Minimize Risk
What does finding a fixer-upper and remodeling it have to do with the UXD, Product Design, Interaction Design or Interface Design?
It's an investment. With a second home or income property there's an expectation of a return that's greater than the resources put into it. Much like designing a digital product you have to make informed decisions about the market, product market fit and the final product.
California has seen some slowdowns in rising housing prices but along most of the coast the value of property keeps increasing. If you can afford to buy and hold on to a property while paying for necessary maintenance and taxes, rising value will allow you to recoup your expenses and perhaps even make a profit.
Nonetheless, prior to purchasing you want to evaluate the opportunities and risks of a particular property.
Community
Most American Neighborhoods change in cycles. Most Post-War construction was done by developers at a large scale for single families. Over time kids grow up and the house might not be suitable to age in place or for multi-generational living. A neighborhood may change from predominantly owners to renters.
Ideally you would spend a few days in a neighborhood before buying. More realistically it possible to drive around at different times of the day and observe, the automobiles, condition of houses and the types of local retail to get an indication of whether you will like a neighborhood.
Housing Stock
There's a limited amount of housing stock in the coastal areas of Southern California. The first mile or two from the beach is highly desirable and has been developed in different waves since the 1920's.
Each period of development has some unique characteristics:
- 20's - 800-1200 sf homes on small lots in walkable areas. More flexibility for both long and short term rentals.
- 50's - 1800-2400 sf single family one story ranches in suburban setting. These are in the most expensive areas and were unaffordable.
- 70's - Small multi-unit developments with some common ownership of land or buildings.
- 80's -Larger 50+ unit condo developments or gated communities.
Change Limiters
If you buy in area with the potential to improve, it's important to know what factors might limit change.
- Zoning Variances - Older building might not be legal according to current codes. Changes to a buildings envelope or parking minimum might require a zoning variance . The process involves public notices and hearings. These are expensive, time-consuming, and can get mired in local politics. In areas that are undergoing rapid change there will always be a constituency that wants to keep things the way they were. You don't want to be your project's hearing to become a forum for larger community issues.
- Shared Ownership - This impacts use, repairs and upgrades. Two or more parties are rarely in sync about changes and funding capital improvements. Condos are known for conflicts between resident owners and ones who rent out their units to seasonal or short-term tenants. Legal documents like CCR's (Covenants, Conditions & Restrictions) might provide a framework for a dialogue about changes but more likely they are meant to lock down the status quo.
Natural Hazards
Any property in Coastal California is potentially at risk from fire, earthquake fault-lines, earthquake induced liquefaction, mudslides and tsunamis. Most American homes are purchased with 30 year mortgages. The lender requires you to insure it against common hazards in the area. Insurance will only cover so much in a major emergency so an investor has to decide which hazards are more likely and worth gambling on.
Fortunately in California information about past events is public and available at sites like property shark.net. However, the insurer's criteria for risk assessment is not public. Their data is historically based. Recent events like more violent rainstorms and fires can greatly affect your property insurance rates.
You also have to measure your total exposure. If you already own property in a high risk area, you are exposing more of your assets if you buy in another high risk area.
Construction Costs
An experienced renovator can project how much income a property can generate through sale or rent and then calculate whether it will profitable after the cost of improvements.
Most American homes are built of simple stick frame construction on top of a concrete foundation. The foundation and framing can last for a long time over multiple changes of exterior finishes and fixture locations. Changing the location of wall and plumbing fixtures is more involved but well within most remodeling budgets.
- Minor Replacement Costs - Windows, plumbing, and electrical fixtures are areas where you have a lot of choices and price points. Fortunately these can be estimated by visiting big box stores, plumbing supply houses or online suppliers. Knowing what's standard in the area and what might signal higher status is important for keeping on budget.
- Major Construction Costs - Changing the roof, cracks in the foundation, and slope management are expensive. As newbie's we only have our own experience to go on. Estimating the cost of improvements with a contractor is time consuming & unlikely at this phase. Consultants on retainer can flag potential disasters to avoid.
- Code Compliance - Bringing older buildings into compliance with modern codes can be cost-prohibitive. North American wood frame construction is relatively straightforward but there have been regular updates to roofing, structural, electrical and plumbing standards over time. There is an art to choosing which alterations can trigger code upgrades. Unfortunately it's difficult to predict these issues without sending a design through the permitting process.
Our Choice
We purchased one unit of a duplex style 70's townhome in the north San Diego community of Leucadia. The lot was close walking proximity to many amenities and a relaxed beach vibe. It's eclectic mix of small beach cottages, several different generations of small scale single and multi-unit developments, and some commercial properties. In some ways it's still in transition. Culturally it's more hippy-dippy than the more conservative suburbs inland.
The neighborhood was situated on sandstone cliffs that are a formidable defense against anything short of a mega-tsunami. It's free of fault-lines and liquefaction risk.
The townhome was 1100 sqft with 2 bedrooms, 1.5 baths and a small garage. It needed work, no home that we could afford within a mile of the beach was really move-in ready.
Purchasing & Escrow
The period when offers are made, countered and one is accepted is stressful. It's followed by a 30 day escrow during which the buyer gets to inspect the property, get financing approved, or potentially back out of the deal. The stress on the buyer and seller is somewhat mitigated by their team:
- Real Estate Agent - We worked with an agent with local knowledge of San Diego County. He quickly got a good feel for our likes and requirements. They are great for working through the paperwork needed for an offer, due diligence on the property, and acting as an emissaries in what can be a very emotionally charged negotiations.
- Consultants - During escrow we can hire consultants to inspect the house for undisclosed issues that could lower the accepted offer like structural damage, broken sewer lines. It involves tact and good judgement to keep issues from turning into potential deal-breakers while addressing areas of concern in a way that's agreeable to both buyer and seller.
- Appraisers & Loan Officers - A bank will lend you money for a 30 year mortgage based on their appraisal that your home's value is worth at least the price that you and the seller agree to. The sample size of comps of roughly similar size, amenities and construction quality is small and can greatly affect the quality of the appraisal. Banks vary greatly in their responsiveness and their ability to underwrite non-standard properties.
Finding & Working with a General Contractor
Once escrow closes the next phase is finding a GC or general contractor. The GC is responsible for keeping the costs near the estimate, scheduling specialized trades, and passing city inspections. Most trades are either employees or sub-contractors under the GC. This process also involves contracting specialist consultants for providing calculations on load bearing features, energy efficiency of windows and lights.The relationship between me and the GC is tightly defined through a contract, change orders, specs, design and working drawings.
Getting a bid from a contractor is often frustrating. There's a dynamic common to any custom project. A contractor is judging whether you are a good potential client or just price shopping for the lowest bid. It is difficult to lock down the project scope & budget until a contractor provides a bid.
A good contractor wants to work on big stable projects where there's enough of a budget to do quality work. A client wants value but has to be educated on what's possible within his budget. There's a supply and demand aspect to labor costs that matches local boom and bust cycles. Material costs have changed as new producers like China have emerged. Few homeowners remodel enough to be on top these changes. Fewer remodel at enough scale to gain volume discounts on materials like a busy contractor.
In California, it's almost a given that a residential contractor will ask whether the homeowner wants to permit the job. The building code is the minimum standard and good contractors try to do better when the budget allows. On the other hand the inspection process is time consuming for the contractor who has to be on site until each inspection has passed and the job has to stop until each phase is signed off. This can add a week to the total project time. While renovating without a permit is illegal it's quite common on smaller interior projects. On bigger projects people often weigh the chance of being caught and the consequences of the project put on hold until it's properly permitted.
In our case we wanted to increase the number of bathrooms and see that reflected in the official records so permitting made sense.
Designers & Role of Drawings
Until the General Contractor is hired almost no drawings have been exchanged between any participants in the process. Any estimates done by the contractors are based on building dimensions, numbers of items, and written descriptions planned changes.
Usually a designer would provide rendering or plans of the proposed project. In our case I drew up 2D drawings in SketchUp which served as the basis for conversations about size and placement of doors, windows, fixtures and cabinetry. Once we had an agreement between the contractor and I, a draftsman imported the sketch work into AutoCad and generated properly annotated working drawings for the city's permit process.
Waterfall vs Agile MVP
In residential construction the workflow follows a waterfall model. Physical constraints prevent continuous iteration, and the minimal value product approach. You have to workout spatial flows, layout, on the drawing board or in a 3D modeling program, convert that into working drawings, and get those approved before you can start tearing into the walls and seeing what's really going on.
In the real world its expensive, potentially destructive, and difficult to redo something that doesn't work. There's not really minimum value product. Paint and furniture are the chief ways to modify the appearance and utility of room economically. Secondly space in critical rooms like kitchens and bathrooms is tight so it's easier for trades to work in sequence than parallel.
While this goes against the current thinking in software development, trades who have learned to work together this way for decades know how their work fits into the grand scheme of things and how to communicate issues that might affect the next trade
Loose Programming within Tight Constraints
The user experience of a residential space is an odd concept. Certain concepts like user flow have analogies to the flow between rooms but homes are not tightly programmed like an amusement park ride.
You are setting up the most comfortable spaces possible for living within the physical constraints of the building envelope and building code requirements. You are balancing these priorities when choosing and procuring finish materials, appliances, and fixtures that have to fit in a constrained space.
Layout Issues
The kitchen was a narrow galley layout with dated cabinetry. You had to twisting & turn to access a laundry room & the garage in the back. The living room did not have a direct access to the front patio area. We saw the potential to reorganize the 2 rooms into an indoor-outdoor space focused towards the outside.
The second story had 2 bedrooms sharing a bathroom layout with a toilet and shower room adjoining a room with 2 sinks. We thought that there was a better way to use the space as 2 separate bathrooms. The rear bedroom had a small non-standard door providing access to a rear deck over the garage.
Contractor
At the early stage, we knew we had to budget for a gut remodel but still had not pinned down whether it was feasible to increase the number of bathroom and potentially convert the garage into an extra bedroom.
We talked to several contractors while we were in that planing mindset. Its a chicken and egg situation. It takes a contractor's time to come up with the numbers, so they don't want to put the time in unless its a definite sale, as a client we don't want to commit to a low ball estimate and get hit by cost-overruns after.
Thankfully we found Chaun Miller, a contractor who was able to ballpark it, show us that a garage conversion would be a time consuming variance process and communicated the issues we could predict. It helped that he was a hybrid design builder with several projects in the same contemporary style we were aiming for.
I had to manage this project remotely. I provided drawings derived from a Sketchup model of the new layout. Chauns' draftsman converted them into correctly annotated working documents and we proceeded with permitting.
New Layout
We changed the ground floor layout carefully to limit changes to the plumbing stack. In the kitchen the sink was repositioned to the front and the washer & dryers to the garage. The living room window opened up into a french door to access the patio. San Diego's mild climate makes outdoor living easy for a good part of the year.
On the 2nd floor, The bathrooms were reconfigured into 2 independent 5x8 bathrooms. The rear bedroom got a sliding door to match the front. Some plumbing need to be moved around but we could work within the constraints of the existing exhaust stacks.
Budgeting Finishes
Sourcing fixtures and surface materials required balancing between splurging according to our own tastes versus finding durable elements that could stand some wear and tear from renters, and predicting what would be suitable for the potential renters.
What's the timeframe to recoup renovation expenses in this scenario?
The highest possible return is short-term Airbnb approach. What's missing from the more ambitious calculations is the time and expense needed to maintain a very small hotel without the efficiencies of scale you would get in a roadside motel.
At the other end of the spectrum is a long term rental with a stable cash-flow.
The China Factor in 2017
We were surprised by the number of suppliers from China since our last project in 2009.
We also had to choose from online suppliers and physical showrooms. Some of the showrooms raised concerns about quality and durability of the Chinese products compared to American and European brands.
After investigating deeper it turns out that some American and European branded products have supply chains that originated in China too. In some cases you had to dig down to the line or model level to really know where your fixtures come from.
Green Factor
California has quite stringent environmental regulations governing building. On interior renovations this affects your choice of lighting fixtures, window size, and plumbing fixtures. It is another area where the China factor has inspired some actors to attempt to sell fixtures without the proper certifications.
For fixtures we stuck with Kohler’s Purist line. As luck would have it, 3 faucets were defective and we had to buy new cartridges to have them working for final inspection. Both Kohler and the plumbing supply store's response to the situation were not optimal.
We went with quartz countertops from an unbranded Chinese source. Our GC verified that our showroom selection made it home.
We were able to do make a small contribution to reducing construction waste and recycle some left-over redwood fencing boards as a veneer surface in the kitchen.
Unknown Unknowns
Construction went smoothly except for one issue. We discovered a leak in a shared roof deck that needed a serious intervention.
Coming to an agreement about the repair with the owner of the neighbouring unit took almost a year of negotiations and lawyers.
We completed the repair with Dave Jovin of Greyhound General as our general contractor and Lifedeck as the waterproofing contractor. Again with this being a remote job, I was happy to find reliable companies who performed great work and communicated well.
Final Thoughts
You can't do due diligence for every contingency out there.
The consultants you can hire can steer you away from a potential catastrophe but there's always an element of risk.
There are no undiscovered deals, the real market is an accurate indicator of current value in mature markets. Simple uncomplicated properties in high demand areas are few and far between or sell at prices that reflect their potential.
Value engineering a renovation is difficult unless you have lots of experience and accurate cost data.
If you want to get anything done you need a high tolerance of uncertainty and enough financial cushion to absorb risk of failure.