So you’re thinking of home remodeling because you want to make your home nicer during a pandemic. Or you are currently stuck in home remodeling hell and wondering why it’s taking so long. I’m so sorry! Let me explain to you why home remodeling always takes longer and costs more than expected.
I’ve done four major home remodels before. None of them were pleasant experiences. All projects took longer than expected. After my first two home remodeling projects, I finally wisened up to the game some general contractors play to extract as much money from homeowners as possible.
If you are planning on buying a property and remodeling it, please know that the permitting and remodeling process can be a very big PITA. If you are not good with dealing with stress, buying an already remodeled home may be a better bet.
Let me share with you one home remodeling example that demonstrates the opaqueness of home remodel pricing.
Opaque Pricing In Home Remodeling
Back in 2014, I bought a fixer on the west side of San Francisco. The house was smaller than our existing house at the time. But it had gorgeous ocean views.
Further, I wanted to utilize new capital from an expiring CD and build more passive income by renting out our old house.
My general contractor (GC), who was also my tennis teammate, made fun of me for spending $6,000 for replacing my 40-year-old gravity furnace. It was lined with asbestos. I also needed to replace all my ducts and vacuum seal my house for a day to prevent any asbestos from escaping as part of the replacement and permit process.
“I could have done it for $2,000!” he said as he tried to make me feel bad about not hiring him. Oh well, saving $4,000 would have been nice. I thought he just did bathrooms and kitchens.
When my general contractor came back to me with a bid of $9,000 to paint the interior of my house, I almost threw up in amazement. $9,000 was a lot of money!
“$9,000 is a great price,” he said with a serious face. This was despite him quoting a furnace removal and replacement price 68% cheaper.
Because I thought $9,000 was ludicrously expensive, I declined his bid and found another fella I worked with in the past for $7,000.
After he discovered I was going with the other fella, my general contractor came back to me and said I was wasting my money. He said he knew guys that could paint my interior for only $5,800!
What the HELL?! He just said $9,000 was a great price. Now he quickly offered a new price 36% lower thanks to some competition.
Unfortunately for him, I didn’t take the bait. He gambled and lost. I decided to go with the other painters.
Endless Pricing Shenanigans With My General Contractor
After I hired my guys for $7,000, my contractor kept on harping at me that I was wasting money even though he initially gave me a bid for $9,000. Unfortunately, after I paid my guys $1,100 after two days of work (three guys one day, two guys the second day), they said the job was too much for them for only $7,000 so they quit.
Befuddled why they quit, I later found out that my contractor was fighting with the painters while I was away at work. My contractor was remodeling the kitchen while they were painting. The painters couldn’t take his harassment anymore! What a sabotage.
So now I was stuck without any painters. Logically I went to my contractor and asked him to do the job for $5,800 (his second bid price) MINUS the $1,100 that I already spent on two days worth of work = $4,700.
My general contractor said he could no longer get the $5,800 price. It was a one time deal and the guys are now busy. Ah, such utter bullshit.
Instead of getting the $5,800 gross price, he offered up one of his painting buddies at my original price of $7,000 minus the $1,100 spent = $5,900.
I understand everybody wants to make a buck, but I was thoroughly disappointed in my friend for trying to screw me.
In the end, I negotiated directly with a painter for $6,400; $600 more than my contractor had said he could get but $600 less than I was going to pay the other guys who quit (thanks to my contractor).
Why Home Remodeling Always Takes Longer And Costs More Than Expected
The reason why home remodeling projects tend to always cost more and take longer than agreed upon is because some general contractors want to make maximum money from you.
Making maximum profits is Business 101. However, some general contractors (GC) go too far. This article is definitely not going to make me any general contractor friends. However, I need to share my experiences on this often times very difficult process.
At the same time, the homeowner is also often at fault due to unreasonable expectations and demands. As soon as one wall is open, homeowners sometimes want to expand the project to do new things.
Let’s go through the reasons why most home remodeling projects take longer and cost more than expected.
1) The number one goal is to win the contract.
To win the project, the GC must highlight an attractive price and good quality craftsmanship. Competition is fierce, so contractors may exaggerate to win the contract.
It doesn’t matter if the price is an artificially low price. The goal is to have the homeowner sign the contract and lock them in. Once the contractor has gotten the homeowner to sign and begun demolition, this is when the GC can start manipulating the project to his benefit.
2) General contractors create a hostage scenario.
The deeper a project goes, the more a GC will highlight “unforeseen” problems that require more work. Even though there’s nothing really unforeseen for contractors who’ve been around long enough. Given most homeowners don’t have extensive experience remodeling, this information asymmetry is a powerful weapon held by the GC.
Let’s say a homeowner is $60,000 deep into a project after two months. Contractors know the chances are low that the homeowner will balk at an additional $10,000 – $20,000 worth of work to make the home better. However, sometimes, the addition work is unnecessary and doesn’t cost the new amounts.
If the homeowner really starts pushing back, then of course the GC will do the homeowner a “favor” and adjust the price so as to not have the project break down. But the homeowner really doesn’t know how to navigate the project as adeptly as the GC.
3) Homeowners’ emotions get in the way.
A new home is very emotional for most people. It might have taken a couple 10 years of saving to come up with the downpayment. Or maybe the couple lost multiple bids and finally paid a big premium for this home.
The more emotional a homeowner is, the more profit the GC knows he can make. For example, let’s say the homeowner mistakenly tells the contractor this is their dream home. They overbid by $100,000. In such a scenario, what’s charging an extra $10,000 in remodeling costs?
4) Homeowners rely on default thinking.
Some experienced homeowners enter into a remodeling project with the default thought that the project will cost more and take longer than expected. Letting your GC know your default thinking is also bad, because a GC might really start taking advantage of you. As the saying goes, “give an inch, take a mile.”
It’s up to homeowners to cut this type of thinking out and make GCs stick to the contract. But GCs can be very intimidating sometimes. They use their intimidation to force things through.
The remedy for this is to have a LATE FEE clause in the contract. In other words, for every day a contractor goes beyond the agreed-upon finish date, you get a credit.
5) Smile and charge.
The most skilled price gougers are the GCs who bring up additional work to be done while constantly being nice and smiley. GCs understand that most homeowners just want to have GCs who take the time to listen to their problems and find beautiful solutions.
They understand homeowners are busy with their jobs and kids and don’t fully understand all the remodeling nuances. By just being responsive over e-mail and talking things through, some GCs adeptly persuade and guilt homeowners into paying more than expected.
6) Pricing discrimination by neighborhood.
I have a new contractor I’m using. He’s extremely unreliable and not a good communicator. But at least he is good value and honest.
One day, he readily admitted to me that if he has a home remodeling job in Pacific Heights, one of the most expensive neighborhoods in San Francisco, he will charge 100% more just because the homes there are more expensive.
He discovered that rich homeowners are much more likely to accept higher remodeling prices because their homes are more expensive on a price per square foot basis. Therefore, there is a bigger cost buffer they can deal with e.g. remodel for $1,000/sqft and sell for $1,500/sqft.
Luckily for the GC, input and labor costs largely remain the same. For example, the cost of sheetrock and electrical wiring doesn’t change by house price.
I have one friend who owns a home in an expensive neighborhood get charged $600 per plant when he landscaped his terrace. Each plant cost less than $50 bucks and he could have easily planted each one himself. He had no idea about the $600/plant cost until they began to die. It was only then that he decided to check his invoice and see how much he had been overcharged.
GCs know that some homeowners are so rich that they never bother to look at the receipts. Check your receipts!
Welcome To The Home Remodeling Jungle
The residential remodeling business makes the auto service business look like a girl scout lemonade stand business. Everybody needs to take their cut in the building business, sometimes even corrupt building inspectors who approve and sign off on your project!
I’ve heard plenty of stories where an inspector demanded payment for approving a project. So far the building, plumbing, and electrical inspectors I’ve been dealing with seem above board.
However, when I pay $325 for a roof permit, and the building inspector doesn’t even bother to climb the ladder to inspect the roof, I begin to wonder. All he did was drive up to my house, look at the roof, and sign the permit card.
Beware, the number one bullshit excuse general contractors like to use to charge more is that the project will cost them money. They will always say something like, “I lost money working,” or “I’m working for free for you.” They will try to guilt you into paying them beyond the initially agreed upon contract. Don’t let them!
They don’t lose anything if they have to work longer. It’s not like they have to spend more money out of their pockets for much more material or pay their sub-contractors if they aren’t working. The GCs just need to spend more time based on their agreement.
If you can successfully navigate the shady home remodeling business and remodel fixers in strong real estate markets you’ll do very well. But chances are high that you will get run over and get buried in your backyard with cost overages.
During the pandemic, new construction and remodeled homes are commanding higher premiums.
Strategies To Keep Your Home Remodel Within Budget And On Time
1) Get multiple bids
Don’t rush into anything, get multiple bids, and be willing to walk away. Be as detailed as possible when drawing up the contract regarding costs, time, materials, and work to do. Whenever a GC wants to charge you more, simply point to your iron clad contract and have them carry on.
If they don’t, then you must be willing to fire them and hire someone else. Be aware that you are only required to pay for work that is completed. Don’t let a GC swindle you out of work that he says he’s planned for.
2) Have alternatives
The best way to keep your general contractor honest is by having a detailed list of alternative people who can do the job. Your GC must feel the pressure of losing your business if they try to screw you too much once remodeling has started.
One strategy is to have a handyman purposefully work on another part of your house while your GC is there. This way, your GC knows you are resourceful and have other alternatives.
Whenever my unreliable GC goes AWOL for more than two weeks, I text him saying I’ll get my friend who he knows to finish the job. If I do, I’ll subtract his cost from our existing contract. My contractor always responds and gets back to work once he hears this.
Keep the communication pressure on.
3) Have a late fee clause
Finally, absolutely include a late fee clause in your contract. Come up with a conservative finish date so that your general contractor will agree to the late fee clause. The conservative finish date is also something you need to be comfortable with as well.
The late fee clause should state that for each day the contractor is late there is a credit or reduction in price.
For example, I once had inserted a late fee clause that stated that for every day over our agreed-upon termination date, I would get a $250 credit. The project went three months over and I was able to save $22,500!
Further, the late fee clause will reduce your anxiety. You might start rooting for your contractor to take his sweet time.
Reduce Your Home Remodeling Expectations
Chances are high your home remodeling experience will be terrible. Therefore, I suggest you lower your expectations. Expect it to take longer and cost more than expected. But keep that to yourself. Further, you must educate yourself as much as possible about the home remodeling process so you aren’t constantly surprised.
You must negotiate hard with your contractor and continue to keep on him during the entire home remodeling project. If you find there are long delays, it is highly likely your contractor is working on another home remodeling project.
Of course, not all general contractors are going to try and rip you off. Some are going to be absolutely wonderful to work with. I just haven’t found any of them so far and neither have any of my friends who’ve remodeled. Even friends who have spent multi-millions remodeling their homes have had terrible experiences.
Good luck with your home remodeling project. It will likely be one the most difficult and frustrating things you’ll ever have to go through. Realtors have told me a home remodeling project gone bad is one of the most cited reasons for divorce and home sale!
But once your remodeling project is done, you’re going to be so glad the nightmare is over. If you focus on increasing the livable space, you will mostly likely increase the value of your home.
I‘ve got to say, reading this post definitely makes me not want to remodel ever again. From now on, I’m just going to buy an already remodeled home. I’m just too old to build sweat equity anymore! I’d much rather make real estate equity passively.
Explore real estate crowdsourcing opportunities. If you don’t want to go through the pain of home remodeling to help make a profit, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. With Fundrise, you can earn real estate income passively while easily gaining exposure to a key asset class for long-term wealth.
If you are an accredited investor and interested in investing in specific commercial real estate deals instead of a diversified eFund, check out CrowdStreet. CrowdStreet focuses on real estate opportunities in 18-hour cities, smaller cities with lower valuations, higher cap rates, and potentially faster growth due to positive demographic trends. CrowdStreet is free to sign up and explore as well.
Shop around for a mortgage. Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible. Then use the offers as leverage to get the lowest interest rate possible. When lenders compete, you win. Average mortgage rates are at record-lows.