Monday, November 5, 2012

Walking Away From A Few Million Dollars Part 4: Contractors, Fixes, and Nosy Neighbors.

If you are just now coming to Ragnar, check out Part 1Part 2, & Part 3 of this story first. :)

From day one, we knew that the problems that most people would see and keep them away from this deal, were the exact ones that made it a good deal since they weren't very bad problems to have (the most blatant which was an easy fix, was the copper vandalism in the plumbing systems). As far as the really obvious stuff (to us) went, we were looking at probably $400K in expenses. Not too bad, considering that we were conservatively expecting monthly rents of roughly $60K and a purchase price for the property of under $300K.

Electrical: Given the amount of wiring that had been taken out, we were in dire need of electrical work. Bill had a contact from his industry days who he thought would be able to get the job done quickly and effectively  They once led a crew and converted a modestly sized plant from 220v to 440v in a weekend, without loosing productivity. That's the kind of work ethic that we needed. A phone call later, we found out that the firm had done the bid for another entity who was thinking about buying the building several years before us. The owner of the electrical company came over, looked at the building and said that while the old bid would need to be changed a bit, it shouldn't be more than $100K and a few weeks to get up and going.

As often seemed to be the case, there were items of contention that came up when we walked through the complex with the inspector, such as how to run wires with a drop ceiling in place. Another was how to safely make electrical connections for cut wires. The inspector generally wasn't really citing anything in the code book for the repairs that we needed to do, because it wasn't in there- instead of arguing on the spot because we knew the codes pretty well, we decided to talk to our contractor who assured us that there was "a way to talk to them" that could get things done. This was one of the first forms of cronyism that was becoming rather evident. After my previously mentioned discussion with the plumbing inspectors I found the whole thing to be nothing short of disgusting.

The Gas Company: To the left, you see an exposed gas line that formerly supplied the largest of the buildings with natural gas. Not only was the pipe undersized to service in excess of 85 unit's worth of gas furnaces and water heaters, but it was exposed above ground (for obvious reasons, they are generally a few feet under ground). In fact, when I first saw it, I walked up to and kind of kicked it just to see if it moved. Not only did it move, but, it had a few inches of give... Not exactly what you want when an explosive gas is flowing through something that is rusting out by the minute... As such, we were going to bury it and needed to talk to the gas company about doing so, since we had no real way of knowing who owned the line.

About a week after first seeing this, I awoke to a call from Bill saying something to the effect of "Jeff, I've done it now... The gas company if flipping out because I tried to get them to meet us out there to talk to them about that gas line." I tried to call the company to sort things out, but, pandora had been let out of her box.

As it turns out, the rep at the call center wouldn't send anyone out there to tell us if the line was the property of the gas company or not- but she did ask if it was a dangerous situation. Bill said something to the effect of "Well, it isn't really dangerous as there is no gas in it, but, someone might trip on it?" This apparently set the representative into some tirade about how that was unacceptable and how they were going to send a team out to investigate...

From what I could gather, this crew had everyone in it but a Navy SEAL. Fortunately, Bill was able to intercept them, and explain the situation. The issue was solved in a matter of minutes. There was no danger, but the line would be ours at closing of the deal. As we originally planned to do, they wanted us to bury the line. The crew was actually surprised that they were sent out for the "problem".

General Contractors: Generally speaking, I do not like general contractors- they are people that in my experience, generally can't do much of anything- be it return calls, show up for bids, do good work... A common thread of them is that they want way too much money to get out of bed and are really good at feeding people truck fulls of bull shit... Despite this, I realized that I was going to have to dance with the devil a little bit and held my nose as I walked through the complex with a few of them to look at minor carpentry work, as well as a decent bit of drywall work, with a whole lot of painting. Even with the problem of getting people to get back to us with bids, we found a painter that would do the whole complex for ~$33K. He was originally from the country and employed a lot of his family. In talking with him, we felt very comfortable and genuinely wanted to employ his firm- after this deal fell through, we found out through first hand experience that they do great work and are a joy to do business with.

Sprinklers: We were able to get in contact with the company that serviced the sprinkler system for the old owners. Since we figured this to be the greatest expense, we contacted them our first week working on the project. When talking to the servicer, he said "Oh yeah! I remember that system. I can't imagine that it will take more than a day, MAYBE 2 to get it up and going again. We charge about $2,400 bucks a day." We decided to budget $10K for our numbers. Because we knew that a bit of copper had been taken out of the valve system pictured on the left.

Bill and I were sure that there were some other issues, but, that is what our budgeting was for. Plus, we added in a healthy contingency for general problems that we would run into. After all, you can generally fix anything, it's just a matter of how much money that you are willing to throw at it!

Elevator: Again, we were able to get in contact with the firm that serviced the elevator for the former owner, who assured us over the phone that it would likely only be $5K to get the system operational. We decided to budget $20K for the job, as my uncle had previously had an elevator installed in his own home and knew that servicing can get expensive quite quickly. In the picture to the right, you can see the old style relay system that it had. These things are pretty amazing in that they are so old, and can still work- however, they aren't necessarily as "good" as newer digital systems.

HVAC: Dealing with HVAC problems created 2 of the more stressful days that we have had. The first was when we met with a contractor about furnace replacement. Bill has been licensed for HVAC for many years and even had experience with it in a former life in industry. We could tell that a fair amount of the furnaces needed to be replaced, but wouldn't be sure how many until we actually kicked the gas on- we were taking an educated guess by sampling them via individual inspection of the flutes and such.

We noticed early on, that certain furnaces had been replaced with the duct work for the returns having re-worked through the closet. While we thought it was odd, didn't pay too much mind to it- attributing it to a lot of the odd work that had been done in the place. When meeting with a contractor; an older gentleman possessing a country drawl, who while likely lacking formal education, really knew his stuff- we got some terrible news. He noticed what he referred to as "white rust" on the vent pipes. I had seen it, but figured that it was due to condensation or water coming down the vent pipe. Bill had just overlooked it. Once we started looking around at the layout of the utility rooms in each unit, Bill and the contractor quickly saw how bad of a problem it was. Basically, the air supplies for both the hot water heater and furnaces were not far enough away from where they were venting to. This causes a kind of mini-vortex of circulatory air and has the potential to cause a whole lot of problems... the "white rust" was a symptom of this.

While we may have been able to push the issue through, it as had been functional and up to code for 40+ years, it wouldn't of been right for the potential inhabitants to the building. We quickly saw that every unit was going to need to have new duct work run so that air could circulate through the apartments properly. This was, in our estimation, going to cost over a quarter of a million dollars, due to the time and labor for framing, installing duct, drywalling for a smooth finish, and replacing the furnaces... Furthermore, we weren't even sure if it would pass code... In our experience, there isn't supposed to be any obstructions in front of a furnace for something like 3 feet. Generally, this is meant as a wall or an appliance.  For our purposes, we were needing to have a box to sit the whole thing on. While this didn't really obstruct the furnace, was infront of it. Another option was to go through the closet and have the return come out in the bedroom, but again, that wasn't exactly an ideal fix as we would need to put grills in the bedroom doors, reducing privacy- not to mention the lost closet space and more than doubling our materials expense... We weren't even sure if the state inspectors would be OK with the fix that we and the contractor had come up with.

My uncle is a pilot and generally takes a flight out to an airport in Indiana with one of his landlord/pilot/contractor buddies once every few weeks. Apparently, the cafe there apparently has a great breakfast (which, is pretty much the only reason they go there). My aunt refers to as "the most expensive breakfast you can eat" due to the cost associated with getting there. Anyway, at one of those breakfasts, Bill's friend kept saying "Bill, there has to be a way to do this. You can't just tear down a building because of this. There are too many of them around for that to be the case."

Bill kept re-explaining the problem. Yet, his friend kept persisting: "Bill, there has to be a way."

A few days later, that expensive breakfast sparked a solution. With some googling, we discovered that Amana makes PTAC units that are designed to work like a heat pump- so they can cool AND heat an area (like the units in hotel rooms). Not only that, but they make them in a size that fit the air conditioner cans that already existed. This was splendid, as we were already going to have to spend upwards of $40K installing window air conditioning units. Not only that, but the PTAC units were only a few hundred dollars more than the AC units and used roughly the same amount of power. All of a sudden, our original $250K fix turned into one that was going to only cost an additional $30K. Further reducing our expenses, we had been planning on spending a bundle of money on new furnaces and repairs for a good number of the old ones... What we had originally seen as a terrible problem that was potentially deal killing, we were likely lucky to have had happen!

Once we knew this could work, we figured that we would price the job out to an HVAC firm in Lexington, as we were going to need HVAC installed in the common areas and some of the 2 BR units as well. When meeting with the only firm that we thought had the resources to tackle the job, the founder of the company came out to meet us. Coming to the job site late, he rolled into the parking lot in his huge (and brand new) black GMC Yukon.

When describing the problem that we had, it took him a while to even understand what we were saying. Which was fine, as it took us a while to wrap our heads around the problem. What did become a problem is when he got into an ego measuring contest with himself where he kept saying that the PTAC we wanted to use didn't exist.... Despite our having a print out of it in Bill's truck. It didn't matter what we told him about what it was, how it worked, and the like- he kept on saying that there would have to be some sort of control mechanism made with a program to aide the unit and that the job would be super expensive.

After a while, he finally got into his SUV wearing his oversized and overpriced watch, and drove off after saying that he would look into the idea and get back with us. He never did.

Don't get me wrong, it worked out well that way. I could tell Bill was fuming and I kept saying "wait til he gets out of the parking lot.... Wait til............" At which time, he spouted off something to the effect of "You can douse your boxer shorts in gasoline and take a stroll through Hell before we will use that so and so on this project!" After a second, he calmed down and said "Not that I am trying to push you around in the decision making here. We are 50-50 partners in this... Feel free to disagree."

"Nah," I laughed, "I don't think that's a good idea. We can find someone else." After that exchange, I understood why the firm in question had a lot of consumer complaints (that we later found out about).

The truly ironic part of this, is that as I was walking through the building room by room to get an inventory of the units that existed (which there were few of), I found one of the PTAC units that we were going to buy over 100 of. Bill found out from an acquaintance that formerly managed the property, that as the old furnaces went out, the owners started switching to the PTACs that we wanted.

Apparently, the "experts" weren't such experts...

Plumbing... Part 2: Another solution that we came up with was in regard to the problem about pressure relief lines for the hot water heaters. The owner of the supply house we were using for most of the materials wanted to get an idea of the project, so he brought an army of his plumber friends to check out the complex. As it turns out, this group of 7 plumbers had decided to team up and put together the bid we would have gone with.

After about an hour of walking and surveying, one of them noticed that due to how the units were arranged, the hot water heaters in every unit were generally back to back- separated by just a wall. We could reduce our gas bills, water usage, chances of heaters going bad, and a host of other problems by simply eliminating 1/2 of the heaters and plumbing 2 apartments hot water lines together. This also solved the problem with the pop off lines that the inspectors were concerned over. The beauty here, is that we would get extra space in 1/2 the units for tenants to have as storage. PLUS they wouldn't notice a difference in their supply of hot water, as there we were going from 1 bathroom to 2 per hot water heater and giving them an even larger tank! A true win-win!

There were a few minor plumbing expenses that we found that day, but overall, was viewed as a victory, since we were again able to cut down expenses pretty significantly.

Nosy Neighbors: About 2 weeks into the process, the lady that lived across the street (and who we referred to as the "cop of the street") was talking to Bill when I pulled into the parking lot one morning. I remember thinking "Huh, that's odd, who is she?" I got out of the car right as Bill had to take a call. She immediately marched over to me and started ranting. I don't remember how it began, but it very quickly went to her saying things to the effect of "You're not going to turn this thing into a Section 8 nightmare with drugs running in and out all of the time because of you renting to (insert a host of different minorities here)."

I stood there, looked at her (bewildered), politely ignored her blatant racism, and responded with something to the effect of "Ma'am, I don't have any desire to spend a bunch of money on this place and invest a lot of my time in it, just to see it go to Hell and eventually lose it to the bank because we take on bad tenants. If you look at the places that both Bill and I have, we care for our properties and try to get good tenants. Sometimes, we mess up, but we try to correct any problems as soon as we can. Besides, I don't think that drugs will ever be an issue her because we are going to turn this into elderly housing. Sure, we will take Section 8, but there are a lot of good people on the program. Plus, we will screen really well because we want to help your property values go up. I really don't want to rent this place to the same type of people who have already destroyed it once."

This didn't phase her and she immediately went into a diatribe as to how I must have known the previous owner and how we were in cahoots with the bank to juice money out of the property. At this point, I started to get a little bit corse and said "Look, I have no idea who owned this place, all I know is what I have heard from other people... and that is this: of the money he got from this place, he either poured it down his throat or snorted it up his nose.... that's why no repairs ever happened here and......."

"Well, you just said you knew him!" she interrupted.

Getting irritated as there were a few other exchanges here, I said "No, I didn't... Quit interrupting me... I am trying to help you out here..."

Thankfully, Bill got off the phone. I am pretty sure he sensed how badly this interaction was going. At this point, I was fuming. He calmly came over, gave her his card and said "check out the business I run and call me if you have any questions." She started going again about some random conspiracy that would have seemed reasonable for a regular listener of Alex Jones, but Bill persisted. Again calmly saying "Hey, I promise you, I have a good reputation. Check out the business I run and call me with any concerns that you have."

After that, she was practically eating out of his hand.

I however, was eating out of no ones. She walked back to her house. Bill and I walked into the building to prepare for meetings later in the day. As Bill retells it, as soon as we were in the lobby of the main building, I, in a rare outburst of anger yelled something to the effect of "******* **! You're **** going to have to deal with that **** _____ ****! Because I am not going to deal with that kind of **** ***** **** ********!" Which, to those of you that know me, can attest that I can come up with some interesting out ways to express my distaste, with an assortment of words that are generally not used by a whole lot of people. Hey, we all have our flaws... :)

Bill, taken back for a second, chuckled, and said "OK". I then took a drink of my sweet tea, took a deep breath, walked down the hall, and made a call to a contractor. I was then un-phased as I was pacing around like normal, going about my work for the rest of the day.

These 2 instances of us flying off the handle are about the only time that either of us were in too bad of shape during the stressful 4 week ordeal. Though, there were other stressful times. Really, I think that these sort of illustrate how well we were working together. While it certainly isn't preferable to get angry about something, I think that it is generally a good thing when people can occasionally fly off the handle and then be OK with each other or the situation in a matter of minutes. If in an argument over something, it is a good thing to be able to disagree, come to an agreement, moving on and then going to get lunch.

That kind of understanding is important to have in relationships.


After all of this, I was pretty sure that I was getting ready to solidly be a millionaire by the coming fall from the equity that was getting ready to be added to this lifeless building. When considering the kind of cash flow that this thing was going to throw off, each of us were going to end up with a pretty nice residual income that wouldn't take a whole lot to maintain. While I knew something could fall through, it seemed unlikely (as such I wasn't yet counting my chickens)... We only had to get definite plans for the elevator and sprinkler systems, but weren't too worried because we had already talked to the firms that were familiar with the systems. Other than that, we just needed to hatch a final plan with the state regulators, who we had already felt out and talked to about things, basically having (what we felt) was a pretty good understanding of things.

We were set.

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