Your own personal economist
10 April 13. Buying and reonvating a house the hard way, Part VIII |
You can see the interior joists from the outside, I explained, and he calmly replied I don't see it. This is fine. In a panic, I call everybody I could think of who knows what joists are (they're the beams under the floor holding everything up). The church pastor recommends Arnulfo the virtuous contractor.
Arnulfo comes out and puts up his ladder. He fills a hand trowel with cement, climbs the ladder, patches a square of the wall with that little pile of cement, and comes down for more. Repeat for half of a heat-wave soaked day. He charges me $280. I pay extra, and have him come out to do everything I could think of that wasn't explicitly in Erick's contract. When negotiating our ad hoc contract, Arnulfo tries to talk me into setting smaller payments.
There was an amusing scene, which I am trying to recount verbatim, where I told Erick that he needed to finish in three weeks:
Erick: It's impossible. Can't be done. Ask anybody. You [points to Arnulfo], could you do all this in three weeks?
Arnulfo: Well, I'm pretty sure I could. If I bring a lotta guys in here, maybe two weeks?
Erick [still more exasperated]: Well you take the contract then!
Arnulfo: I don't wanna take your contract, Mister Erick. That would hurt you and your workers.
Erick: What do you care about me? You just met me yesterday, maybe two days ago! Why would you care about me?
The drama continues. I tell Erick that I'm going to split off portions of the breached contract and give them to Arnulfo. Erick redoubles his efforts to debate and negotiate. Arnulfo keeps working. Tim, for his part, tells me that he doesn't know Arnulfo, and there were a few days where he didn't show up so how do I know Arnulfo won't disappear like Erick did, and splitting the contract will only complicate things.
So here I am, three weeks after I fired Erick: it's a sunny day out, and Arnulfo's crew is downstairs laying some rather attractive Moroccan tile and putting a few more hours into the time-consuming process of hanging more doors.
When I first moved in to The Partisan, I was amused by all the odd features: the step at the end of the second floor hallway for no apparent reason, the strange curve along one wall at about hip level, the occasional bump-out in a corner to conceal a pipe that would have been behind a wall if it hadn't been retrofitted in, the closet under the stairs with this weird thing I hit my head on every single time. I guess that's how they built houses in the 1840s and `50s, before CAD and standardized everything.
Erick's crew made some mistakes, to put it lightly, and felt no compulsion to correct them. They had the option to rebuild the part of floor past the odd step to make it level with the rest of the floor, but it didn't occur to them. There's a strange jog in the kitchen wall, because Erick refused to lay a concrete footer for the wall until Tim insisted, at which point the wall wasn't quite straight. They just assumed that the plumbing to the radiators was OK, except it wasn't, and then Arnulfo's crew had to make modifications accordingly, meaning that they had to bump out one space to cover some pipes. When Erick's crew demolished the closet in the front bedroom (thus causing lots of damage in the process, but that's a digression), we found that it's a load-bearing closet, with a pillar hidden in one of the walls. The new closet we built in that space is a real improvement over the one that had been there before, but it's still a load-bearing closet, which will surprise somebody else twenty years from now. None of these things are in the drawings from the architect, which basically assumed a more rational scene behind the walls and competent execution by competent contractors.
The architect has been lurking in the background of my narrative, but my central renovation mystery is about him: why did the head of a successful architecture firm, with decades of experience, stand behind such terrible contractors?
Tim assured me many times that I would have great difficulty finding anybody who could underbid Erick. Perhaps Tim sees the pain of dealing with people like Erick as the price you have to pay when you don't have all that much cash.
I got a call from “Sarah” the investor, who had found me via a tip from Chuck the racist contractor. Tim had advocated for Erick the duplicitous contractor to handle Sarah's job, and it was a disaster, in exactly the ways I've described in my case. Sarah did some research, and found disastrous contracts with the same architect/contractor pair in years past, and another case here in the present day. There a lot of evidence that Tim knew that Erick would be a disaster, and yet he encouraged me to work with Erick over other contractors.
Maybe he just didn't like me.
It could be simple kickbacks, and although I don't really believe it, this is the knee-jerk reaction of many to whom I've told the story. By this explanation, I got such a cheap contract with Tim because he knew that whatever contractor worked with him would throw in a couple thousand more. [Kickbacks are a violation of the American Institute of Architects ethics code §3.201. Given that the procuring cause setup is already more-or-less a form of kickback, the corresponding segment of the REALTOR code of ethics is carefully worded to include only those kickbacks outlawed by federal law and situations where the REALTOR has a “direct interest” in a company being referred.] Sarah's preferred version is that there are no actual kickbacks, but the more Erick breaks things and then negotiates with me about what I'll pay to have them fixed again, the more $250/hour consultations I'll need with Tim. This is so tragic I don't want to believe it's true.
The entire house-buying process reeks of informational asymmetries. The contractor
has built a dozen houses from the ground up, while I have written extensively on
computation-intensive modeling and intellectual property law. The architect has a
database of carefully considered contractors on hand, and I have the phone book. My
solution in so many cases was to get a knowledgeable advocate who can provide the
information that the first- or second-time buyer doesn't have, like getting a REALTOR
(but he or she is paid by the seller), getting a home inspector (but incompetent ones never
go out of business), hiring a mortgage broker (but see several hundred essays on how the
U.S. mortgage market has been working out), and finding an architect to serve as an independent
node on the triangle (but what happens when I don't have enough information to get a
truly independent contractor?). Now, I know more than I ever cared to know about house
construction and the housing market, but the tile looks great, and perhaps the reward
to amassing all this knowledge is that I'll never have to use it again.
2 April 13. Buying and renovating a house the hard way, Part VII |
April comes, and the drawings are finally done, and we get to bidding for a new contractor. It comes down to two: one who had worked with Tim (“Erick”), and one who hadn't. Tim stood by the one who he had worked with. I could see the triangle flattening before my eyes, but Tim pointed out that this also had advantages, as his guy was rather loyal and would do extra work if Tim asked him to, and his guy had underbid by about $20,000.
Then on day one of the work, Erick opened the walls and told me everything was rotten and he'd have to do at least $40,000 more work than expected.
Erick the duplicitous contractor quickly proved to be delighted by the competitive fun of trying to get owners to pay more. His crew demolished the plumbing to an unworkable state, then disappeared for two weeks. Erick tells me that he could fix the plumbing so I could keep living in the house without having to shower at work, but I'd have to pay him a change order of $15,000 first. Until then, he's not showing up.
My mood falls through the bottom of the mood graph. I now understood that Erick was not going to do the work, that Tim was not going to act as an independent node on the triangle, and that I still had a contract that obligated me to pay Erick over a hundred thousand dollars.
I spend the next three months trying to figure out how I can get somebody who doesn't want to work to show up to work, which, it turns out, is impossible. I hire somebody to manage the contract, an expert in schmooze who could sweet-talk Erick into showing up. He and Erick bond, arrange dinners together. The contract manager reports back to me that Erick is a nice guy, and I should lay off and cut him some slack.
Meanwhile, I keep my tent pitched and pretend I'm camping in the middle bedroom. I find some humor in knowing that if I walk too far down the hallway on the second floor, I'll fall to my death. Until the flies started showing up, guests loved the grand veranda feel of the kitchen when it had no ceiling, and after they left I'd wash the wine glasses using water I'd packed in from work. I decided against starting a blog about public restrooms in the area.
After a meeting with the architect, I am talked into making more payments to get things moving, after which nothing gets done with even more vigor. I talk to a lawyer, who says that I might be able to claw some money back via a lawsuit, maybe even by next year. He does agree that Erick is in breach of contract, and so I can sever the contract and take a loss if need be.
Being able to sever the contract without penalty was important because contractors
have been known to sue homeowners for the remaining dollar amount on a signed and
agreed-upon contract, even if the homeowner has to hire somebody else to finish the
job. My contract had a section about how if I hire a cheaper contractor to finish the
job, I would have to pay the original contractor the difference in cost, which seemed
like the sort of vague and easy-to-bicker-over clause that lawyers put into contracts
to make sure future lawyers will have work. But when Erick stopped showing up, he
owed no more than an apology. In some locales, contractors have to post a bond with
the city, so that if they screw up badly enough, then homeowners can claim the bond
without the rigmarole of a full lawsuit; I didn't know to ask beforehand,
and the architect failed to check, but Erick had no bond.
30 March 13. Buying and renovating a house the hard way, Part VI: the architect's triangle |
It is dawn here at The Partisan, and we are about halfway through the tale. I have successfully picked one of the few whole houses in a neighborhood where most have been split into condos. I scored a mortgage that gave me what seemed like enough cash to rehabilitate the house. Now I needed an architect and a general contractor to guide me through the process.
Experienced craftsman do a lot of design on the fly. Framing and drywalling a wall is a pretty routine operation, so if you bring in an experienced contractor, draw a line in the middle of a room, and say I need you to build a wall right here, that's enough for the contractor to know what to do. For something more complex (or more likely to conform to code), add a design phase that does more up-front planning and more extensive sketches of what is to be built, and you have a design/build team.
I spoke to several architects about the design/build process, and none said that the abbreviated design/build would produce inherently inferior work to hiring a full-on architect. The difference, they each explained, is in the incentives. Each architect then drew a little triangle in the air: here is you the owner, and here is the architect, and here is the contractor. For a design/build situation, the contractor has every incentive to implement cheap designs, and you don't have any way to change that. With an architect, the contractor can't cheap out without consulting the architect, who is thus an advocate for the buyer.
“Tim” the architect dresses like a fiscally successful artist--diamond earrings, nice shirt but usually no tie--and drives a yellow VW Beetle of recent vintage that just screams I am a designer to me. He always had on hand an appropriate anecdote, how he got his start in Baltimore living in the house he was renovating, or the one about the vindictive neighbor who got a renovator fined for having clean water running off from the property, or the Japanese executive who wouldn't tolerate more than a millimeter of variation in the flatness of the wall. Along with his friendly demeanor, he brought an employee who had a contracting firm on the side. I would be getting a design/build team, plus the design skills of a full-on architectural firm. Tim assured me that the triangle of incentives had three sides, but it was hard for me to fully believe that in a dispute between myself and Tim's employee/friend that the architect would fight very hard for my cause.
To the economists, a contract is about risk. Behind a sheet of drywall, there could be mold, electrical work that's only failing to catch fire because the wood is perpetually damp, or pristine framing that just needs a new piece of drywall screwed on. If you have a contract that pays whatever time and labor is needed, then the owner takes all the risk, paying heavily if the wall is destroyed and next to nothing if the wall is OK. If there is a fixed price, then the contractor accepts the risk, making no profit or even taking a loss if the wall is rotten and making a solid profit if the work turns out to be cheap and easy. My ability to put up drywall is nil, but I'm increasingly convinced that the real skill behind being a successful contractor is in evaluating the risk that goes into a project and deciding the right price to attach to it. After that, working the power drill is the easy part.
The tradition in contracting is not to do materials-plus-labor contracts, because it is far too easy for the contractor to pad the time and materials needed. Instead, risk is shared by a custom that leaves contractors to bear the minor risks of having to improvise fixes to common problems, but requires owners to pay extra should there be an exceptionally large surprise requiring a change order to the work and the payments. Much of my time in the last four months has been spent debating whether some new detail is in need of a change order or should just be done without further discussion.
Back to Tim's employee, “Chuck” the racist contractor. We call him that because he at some point explained to me a surprisingly detailed theory of the correlation between government workers' skin tones and their inclination to do work. In December, at the outset of the contract, I asked him to replace the bombed-out boiler in the house as a side project (I could only guess as to how Dewey lived there). His worker spent several days down in the dungeon of a basement dutifully installing machinery and a maze of pipes. I didn't hear from Chuck until the last day, when we stood in the kitchen in our winter coats as he expressed his surprise that one would need to run a wire to the circuit breaker box to make the boiler run, and by the condition of the pipes that his plumber had to repair, and told me that I'd have to pay for these surprises before any of it could be turned on. You can see from my sarcastic sentence structure that I found his surprise to either be not genuine or a sign of real lack of care in the bid.
Over on the big contract, I had told him and Tim that I had a budget of $120,000, and so Chuck sent me a half-page bid with a list of broad tasks and a number at the bottom: $128,000. Given his already demonstrated lack of estimation skills, having no breakdown made it hard to believe that there wasn't a slew of change orders coming down the pipeline. After two weeks of trying to get Chuck to give a detailed bid, and after a few other questionable details, I gave up on him (and did I mention the racism thing?). Tim later gossiped that he thought Chuck was being such a pain because he wanted to be fired from the contract, because he didn't think it could be done.
This is a good time to mention the winner's curse. The term originated in the literature on oil field auctions, so I'll use that as the example. The value of an oil field is the same to everybody: nature put only so much oil under a field, and we can't expect that one oil company can drill it out for all that much less than the next. Before the auction, each company drills some test holes at the field, and takes a guess as to the total volume of oil given the tests. Naturally, those who got good test results bid more.
The highest bidder will be the company that made the luckiest, most exceptional random draws from the field, and so the highest bidder will be consistently disappointed when the total yield is closer to what you would infer from averaging everybody's guess, and not relying on only the most optimistic data.
Application to the situation here is immediate: the person who offers the lowest bid
on a house in need of rehab is the one who is most naïvely optimistic about the cost
of renovation, and the contractor who offers the lowest bid on the rehab is the one who is most
likely to prove overoptimistic about the state of things behind the walls. It seems Chuck worked
this out quickly while the rest of us were still uncomfortably bound to the situation.
26 March 13. Buying and renovating a house the hard way, part V |
We finally got in one rainy day in October. As soon as we walked in, we observed the key defect of The Partisan: it leans. The house is at the end of a row of houses, and it slants away from the row, into the mud on the other side, by enough to be visible and even tangible. The first floor was almost empty, and the owner of the house buzzed us in but did not come down to greet us. We found the basement, and in the rain it was in the process of flooding. Little spouts of water were coming in through the brickwork.
The house had been neglected for this last decade of its 150-year life. The roof was only recently fixed, after letting leaks through for what seems like years. There were no gutters to speak of, including on the neighbors' properties, so voluminous water exited the block via the foundation of The Partisan, eventually sinking one side of the house.
When we got up to the second floor, we saw the owner, “Dewey”, sitting behind his desk in the front bedroom/his office. He was personable, and was happy to give the narrative of the house as far as he knew it, which tied in with his own narrative. The house had been Dewey's real estate agency, but the agency had packed up years ago. Over the course of the last decade, Dewey had developed MS, and I gather that as his ability to climb stairs deteriorated, so did the house. When we asked him about the basement and the water pouring in on the side, he would cock his head to one side, look bemused, and say `Hmm. I didn't know this. You know, I can't get down there.'
I told you about The Qastle, The Luther and The BP because they were the slippery slope that led me, a person whose experience in house renovation mostly consisted of calling a plumber, to where I was standing in a dining room, plaster replete with Character, conscious of my balance in a way that typically only happens when I'm hiking up a rock slide, air humid from seeping rain, and thinking OK, let's break down the costs. To kill the suspense, I did buy the house, and so I can break down the final costs for you: a new support beam in the basement on new concrete piers ($5,000), some new roofing and a gutter system for myself and my neighbors ($3,000), a two-foot apron of cement all around the house ($3,000). Inside, the virtuous contractor who finally saves the day will lay new floors, and build wedge-shaped platforms underneath to bring the new floor to level ($5,000 for just the platforms).
To give you a sense of scale for what's to follow, check your insurance policy if you have a house, and you'll be able to find the company's estimate for the cost of rebuilding should your house burn to the ground entirely. But I'll save you the trouble: if you have a non-mansion single-family home, the replacement cost is probably between $100,000 and $250,000. Add maybe another fifty thousand to go from what the insurance company will pay to the reality of what it would cost. So when I tell you that Partisan-sized houses in the U Street neighborhood sell for around $700,000, you can calculate that the moist dirt under these houses is worth about half a million dollars.
If you ask me, fifteen dollars is too much to pay for dinner, yet in the last year I've grown comfortable throwing around numbers like these, and find myself preceding a price like $3,000 with the word only.
I brought in a support of contractors to estimate the costs. Some thought $120,000 would do it; Jim the hard-nosed inspector guessed surprisingly low at $80,000; my favorite insisted that it was absolutely impossible to fix the house for under half a million dollars, and looked at me with pity that I was so naïve as to think that this could be done for any less. I'm still not quite clear on what floating the foundation means, exactly.
After slogging through several contractor appointments, each taking an hour plus travel time, I tried an experiment where I brought in three at once. It would either be very efficient or a learning experience.
One pointed out that the joists in the basement were rotted through and would all need replacing. The others agreed. None had gone down to the basement before making this evaluation. “Brenda”, an architect and a typically attractive gal, worked hard on giving me the girlfriend experience while discussing the job with me. She'd beckon me into a corner to share a secret with me, the secret being that I should envision the interior space entirely gutted and then completely rebuilt, which she could do for maybe $400,000. By the end, the three came to a consensus that the house had to be eviscerated, and there was no other alternative.
Having gathered the full range of possibilities, from doable from my savings to absolute
financial disaster, I bought the house.
22 March 13. Buying and renovating a house the hard way, part IV: LUST |
After that contract got annulled, there was The BP. It was a somewhat run-of-the-mill row house. I can tell you now that the house had been foreclosed from a somewhat disreputable landlord and sat vacant for several months while the bank did nothing, until a woman figured out how to get the front door open and started renting out rooms. She did that for about a year, and after she finally got found out, the bank gave the house a quick renovation.
But when I toured the house, all I saw was a recent interior renovation and a renter-friendly space. The basement was connected to the main house by a stairwell, which legally made it a not-separate unit--no need for a C of O. So things looked easier and more hopeful, and I was delighted to see my bid get accepted.
The process of deciding to purchase a product is the process of asking what will my life be like with this? If you rush, you can go from first seeing a house to finally writing that six-figure check in maybe five or six weeks, which is long enough for a whole new you to be born, brush its teeth by the sink, have breakfast in the perfect place for a round table, lounge on the couch along the long wall, get soup at the Vietnamese place that serves a sprig of basil with every order, and come home and cuddle into the bed over in the corner of the bedroom with all the windows. In my case, the transaction took six months, during which the future me matured, and it became more and more frustrating living the life of the current me, who commuted for three and a half hours a day and had all his stuff in anticipatory moving boxes. On the day the contract fell through, that new me died its little death.
The BP is so named because Jim the hard-nosed inspector smelled gas in the basement, and quickly traced it to an oil spill behind the house.
In the days before prevalent gas pipelines, many houses had a heating oil tank out back. My house in Baltimore had a 300-gallon tank in the basement, and now and then a truck would pull up and fill it via a hole in the wall. I joked about how the house got zero miles per gallon and some number of people would laugh at that. In DC, the tanks were typically buried. Being outside and under constant attack by the elements, the pressure of a few cubic meters of dirt, and the Conqueror Worm, these tanks had about a thirty-year lifespan. After that, they'd start leaking. If it's a small leak, the owner might think that the house is drafty and the furnace not as efficient as it used to be. If it's noticeable, the owner has to decide whether to pay for the rather elaborate decomissioning procedure involving 300 gallons of sand or to just let it lie, in which case it will continue to leak, even after the meter on the tank reads zero.
Underground storage tanks are an environmental problem faced by every populated area, though they are typically, uh, buried in the environmental press. From the EPA: “As of March 2011, over 498,000 releases from federally-regulated leaking underground storage tanks (LUST) had occurred nationwide.” And those are the tanks large enough to be tracked by the EPA. If The BP's oil tank spilled 300 gallons of oil into DC's groundwater, that wouldn't even rate.
In fact, the DC government has an underground storage tank division. I called them, in the hopes of getting “Roy”, the real estate agent for the bank that owned the property, to take some action. Roy had been promising to get the leak fixed for months, but was clearly dragging his heels. Having the city officials contact him cleared things up quick: after a full six months of half-hearted attempts at cleaning up the property, Roy simply canceled my contract, making up a spurious excuse about paperwork.
He relisted the property, including in the listing a report from a less competent home inspector who did not find the oil leak, and it was sold within a few days.
As for the UST division of the city government, they determined that the storage tank had not been buried, and therefore was a leaking overground storage tank (a LOST?). There is no OST division of the city government, so the UST division was unsure of whose responsibility enforcing cleanup would be.
To jump ahead a few months, I knocked on the door of The BP one day. Shola, the architecture student who had bought the house, answered the door and gave me a brief tour of the place. As somebody who is not naïve to these things, he was able to fix the water and termite damage throughout the house, and even made a number of improvements to the layout. Roy had had the back yard covered in a layer of concrete, thus burying the problem. Shola was happy to hear me report that the problem came from an OST that was not covered over along with the contaminated soil. So I guess that's a happy ending.
Where was Chris in all this? Well, he makes money via commission, not an hourly wage,
and it's the quick transactions that make the payments on the BMW SUV he drove most days.
Rather than putting in the focus to make the transaction happen or fail fast, Chris put
me on the back burner, spending twenty minutes every other week to keep the paperwork
in order, but otherwise moving on to sell many other properties while I waited.
18 March 13. Buying and renovating a house the hard way, part III|
Next up, “Chris,” another agent who rebates part of the fee, but who still works on the traditional commission. I told him I and a few friends would be coming to our first house search on bikes, he showed up in a Prius, and we raced to see who'd get to the next house first. The first house, in DC townhouse style, was small enough for one person, to the point that the architect scored some extra space by omitting any doorway on the bathroom--“It's European style,” Chris quipped.
The house I bid on was the second of the day, at 1517 Something-or-other Street, so we named it The Luther. The Luther was a simple house, absurdly tall when you walk up to it due to how it stood on the hill. Like most houses around here, there's a basement, though I imagine if you excavated all the dirt from the front yard hill, the basement would be the first floor.
Before a housing contract is finally settled and paid for, there's an inspection where the buyer checks out the goods. The housing inspection business is a field where you can make a healthy living being incompetent, because real estate agents are strongly inclined to recommend nearsighted, kinda dim home inspectors who consistently think every house looks just fine and see no reason why the sale shouldn't go through.
Last time I bought a house, I went with the inspector the REALTOR recommended, and discovered the house's foibles and what made it a special little deathtrap as the years passed. But this time, I wanted to rent out the basement, and that takes a C of O from the city. So not any old inspector would do, and I spent an hour or two on the telephone before finally arriving at an inspector who used to work for the DC government and would therefore be able to advise me on what is up to code and what isn't. Indeed, by the time I walked up to our appointment at the house, “Jim” already had a list of problems with the façade of the house, and we were barely past the introductions before he started counting out the ways in which the front step violated code. Over the next few months, Chris the REALTOR made a comment here and there about how he avoids inspectors like Jim, which I took to mean that I had done the right thing.
Jim pieced together that The Luther was an end-unit because the house next door
had burned down. What had been an interior wall wasn't adequately protected now that it
was an exterior wall, and leaked over the years. As a result,
there's mold in the basement, covered by a layer of drywall, which could cost up to
$40k to clean up. Or maybe you could find somebody to do it for $4k. Who knows.