The TCO Method ™
Episode 03 
Saying The Quiet Part Out Loud
Hosted by Andy McQuade

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[Music]

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Welcome to the TCO Method, the only show focused on helping you massively increase your net operating income.

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I am Andy McQuade and thank you so much for joining me for this second episode, right?

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Second official episode of the TCO Method. Today, we are going to focus on saying the quiet part out loud.

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And there’s a few of them in real estate, right? There’s a few of them in construction, but the one I

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want to talk about is the one that is sort of my pet peeve. And I’m going to apologize in advance.

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Again, this is the third actual episode of the TCO Method. First one was a sneak preview.

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Second one was two cars, no brains. And this one is going to be focused on saying the quiet part out loud,

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which should be interesting, but probably won’t make me a lot of friends. So with that, we’ll get right into it.

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The quiet part that I want to talk about that everybody sort of needs to be aware of is a little

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complicated, but not really complicated. So I spent the vast majority of my career on the supply side of

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construction and property management, doing and working with procurement operations for builders and

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whatever. So I was a sales guy, right? Long story short. And a part of what I noticed in the later part of my

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career as I was working more with the operations, maintenance and management of properties, they had a

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lot of things that were caused by decisions made years prior. And it was costing money because they

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decided to pick product or service or whatever XYZ during construction or remodeling renovation,

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whatever you wanted to call it. And it wasn’t necessarily the best fit for the use of that property.

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Right? So there’s a lot of talk in modern procurement and purchasing now about highest and best use,

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most value to the company. But the reality is that the priorities of the construction company, the

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remodeler, the renovator are not the same as the priorities of the operator of a multi-family

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commercial property or an office building or whatever. So a lot of times decisions are made so that they

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can come in on time and under budget, which means that the product has to meet whatever specs are

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laid out by the architect at the beginning of the project, which is a whole nother thing that we’ll

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talk about because architect specifications, just I did it for a year, working with really high-end

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commercial architecture shops across the country and some of the biggest cities servicing some of

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the biggest national clients. And I can tell you right now that the architect is not always

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in it for the customer or their benefit and they’re not always in it for

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the tenant and what the best use is going to be for a space. So there’s there’s graft and there’s

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bribery and there’s money that changes hands and kickbacks and librarians in some of these huge

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places that want to get paid to put products into a spec to put them out for the architects to pick from

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in the libraries. There’s yeah, there’s just there’s just a lot of very unfortunate things that

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happened with some of these larger firms that I was completely oblivious to until I actually had a

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sales team going into these offices and working with some of these places. And you know six months in

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when we had a librarian basically say, hey, I want 5% of whatever it is that gets sold into this job

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if I recommend your product. I was like, what? It’s freaking blew my mind. Needless to say, we didn’t do

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that because that’s a huge issue, but as a product manufacturer and supplier, I was like, wait,

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this is actually a thing. I’ll explain so much, so much about why bad decisions are made. But in

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any event, there’s this thing that I call race to the bottom, right? And this is a quiet part being

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set out loud. The reality is that the builders and contractors that are working on these projects

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are interested in a couple of things. Completing it on time and making it look pretty to whatever

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the customers expectations are because that’s where most of their headaches come in.

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The second thing is they want to make sure that it lasts for whatever the duration of the warranty

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is that they offer. It’s a one year warranty, two year warranty, 90 day warranty, no warranty,

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they don’t want to own it after whatever the workmanship warranty is that they put on that project.

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Which means that your average tenant, and we’re talking in multi-family right now, your average

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tenant is going to stay in a unit for maybe two or three years. And then you’ll get to update and

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refresh, but you’re not going to do a full turn most likely unless there’s damages. For somewhere in

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the five, seven to ten year mark, obviously the longer you can go without a massive renovation cost

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on your capital expenditures, the better. But there are certain, we’ll call them bones in these units

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that don’t need to get refreshed every time you go in and update the paint colors in the carpet

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in the countertops and the cabinets and light fixtures or whatever it is you’re doing.

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So the quiet part out loud is that we literally incentivize the builders and contractors that we hire

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to do these projects, whether it’s new construction renovation doesn’t matter. We’re paying them

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to put the cheapest junk they can put in that will last for as long as their warranty lasts,

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and that’s it. Unless you specifically give them the exact product choices and selections that

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they have to use for the project with no substitutions, they will find a way to put a less expensive

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product in that does the same job, but that helps them come in under budget. Why? A bunch of reasons.

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Number one, because stepping over dollars to pick up pennies is not their problem, right? I’ve

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seen operators do this too, right? Big multi-family operators, over ten thousand doors under management,

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and they would rather put stuff in that starts to have issues after three years and then pay their

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guys to go into these apartments and maintain them and operate them and do whatever it is to keep them

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functioning the way they’re supposed to or just let them run endlessly and just use utilities and

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cost the company more money as opposed to paying extra money at the beginning of the project

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during a rehab to do it right. So it takes all kinds and I’m not judging. Everybody has their own

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reasons why they do things, but I do question the logic if you’re going to own and operate a property

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long term. Why you would choose to put something in that you know will have problems that you know

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will cost you more and that you know you probably won’t change again for 10 to 15 years.

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It doesn’t make a lot of sense to me. I don’t know that it makes a lot of sense to a lot of people

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when you put the numbers on paper. It just doesn’t seem to make sense. So my advice is to avoid choices

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like that right this brings in the whole two cars no brains conversation from the last episode.

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And yes I am talking about the two cars no brain situation but we’re going to put it more specifically

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into this race to the bottom conversation that we’re having. So we pay project managers

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to come in under budget and on time. We pay construction companies to come in on time and within scope.

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Construction companies pay their project managers to come in under budget. And depending on

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how far under budget they come in they get a bonus nine times out of ten. So we’re accepting

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and incentivizing bad behavior at the fundamental root level of the industry because we’re directly

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tying compensation to cutting corners and calling it good performance.

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There is something called value engineering that gets thrown around a lot by both building

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materials providers and by builders construction companies GCs subcontractors whatever you want to

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call it. If there’s labor and materials involved they will pitch this value engineering thing to their

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clients. Now the problem with value engineering isn’t that it exists. It’s that nine times out of ten

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especially in the last call at five to ten years. They will value engineer all the value out

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to secure a low price. So what’s the problem with that? Well for example we used to have a

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customer of mine back when I was working at the lumber yard who insisted on value engineering

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all the trust packages for these homes. They’re put in 716 so SB on the roof and they would insist

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that the trust is on a roof would be spaced two foot on center and value engineered

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so that they met code but they didn’t care if that plywood sagged and you could see sags in the

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roof after their workmanship warranty was up. This was the track home builder so they would build you

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know 90 to 110 homes a year and all they cared about was the lowest price possible.

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Well when you drive through those tracks even now you can see every single one of those sheets of

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plywood has a belly in it. Now it looked fine when that first homeowner bought it but do you think the

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curb appeal factor lowers the property value of that home when they’re going to resell it? Well right

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now inventory so low would it really affect anything if the roof isn’t leaking? Probably not.

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But when it becomes a buyer’s market and sellers are desperate to sell do you think there would be

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a concession because of roof is saggy and just looks terrible? I think there probably would be. I’m

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pretty sure it’s actually happened. It’s been a while but I’m pretty sure it’s happened.

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So they value engineered the value out but added value to them because their workmanship

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warranty is 12 months. So once somebody signs that dotted line and takes a position at that house

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you get a leaky faucet a leaky toilet leaky roof whatever it happens to be the builder’s on the hook to

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come in and fix that labor and materials. Once that’s over it’s whatever the manufacturer’s warranty

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if you can find proof that that is the specific product like good luck identifying the siding on

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your house 15 years down the line. Building materials companies just don’t maintain the exact same

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product typically in the exact same configuration for that long. Like the warranty might be 30 years.

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Number one it’s going to depreciate after say five to seven typically sometimes it’s sooner

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sometimes it’s later but good luck actually matching that product like you’re not going to be able

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to something goes wrong you have an insurance claim whatever anybody who’s ever lived through this

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knows they have to basically fight to get the entire visible section covered by the insurance

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company because you can’t match it whether it’s because of fading because they don’t sell that

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particular product anymore the wood grain change the colors a little different the sheen is a

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little different like just a ton of things that go into building materials that people don’t think

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about but the reality is that anything after the first 12 to 24 months is going to be on the owner of

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that home regardless of whether there was a manufacturer’s warranty or not I mean half the manufacturer’s

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warranties out there aren’t transferable anyway so the builder buys the product puts it in the house

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it’s a non transferable warranty so if the builder calls to say hey I need this part the assumption is

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going to be the builder still owns that and it’s still covered Joe homeowner calls up and says hey I

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got this part serial number blah blah blah if it was registered it probably wasn’t registered to them

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if it wasn’t registered you got a 50 50 chance of them honoring the warranty

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because they’re going to want proof of purchase as a homeowner have proof of purchase for faucet

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for shingles on a roof no they don’t so it’s going to be a he said she’s

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said in good luck getting any money out of it and when they do give it to you it’s going to be

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materials only not labor so in a lot of cases it’s not even worth pursuing

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because the labor is the more expensive part anyway I got off on a tangent my apologies

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and this might happen more often so I’m going to apologize in advance

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so the quiet part out loud is how do you control as an operator of properties for income

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how do you control these incentives that have been rolled out since the dawn of construction

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how do you incentivize or remove the incentive to just put the cheapest possible thing into these

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apartments or into these spaces I’ve seen flippers and no offense to flippers I know a ton

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I know a ton of people who flip who wholesale who property manage who do you know renovations

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themselves in house operate crews hire crews out they don’t care what they use

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so you can buy a turnkey flip that’s being advertised as turnkey for a run all ready to go

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and it’ll have laminate floors what happens the first time a laminate floor gets wet

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swells up like a balloon in the picture of the wood that stamped on top of it peels off or wrinkles

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pushes against the walls it pushes against you know cabinets it just it’s it’s hot garbage and yet

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in 2023 we still see people using it why because it’s cheaper than a good LVT

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and it’s definitely cheaper than an engineered hardwood

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what’s the difference between an engineered hardwood and a laminate a laminate is literally cardboard

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press board glued together with a picture of wood grain stuff put on top it may be actual wood grain

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it might be a very thin layer of wood with a finish on it but nine times out of ten it’s a

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printed picture of wood and a pattern and maybe a texture with a coating on top to protect it

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from wear and tear from physical stuff but because it’s a pre finished floor the first time you spell

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something on it at least down underneath and then that leak sits on the sub floor and soaks into

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your flooring and it makes it swell and fail

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engineered flooring that’s actually a very thick

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you know like quarter inch maybe a little more of hardwood slab hardwood

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which is then applied using special glues and a lot of force to a very resilient

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plywood base not cardboard and even though it may be a pre finished product sometimes it can

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come unfinished so you can put a finished coat on top of it but anyway long story short

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there apples and oranges so i’m not talking about engineered hardwood i’m talking about

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laminate junk cardboard press board and it’s the same thing with you know MDF base MDF shoe

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the the biggest difference is that typically your your base boards and your trim in your house

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that are going to be MDF aren’t going to get direct exposure to water spills because they’re not

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laying flat on your floor right if you have a flood they’re probably going to fail but so is the

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prime finger jointed pine or whatever that you would have had there anyway would have had been

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ripped off and in replace so it’s it’s six and one half a dozen of them another in that case

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but if we’re flooring it’s a complete joke yet it’s used all the time you know very very

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similarly we see very inexpensive low quality paints that are very hard to touch up

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that are almost transparent in some cases depending on how they’re applied and who applies them

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being used for rentals and then you know you get a spot on a wall from somebody moving in

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and on your move an inspection you know it’s there you offer to fix it you end up having

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a repaint in an entire wall instead of being able to just touch up one spot so

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the stuff that goes into these units does matter right chasing the race to the bottom for that bonus

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for that you know that project manager you need to put things as an owner if you’re involved in

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this type of project where you’re hiring a GC to build for you or you’re hiring a subcontractor

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to come in and turn units and you’re doing you know labor and materials because we’re into a whole

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different conversation with the the owner of the building or the owner of the property

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buying the materials because then there’s no incentive for the builder or the contractor

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to reduce waste and it’s not unusual for a home builder to buy the framing package

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and supply that for the framing carpenter that’s going to actually stand the house up right

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they’re just there is labor and there’s things you can do from an inspection standpoint to make

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sure that they’re not generating too much waste and to hold them accountable you know in their

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final payment for that how do you hold somebody accountable when stuff starts failing that they

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bought three four five six years ago and it’s failing you know extremely prematurely because

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it’s the wrong product or a inferior product to what could have been used that should have been

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used right you can you can do a specification sheet that spells out exactly what the products are

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builders and contractors hate that because they can’t use the supply chain and the vendors and

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the relationships that they’ve already got in place unless that product is available everywhere

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and if you do or equivalent in the specification that means that they get to shop around

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and the definition of or equivalent changes drastically

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because just because there’s a product out there that works for a purpose

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and looks similar doesn’t mean that it forms long term in the same way

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you can buy product a and use it and it’ll work for four years and then it has a catastrophic failure

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that requires repairs or maintenance or costs extra money to operate in utilities or

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or water sewer or whatever or you can have the better product that costs more

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that is a stable product for you know five ten fifteen years depending on what it is

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and it looks the same and just costs a little bit more at the beginning of the project but we’re incentivizing

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bad behavior by paying people bonuses based on the race to the bottom

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and it’s a super widespread problem because you’ll see this whole RFPRFQ soliciting bids I want three GCs

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and three subcontractors and three material bids and there’s no ifans or butts when it comes to

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relationship to value to partnering and innovating with your vendors there’s just we just need to get

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this job and be cheaper than everybody else and if our service is terrible oh well they got what they

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paid for there’s not enough margin in there for us to babysit this project we’re gonna drop ship

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stuff and it’s gonna get there when it gets there and if they don’t like it oh well you know and

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and the worst part is that now covid the pandemic

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basically gave everybody a pass on logistics and transportation because of supply chain

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disruptions that made the news every 30 seconds and they’re still using it today

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and while yes there are still some supply chain snafu and hiccups that are impacting

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building materials and construction a lot of companies now just default to the supply chain issues

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as the root cause of their lackluster service delivery when it might be that they’re looking

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to save money and so they’ll get to it when they get to it because it’s more affordable to do so

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than to deliver the same level of customer service they were delivering prior right we see it with

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these box stores on the building material side where over 50% of the employees in a building now

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are part time there’s no skin in the game for them there’s no incentive for them to take care of

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the customer because it’s just another part time job it’s not a career

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some of the stuff is very technical and it’s not something that your average joe is going to be able

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to give a good answer to like i love it when i hear people with horror stories from going to

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hardware store a big box store and being told you know something simple like

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window glazing old homes

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historical homes use window glazing to keep the window pains in from the outside

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literally heard someone the other day tele customer that they could just use whitecock

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i guess it could it’s probably going to be a bad day in about a year but

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yeah you could probably cock it i guess i don’t know i don’t know

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the wrong product the guy didn’t even know what window glazing was like they still sell it on the

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shelf it’s in a different area but it’s there so just you know interesting little tidbits of

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bad info that comes from having people that do whatever for a living and it’s just another part time

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job they’ve never really worked in the industry or if they did they swung a hammer for a few years but

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you don’t need to be a technical genius to swing a hammer you don’t need to know how paint works or

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what window glazing is doesn’t qualify you as an expert for those particular things you want to tell

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somebody you work as a framer for 25 years even on super high-end homes you want to tell somebody

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how to frame a house or how to you know frame out a window or a door or you know the do-sheeting or

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or any of that kind of stuff you are probably qualified to do so even if you were just a laborer

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because you have to cut and measure and carry and stack and you’re going to absorb over time

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how it’s supposed to look and what’s what it’s supposed to do and hopefully why you’re doing what

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you’re doing but if you’re going to give somebody advice on how to paint a wall it’s like having an

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electrician replace your faucet on your sink instead of a plumber right like I don’t get it but anyway

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back to the topic the race to the bottom is probably the worst thing out there for the industry as a

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whole because it costs my customers I’ve seen it personally for years and it’s part of the reason

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why I do what I do now honestly because it creates a huge amount of construction waste then just

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all sorts of bad things for the environment it costs a lot of money to repair and deal with

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and maintain and it’s you know it’s a pet peeve of mine like I said at the beginning of the show

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that people are still participating in the race to the bottom and the only way to change it the

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only way I can see to change it is going to be to stop accepting it as the norm

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right you can’t do laborer materials we already talked about the the risk of loss and theft

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and all the other stuff if you’re buying materials and not letting the contractor own that part of

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the process there’s going to be shrink loss of value loss of product loss of time whatever it may be

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if they’re not responsible for the product the only way I can see to fix the problem is to have

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very specific product specifications with no substitutions allowed in the contract for the actual spec

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the problem is that people don’t do what I do every day even architects and designers

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have no idea what the useful lifespan or what the maintenance impacts are of those products

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after they’re installed in a unit for its intended purpose like you can have conversations

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with your architect near designer about useful life and resilient products

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the downside is that the useful life and resilient products that they recommend and know about

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are the ones that the vendor reps show up and train them on in a luncheon learn and that are in

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the libraries and in the you well guides online they don’t actually have first-hand experience

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with the lifespan of usable products or how it fits into the lifespan of an apartment building

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because that’s not their job they’re involved in the very front section this big little tiny little

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tiny section of time that the project is being built and then they’re done they’re paid when the

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project is complete or maybe before and their involvement ends like they don’t even get warranty

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calls because it’s not their problem all the stuff that they recommend in the library and they put

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into the designs were approved by the builder and maybe by the customer depending on exactly how

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that relationship was set up at the beginning of the project so the real question is I guess the real

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point is less than a question you need to bring products that you know are functional and have a

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longer useful life and more resilience to your builder and to the architect to say this is what you

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are going to use come heller high water and if you don’t like it I will hire someone else to do it

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why is that the quiet part out loud because it’s a gap that’s existed since the dawn of time in

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construction as long as I’ve been involved and I started working in the industry in 1997

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and it still exists today and there’s no good answer for it

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because they want to own the products they want to own the relationships and they want to find ways

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for them to save money so if you’re going to do this and you’re going to dictate exactly what gets used

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and in what way they’re probably going to charge you more money for the inconvenience of

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of having to you know basically lose margin in an area where they would get their bonus

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so I don’t know if that’s the right answer I don’t know if anybody else has answers

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email me podcast@tco-method.com let me know what you think am I just making this up is this not a problem

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everybody sees do people just not care is just a part of a cost of doing business because I know that

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unexpected expenditures like having to replace an entire floor in a rental because the tenant

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decided to spill water or had a leaky faucet is probably not going to help your NLI numbers at all

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I guess if you can write it off as an insurance expense and your insurance doesn’t skyrocket because of it

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maybe you’ll be okay but one way or that there’s a cost that’s going to impact your business

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from a failure that happens prematurely whether it’s a leaky faucet that costs you extra money

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on your water and your sewer whether it’s a light fixture that needs to be replaced prematurely

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because there’s no bulbs in it to replace because you for whatever reason decided that an

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integrated led was the right answer for that project maybe it’s something you know a little bit more

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technical like you decided to have concrete stamp create walkways put in this nice place that’s an

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Airbnb and then the property maintenance people decided to throw rocks out on it and it completely

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crumbled after a year because it wasn’t sealed properly anything can happen in this industry

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and I guess everybody involved in the process should have a fiduciary duty to extend the useful

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life of it for as long as possible but there’s no incentive to do that on the construction side

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on the architect side on the implementation side at the beginning of the process

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it’s the people who operate the property later that are stuck with that and it just becomes a part

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of overhead and I guess if it’s an outside property management company that doesn’t own the actual

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place it creates work for them to charge more than the 8% 10% whatever of gross rents that they’re

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getting to to maintain and operate that property so there’s there’s a few different levels

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that change has to happen on and I don’t know how to do it I don’t I’m an industry forever

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it’s very slow to adopt change and it’s even slower to change something when they’ve been getting paid

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and incentivized through their pay structure to step over the dollars to pick up the pennies

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at the beginning phases of a construction rental project so let me know your thoughts

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that’s all I got for today it will be the 16th of May when this comes out Tuesday first episode

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live on Apple podcasts so please like subscribe leave me a comment share it let your friends know it’s

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out it’ll be out everywhere but it’ll be the first day it’s on Apple podcasts please go there leave

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a comment leave a reply tell me you think I’m a dummy tell me that the industry will change tell me

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the industry won’t change give me an opinion I love to hear it I love to have in-depth conversations

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about technical stuff like this and I appreciate your time talk to you next time

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DCO method

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(upbeat music)