Bad Design is Bad Economics

  

You’ll see me harp a lot about design issues in a blog about real estate flipping, but design is what makes or breaks a house when you’re selling it.

 

This may strike you as obvious, as it does me, but it’s not obvious to everyone.  The wide proliferation of ugly spec houses throughout L.A. attests to that.

 

I know a team of developers who once showed me a high-end multi-million dollar house they were flipping in the Hollywood Hills.  They bragged to me about the deals they got on materials and how they bought overstocked flooring, doors, hardware, vanities and fixtures at huge discounts off Craigslist and eBay.  There was hardwood flooring of one color in the sunken living room, another kind of wood on the stairs to the dining area which had cheap-looking engineered flooring of another color.  There were at least six different kinds of doors in the house – solid flush wood stained, solid flush wood painted, doors with clear glass panels, doors with frosted glass panels, louvered closet doors and mirrored closet doors.  There was different door hardware in every room – some knobs, some levers, some chrome, some brass.  There were even windows of aluminum, black anodized, and white vinyl clad.  Outside they had aluminum railings, white light fixtures and a faux gold-leaf door.  And some of their ideas were just plain asking for trouble – a faux-concrete finish over drywall in a shower?  A large wood-framed window in another shower?  Both disasters waiting to happen.  The place was a mess.  It looked like the showroom at a bad Expo Design Center.  Think I’m exaggerating?  I’m not.  And these guys were both real estate agents who thought they knew their market.  What they didn’t know was anything about design or the value of working with an architect. 

 

The end result?  Their house sat on the market for almost a year with repeated price reductions and eventually sold at a loss for about $450 per square foot.  My smaller house directly across the street sold in 60 days with multiple offers at $1,200 per square foot.  Those guys ended up hiring my architect for their next project.

 

See other postings here about why you should work with an architecthow to find, hire and negotiate with a contractor and the option of working with a design-build firm.

Advertisements

Hiring a Contractor – Fixed-Price or Cost-Plus?

There are two types of contracts when working with a contractor – “cost-plus” or “fixed-price”.  Under cost-plus, you pay the contractor for the cost of materials and labor plus a commission to cover his compensation – typically 20% but it can range anywhere from less than 10% to over 25%.  Of course both parties work to a pre-determined budget so you have a pretty good idea of what the total job will cost.  With a fixed-price contract, you pay a set amount and it’s up to the contractor to make it work – if he’s over budget, it comes out of his pocket and the more money he saves, the more he makes – you pay the same either way.

 

A recent article in the Los Angeles Times Sunday Real Estate section [“Digging – It’s Your Job” 7/13/08] suggested always negotiating a “fixed-price” contract, never a “cost-plus”.  Their reasoning was that it left it up to the contractor to lose money or turn a profit.  I couldn’t disagree more.  What contractor is going to choose to lose money?

 

I always work on a cost-plus basis and here’s why.  I want to know what I’m paying for, and I want control over my budget.  The estimated cost of the project is just that – an estimate.  Every job is full of surprises and budgets need to be flexible.  You never know what you’re going to find when you’re opening walls or removing flooring.  No contractor is going to want to lose money and with a fixed-price contract, he’ll do everything possible to cut corners including using inferior materials or skipping important steps to maximize his profit.

 

If you want to know exactly what you’re paying for what, negotiate a cost-plus contract within a set budget and insist on detailed invoices with back-up.  My contractor’s invoices generally have up to five or more pages of Excel spreadsheet showing over 200 or more line items detailing what’s being billed against the original estimate.  Changes to the original estimate are discussed in advance, solutions worked out between us and billed separately as a change order.

 

The only time I might make an exception and opt for a fixed-price contract would be for a small job like a closet make-over, a bathroom remodel or maybe even a kitchen – but never for a major house remodel.

To learn more about finding and hiring a contractor and why to work with an architect, read “How to Find and Hire a Contractor” and “Architects!  Who Needs ‘Em?” here.