Dealing with Builders and Tradesmen

Builders, renovations for your own home and for investment properties

With the house you are living in, if maintenance has not been kept up, you may run into expensive repairs. Your renovations are more personal and you are there while the renovations are going on. So although you are inconvenienced by the noise and the mess, at least you are there to see how the work is progressing.

With an investment property, it’s a bit trickier because you have to meet the contractors at the property and you are not there to supervise the work. No matter how well you know your contractors, it is always advisable to show up on a regular basis and check out their progress.

Let me give you an example to illustrate this. I was having a builder put up a partition wall to make the through lounge into two rooms in one of my investment properties. The room was large enough to divide without sacrificing living space and I was going to make one of the rooms into another bedroom because I knew it would bring in more rental income. A job that should have taken a few days had already taken three months and, if it weren’t for a neighbour telling me that the builder and his men were sitting around on boxes every day drinking tea and smoking for hours on end, they might still be there three years later. After the neighbour reported this to me, I came to the house every day until the job was finished, pretending to work on different things. Amazingly, they finished the job a few days after I got there.

There are different ways of looking at property renovations:
For the most part, investors look at it as “let’s get it fixed up and rented out as quickly as possible. For the last several years, it was very common for people to buy a fixer-upper house – maybe they went in with two or three others and did their own repairs for a quick turnaround. Or they got others to do the renovations for them – either way, many people were making money hand over fist. When property prices are rising quickly, it’s easy to make money even if you are a novice. However, in this economic climate, you cannot turn around properties so easily any more. If you are investing right now, you will probably have to rent out the property for a few years before you are able to turn in around for a profit. Therefore, you need to consider the issue of renovations, upgrades and repairs very seriously.

With an investment property, you may want to use low-grade to medium-grade items and materials just so you can get tenants in.
For your own home, you may want to upgrade. It’s a different kind of call when you are doing your own house as opposed to an investment property.

Ask yourself, how much am I going to invest in my property? Am I going to stay there for a long time in which case I might like to get an upgraded bathroom, an upgraded kitchen and nicer appliances. Also, because it’s your own home and you are living in it, you have more time to save up and do the renovations in your own time.

With an investment property, you don’t have that kind of time. You need that property to start bringing in you an income as soon as possible and you want to do it as cheaply as possible, unless you have a luxury investment property where you can get a very good return on your investment. Then you may want to hire an interior designer to help you make the property as attractive as possible to tenants who will pay a very high rental.

However, if you are going to hire an interior designer, make sure that your builder is willing to work with them. I hired an interior designer to design the kind of kitchen that would be attractive to a prospective tenant who was going to be paying a high rent. She came in, made recommendations on cabinetry, counter tops, hardware and flooring. I was very pleased with the samples she showed me and she gave my builder a list of the things she needed.

Whether the builder was having a bad hair day or he had a hearing loss, or he just didn’t like the interior designer, the end result was that everything that she put down on her list was ignored. She asked for white counter tops of high grade quality and he had substituted a dingy greenish-brown colour of the cheapest grade. Instead of buying new doors for the cabinets, he gave me second hand doors and wanted to charge me for new doors. And the knobs – unbelievable as it may seem, he put on knobs that were different colours and sizes that he must have had lying around from other jobs. They weren’t just different colours and sizes but the wrong colours and the wrong sizes and wherever the doors and cabinets didn’t fit properly, he cut them down to make them almost fit, but not quite fit. The lesson I learned from this was that I needed to buy the materials myself – at least then I could be sure that the interior designer’s instructions had been adhered to.

To summarise:
- know the difference between renovations on your own home and those on an investment property
- with an investment property, try to make a point of supervising builders on a regular basis. If you are not living close by, get someone to check for you and report back to you
- in the current downturn economy, it’s very difficult to buy, fix up and sell a property in a short space of time. This is only for the professionals, not amateurs

With an investment property, what you want to avoid are hassles with your tenants. There are enough things that can go wrong when you are letting a property, so if you can get these things fixed before they move in, chances are you will save yourself a great deal of money and aggravation down the line.

Firstly, the heating. Make sure it works, and if necessary, pay a little extra for a guarantee which gives the tenants an emergency call-out number so that you are not disturbed at a very inconvenient moment.

The damp. The last thing you want is tenants calling you out saying that there are mushrooms growing up on the inside of the walls….In fact, this happened to me with one of my properties. It developed dry rot, a very expensive disaster to remedy, all because the builder did not give me the option of spending an extra $3.00 for three air bricks. Had he done so, my tenants would not have had to contend with huge mushrooms that kept sprouting up all over the bathroom and kitchen walls due to a lack of subfloor ventilation.

It’s amazing that so many damp companies go out of business within a few years of opening their doors. You would think that since most old houses have a bit of damp and people tend to have it treated to prevent major problems from developing, there would be enough work to keep these companies afloat for years to come. The reality is that many companies will give you ten and twenty year guarantees, but a couple of years later, they are out of business. On the odd chance that a company is still in business, their policies are downright ludicrous. Four years ago, I had a whole house treated for damp and they gave me a ten year guarantee. When I called them to come out and look at it, they tried to hit me up for another $110 before they would come out. Their new policy is that if they determine that the damp has come back and it is their fault, then they will fix it – otherwise they want nothing to do with it. So make sure the damp company you are dealing with is reputable.

The roof. Tenants having to use buckets to catch water pouring in, have a tendency to lose patience very quickly and to withhold their rent. A ceiling could fall down and injure your tenants.

I’ve had more problems with roofs than just about anything else in my property investment career.

Flat roofs are often the biggest nightmare. They usually last ten years, sometimes more, sometimes less, but they are always a problem at some stage. My offices had three flat roofs and finding someone who is exceptionally good at doing flat roofs is a real ordeal. I had five different roofers come out to bid for the job and I had five different recommendations.

The first roofer said they were fine and would last me another five years. The second roofer told me to put a coating of tar over them and that would seal them for a good few years. The third one told me to build up the roof with plasterboard and then it would be even and drain away properly. The fourth roofer told me that he could recover the existing roof with more felt and that would do the trick. Finally, the fifth roofer told me that the whole roof had to be stripped away and back to the very bones and then built up from the start. I went along with the fourth roofer who wanted to recover the existing one with the better quality felt. I was assured by my master roofer that this roofer was good but whenever I looked at the roof, there was always a huge pool of water sitting in it and it looked as though it would leak at any time. I keep thinking that a roof should have water draining away from it, not sitting in it. I have since sold that property, but sometimes I wonder how long that flat roof lasted and whether it still has water sitting in it to this day.

The plumbing – have the plumbers check all appliances, drains and gutters before the tenants move in.

At one of my properties, the tenants would regularly phone me saying that there was water leaking down into the lounge ceiling from the upstairs bathroom. The dangerous element here is that it would frequently be coming in through the electric light as well. Several plumbers came out to look at the problem.

One plumber said that problem was the silicone around the bathtub so he whipped it around and for about a week it was fine. Then it started leaking again and I had another plumber come and look at it. This one said it was a leak in the pipes under the bath and he replaced the pipes and said it would be fine. Not so. Another plumber came out and said that the bath was not even and needed to be put on a piece of plasterboard and made even. So they ripped out the bathtub and then put it on a piece of plasterboard. This held for about six months and then it started leaking again. When yet another plumber came out and told me I had to replace the whole bathroom and ceiling, I ushered him out the door. The last plumber I called had a simpler solution. He replaced all the tiling around the bath, regrouted it, and then put in new silicone. That lasted a year until I sold it and I only hope that the new owners have not had further leaks.

The saying, “adversity is the mother of invention” was very true in the case of another of my properties. The toilet had an enormous big copper pipe coming out of the seat at the back. It looked dreadful but each plumber who looked at it said that it was best left alone. They said “if it ain’t broke, don’t fix it.” It was working so I opted for not fixing it. Instead, I painted the pipe a cream colour to match the walls and sold the property as is.

the electrics must be checked by a certified electrician who gives you a document stating that they are safe to use

Basically, anything that involves the structure or safety of your property must be seen to as a matter of priority. The risk you run, otherwise, is that your insurance cover may be invalid.

The areas you can afford to economise on with a rental property are:
- the carpets,
- the appliances
- the paint job
- the curtains/drapes
- the quality of the fittings in the kitchen and bathroom

The areas you must take care of are:
- the plumbing
- the electrics
- the roof
- any damp
- the heating / cooling system
- the washing machine and dryer – make sure they are in working order

Another 6 US banks fail

This week I am going to discuss the failure of yet another batch of US banks.

Jim Sinclair is a precious metals expert who has authored numerous magazine articles and three books dealing with a variety of investment subjects, including precious metals, trading strategies and geopolitical events, and their relationship to world economics and the markets. He is a frequent and enormously popular speaker at gold investment conferences and his commentary on gold and other financial issues garners extensive media coverage at home and abroad.and a very generous, knowledgeable and person, has a wonderful website www.jsmineset.com that is literally a mine of accurate and essential information about gold. Having followed it for over two years now, I would like to quote from CIGA (Comrade in Golden Arms) Richard in today's posting about six US banks that have just failed:

Earlier this year, the Financial Accounting Standards Board (FASB) capitulated to pressure from banks and financial institutions and allowed financial institutions to value worthless assets at values that the financial institution had concluded were correct, not values that were market-related.

Six more banks were closed this week. Collectively, they had assets of $13.425 billion and deposits of $9.368 billion. The total estimated cost to the FDIC’s Deposit Insurance Fund (“DIF”) is $2.384 billion.

Consistent with recent trends, by the time these banks were finally closed their condition had deteriorated to a point far worse than banks were allowed to in the years before this crisis. As a result, the FDIC continues to incur much higher rescue costs than it would if it were able to close them at a stage more like they have been historically. The total cost to the DIF of closing this week’s failed banks exceeds 25% of their total deposits. By contrast, the FDIC was only required to make up about 5.7% of insured deposits in connection with the three banks it closed in 2007, at the beginning of this crisis.

The details of this week’s closings also point out some troublesome discrepancies between the value of assets stated on the banks’ balance sheets and their perceived market value. Five of the six acquiring banks this week required the FDIC to enter loss-share agreements as a condition of their purchasing the assets of the failed institutions.

Insisting upon a loss-share agreement indicates the prospective buyer is so worried about the value of the assets it is purchasing, it is unwilling to alone bear the risk that their value will turn out to be lower than anticipated. In the case of the three banks closed in 2007, none of the acquiring banks required that the FDIC enter into a loss-share agreement.

The largest of this week’s bank failures was AmTrust Bank of Cleveland, Ohio. On paper, AmTrust appeared to be very well capitalised. It claimed to have assets of $12 billion against deposits of $8 billion, a ratio of 1.5:1.

However, closing AmTrust cost the FDIC an estimated $2.0 billion, 25% of the value of its deposits. Furthermore, the purchasing bank, New York Community Bank (“NYCB”), was only willing to purchase about $9.0 billion (75%) of AmTrust’s assets, and did so only on the condition that the FDIC agree to share the risk of loss with respect to $6.0 billion of that amount. In the final analysis, it appears that NYCB had confidence in the value of only $3 billion of the $12 billion in assets on AmTrust’s balance sheet.

Furthermore, the parties appear to have concluded that the $12 billion in assets listed on AmTrust’s balance sheet were only worth about $6 billion. Otherwise, the FDIC would not have allowed for a $2 billion charge to the DIR to make good on AmTrust’s $8 billion in deposits.

There is not enough information available at this point to determine the causes of this huge discrepancy between the claimed and actual values of AmTrust’s assets. However, in the absence of an allegation of criminal fraud it stands to reason that the failure to require fair value accounting contributed substantially to this discrepancy.

The facts surrounding the closings of the remaining five banks this week raise similar concerns.

This week’s bank closings continue to warn of U.S. banks’ deteriorating balance sheets and of the FDIC’s inability to resolve troubled banks before they cause extraordinary losses. Nationwide, banks are going broke much faster than the FDIC can close them. This creates a domino effect whereby the FDIC loses the ability to mitigate losses at the same time it exhausts its capacity to pay claims.

As of November 12, 2009, the DIF had fallen into deficit and in order to replenish it, the FDIC ordered banks to pre-pay three years’ worth of deposit insurance premiums, amounting to about $45 billion. In the three weeks since then, the FDIC has been forced to acknowledge another $3.394 billion in liabilities – more than 7.5% of the new revenue it is attempting to raise by way of the pre-payments. Very soon the entire $45 billion will be wiped out and the U.S. Treasury will become the FDIC’s sole source of funding for years to come.

Given this dire situation with the banks in the US, the case for holding physical gold strengthens. If you have not yet added gold into your portfolio, I strongly suggest that you investigate your options and consider putting at least 10% of your assets into the yellow metal.