not beveled – rather than thinner, cheaper glass.
The very first posting on the excellent Canadian website Modern Planet was about the Noguchi table and makes a plea for resisting the urge to buy an unlicensed knock-off of this classic. This sparked a fascinating comments thread that’s still active after two years and has veered into a general discussion of “real vs. fake”. I tried unsuccessfully to add my comment – so I’ll post it here:
I agree that unlicensed knock-offs have an appeal to people on a budget and are sometimes even better quality. But in my mind, it comes down to this – are you the kind of person who gets as much pleasure from owning a fake Rolex watch or driving a Hyundai because it looks vaguely like a Mercedes Benz as someone who owns a real Rolex or a real Mercedes? If you are, fine. Both watches tell time just as accurately and both cars will transport you in nearly equal comfort. But if you’re the kind of person who appreciates art and celebrates and feels enriched by the art in the everyday objects around you, than I would encourage you to find products that you enjoy that you can afford rather than throw money away on cheap versions of something else. I, for one, would love to own a real Picasso. But I can’t afford one and it would bring me absolutely no pleasure to own a forgery. I’d rather seek out and find a lesser-known artist at affordable prices with the hopes that I might be discovering the next Picasso. If I couldn’t afford a real Noguchi table, I’d find something else that I can afford and hope that it becomes tomorrow’s classic. I DO buy vintage furniture with the hopes that it will hold it’s value – or even appreciate. And I’ve lucked-out a few times. Some Hans Wegner chairs I bought for $500 each from a private party sold for $2,500 each to a dealer. And chairs I didn’t recognize and bought for $100 each turned out to be worth $1,250 each when I sold them after their designer, Milo Baughman, had a resurgence of popularity. I recognize that it’s the copies of treasures like the Mona Lisa or Michaelangelo’s David that make the originals even more widely known and coveted – but I would advise against buying knock-off furniture that’s “almost as good” as (or even better than) the real thing. I bet you’d find it more satisfying to find a lesser known original that fits your budget. It may even prove to be a better investment.
Posted by jetsetrnv8r on October 7, 2008
The selection of a contractor is the single most important part of your project. Whether you’re remodeling a kitchen, building an addition to your home, or undertaking a complete gut-to-the-studs remodel, the contractor is the one who is going to fulfill your expectations – or not.
The first question to ask yourself is; are you going to be working with an architect? (More on that here.) If so, then the selection of a contractor is a joint effort between the two of you and the architect can be your guide. Just remember that the final decision is up to you. Even if your architect has a contractor he frequently works with, insist on interviewing and bidding at least two more and doing your due diligence as described below to make sure you’re comfortable with your architect’s choice. NEVER blindly accept your architect’s contractor.
Another option is to work with a design-build firm. For more on that, read this.
If you’re not working with an architect or a design-build firm, then it’s all up to you. Don’t rush it. Don’t hire the first person you find. Expect to take your time and interview as many contractors as possible until you feel like an expert in your own right. You need to be completely comfortable and confident with your final choice. The worst thing you can do is put yourself in a position where you’re going to have to hire a second contractor to finish the job – or fix the first one’s mistakes.
I think of the process in three phases – 1) initial screening, 2) due-diligence, and 3) final negotiations. Here’s how to proceed:
Phase 1 – Screening
1. Collect referrals. Cast a wide net. Talk to as many friends and relatives in your area that you can find and ask them who they know. Better yet, canvass your neighborhood. If anyone has had work done that you like, find out who did it. It’s an added plus to have a contractor who commonly works in your neighborhood and knows the particular quirks of the area. Try to get at least five or six candidates – I started with as many as ten for my first project. Do not waste your time looking in the phone book or responding to flyers tucked in your mailbox.
2. Meet face-to-face. Your contractor is going to be your partner – a member of your family for many months. It’s important to work with someone you like and can communicate with. Do they respond to an invitation to meet? You’d be surprised how many contractors don’t even return a phone call. How promptly do they respond? It’s important that they be readily available and responsive when you need them. Do they come prepared for the meeting? Don’t tell them what to bring – see if they adequately prepare on their own. A good, professional, business-like contractor will bring photos of other jobs they’ve done, sample contracts and invoices, and a list of references. I’ve had some even give a Powerpoint presentation.
3. Let him/her talk first. In your first meeting, resist the urge to do all the talking or to show off your home. Let the contractor start the meeting. You’ll learn more by seeing how he/she fills the awkward silence. Save your questions till the end after you see what information they volunteer.
4. Be prepared with your list of questions. And take lots of notes. Go into the meeting knowing exactly what you want to know before the meeting ends. Make yourself a checklist and use it for every interview so you can compare apples-to-apples when you’re making your final selection. Then, whatever they don’t answer on their own, you can start asking the right questions. These should include:
Are they licensed and bonded?
How long have they been in business?
How many employees do they have? Some contractors may work alone, some might head a big company. One’s not necessarily better than another but be aware that if you work with a one-man-band, what happens if he gets sick or has an emergency?
What’s the biggest job they’ve ever done? What’s the smallest? What kind of projects do they do most often? See where your project falls in their field of experience.
Who are their subcontractors? Even the largest contractors sub-contract specialty work like plumbing, electrical, concrete, etc. and a contractor is only as good as his subs. How long have they worked with each of them and how deep is the relationship? How much control will you have over their subs (if you want any). What is their bidding process when working with subs. Will you be able to bring in your own subs (if you know any).
How many jobs do they typically carry at the same time? How many other jobs will they have while they work on your project? Will you be their only job or will you be competing for their attention with other projects? A large contractor with other jobs will be more likely to be financially stable than a lone operator who’s always cash-strapped – just be sure they have a team dedicated to your project so you will feel like their only – or most important – client.
Ask them to describe their best and worst experiences. What has made particular projects more successful than others? How have they resolved differences with difficult clients?
How long do they estimate your project will take? How do they stick to a schedule? What’s their track record of finishing on time or finishing late? What issues might they encounter on your project that could cause delays?
What does their typical contract look like? Do they prefer to work on a fixed-price or cost-plus basis? How flexible are they if you want to buy some materials like appliances and fixtures directly to save money? (More on that here.)
How do they bill? What does their typical invoice look like? How much detail and back-up do they provide? How quickly do they expect you to turn around payment?
5. Set your own rules. Regardless of their preferences, they need to accommodate how you want to work. What kind of contract do you want – fixed price or cost-plus? How do you want to be billed and how often? How long do you need to turn around payment? What kind of back-up and detail do you want to see on your invoices? The right contractor for your job will be flexible enough to meet your needs – or provide a convincing explanation for why they prefer to work their way.
6. Now discuss your specific job. After you’ve learned everything about the candidate, then show them your house and discuss what you want done. Be general – leave details open-ended – see what information they ask for or what suggestions they have. A good contractor won’t be afraid to suggest alternatives you might not have thought about, or point out problems or issues such as supporting walls, space utilization or potential permit issues.
7. Get references. References are paramount and any decent contractor should come prepared with names and phone numbers – or promise to get back to you quickly with them. Get at least three client references – but also ask to talk to two or three sub-contractors or suppliers in addition to clients.
8. End the meeting. Thank them and send them on their way. See what kind of follow-up they do. See if they call to thank you for the meeting and propose next steps. See how quickly they get back to you with promised follow-up information like references or a sample contract. See how eager they are to earn your work.
Phase 2 – Due Diligence
1. Call their references. They should have prepped their clients to expect your call so don’t be shy. Ask them how satisfied they are and if they would work with the same contractor again. Ask them if the contractor met their expectations. Most importantly, ask them to describe a conflict or disagreement and how they worked through it. Nobody is perfect and your job is going to be stressful. Working through your differences will strengthen your relationship.
2. Arrange to meet again – but at their office this time. See how established they are. See how they run their business. See how busy they are. Meet their team. Talk about the results of your reference calls and any new questions that have arisen.
3. Ask for site inspections. Ask each candidate to take you to at least two, if not three client’s homes and show you their work first-hand. They should have a good enough relationship with past clients to be able to set this up. If not – that’s a huge red-flag and stop right there. A satisfied client should be more than happy and proud to show off their home. My contractor is always parading prospective new clients through my projects and I’m more than happy to oblige.
Phase 3 – Contract Negotiation
By now you should have narrowed it down to two or three finalists. Don’t dismiss anyone until you’ve signed contracts with your first choice – you never know for sure till the ink is dry and going to your back-up after you’ve dismissed him puts him in a stronger negotiating position.
There’s so much involved in negotiating a contract that I’ve saved it for a separate posting. Look for it here. But in summary:
Decide how you want to work and be firm. With everything you’ve learned up to now, you’ll know if you want a fixed-price or cost-plus contract. (More on that here.)
How do you want to be billed? How much back-up do you want to see?
How amenable is he/she to letting you save money by buying appliances and materials yourself? Or subbing parts of the job yourself? This gets complicated so I’ll address it in a separate posting.
What kind of assurances can you build-in to the contract for them to stay on schedule? Again, more on this later.
This is a lot of information but there’s a lot involved in hiring a contractor. Stay tuned for a separate posting about negotiating your contract and feel free to contact me through this blog with any questions. I’m here to help.
Posted by jetsetrnv8r on October 3, 2008