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Constructing a Price: Renovations
by Robert Soloway

There’s a joke about the doctor who needs a plumbing repair and when the plumber comes over the estimate is for $1000. The plumber tells the doctor it will take about a day. “Wow”, the doctor responds, I’m a doctor and I don’t make $1000 a day. To which the plumber replies, “I didn’t either when I was a doctor”.

I guess this editorial qualifies as an expose. I spent 7 years in the real estate/renovation business so I know a little from whence I speak.

Recently, I was sitting in the faculty lounge at a college in which I was a part time instructor, and a colleague was looking at a document that turned out to be a proposal for renovation on her home. She told me that she was surprised by the cost, so I had a look. I was surprised too. It was for $146,000.

On closer inspection I found some great charges worth repeating.

He had charged her $30 per hour for 6 “day laborers” for 2 days to take off her roof. That’s almost $3000. I’m guessing he was actually going to pay about $8 an hour for the laborers, tops. That would amount to $600 for the 2 days; a nice mark-up. In addition, I’m betting that one day would be adequate.

He had $3000 for a staircase to her attic. This one I know the exact cost of because I ended up designing it, helping her get the lumber, and finding her a semi-retired carpenter. He charged her $180 a day (3 days) and the lumber was under $200. That means that the contractor’s estimate of $3000 had about $2300 included for a trip to Home Depot and a few hours of measuring and calculating (I didn’t charge her at all).

I think this is simply the result of supply and demand. As the number of people who are unskilled in construction increases, the ones skilled are free to charge what they will. As a child in the 50’s, my father taught me everything from auto-mechanics to TV repair (now if they will only bring back tubes and carburetors I’ll be fine). We didn’t pay to get anything fixed. In our present day society, many people can’t change a flat tire or hammer a nail. So, in a savagely capitalistic society, like ours, the result is exploitation.

I’ve been watching many large expensive homes going up and the prices floor me (or maybe they “ceiling me”). Understand that most houses are basically the same in terms of major construction. That is to say, a cheap house uses 2 x 4’s (as studs) and an expensive house uses 2 x 4’s. It isn’t like the more expensive home is stronger and uses 3 x 5’s (don’t exist except in index cards). Same sheetrock, same plywood, etc.

This is going to shock you, but the materials in an average room cost less than $1000. That’s all the studs, all the floor joists, all the plywood, all the sheetrock and extras. That’s a basic room. Ever wonder why you can buy a house in a rural county that is 1500 square feet for $119,000, land, yard, appliances, everything? That’s because basic construction costs less that $30 per square foot. That means a 1500 square foot home can be built for less than $45,000. Add in a few extras, the land, and selling expenses (agents, lawyers, fees, etc) and you can still make a profit at $119,000. Do the same math for a 3000 sq ft home and you’re looking at $90,000.

So why is an average 3000 square foot home in my neighborhood $600,000 if it can be built for $90,000?

The construction industry uses a very safe way to price a job. They estimate the cost, maximize it, and then triple or quadruple that.

If the house cost $90,000 to build, $40,000 for the land (1/6th acre), $50,000 for the extras like fancy moldings, garden tubs, and fancy appliances, you’re at $180,000. Pay an agent to sell it and you’re right at $200,000. Triple it and you’re near $600,000. Bingo.

I had this suspicion for quite a while and then one day I actually heard it said! My ex-wife had a landscape architect design a stone wall and stairs outside her house. While he was there he took a phone call and walked aside to speak. I had to get something and wandered near enough to hear this conversation.

“Well, the plant should be no more than $60 and at most the labor might come to $45, so let’s see, that’s 105, tell him $315. He had maximized it and tripled it. Interestingly, he had estimated my ex-wife’s project at $13,500. I took the design, made the wall slightly long, a little taller, and added one more step, and I did it for $4500, less than a third of what he would have charged. I guess that is his mark-up, 3 times the maximum cost.

Okay, here is the point. You should bargain with these people. The mark-ups are too large. If you live in a wealthy neighborhood and they know the renovation is going to add a lot of value to your house, they are merciless. They charge you more in those situations as though they were cutting themselves in on the profits you will make when you sell it.

Eventually I told my colleague that instead of the addition, she should go out to one of the rural counties, buy a house, and tell them they can keep the land if they’ll move the structure to her backyard.

She’ll save $30,000 and have an extra kitchen and 2 additional bathrooms.

Published: Jul 15,2008 22:10
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