Skinning Your Knee vs. Breaking Your Leg

30 thoughts on “Skinning Your Knee vs. Breaking Your Leg”

  1. This is exactly why my folks, who are small-scale developers, are allergic to debt. This makes them almost unique in their professional niche; I’ve been in meetings where people have been surprised to hear that they intend to self-fund their work. They’re also unique in actually wanting to hold onto part of what they develop; the entire industry seems to run on the assumption that you’ll build something, haul in a tenant that looks good, sell it and get out with your big pile of money. No wonder so much of our building work is ugly, if no-one is sticking around for the long term to put up with it.

  2. How many properties did this family have? What was the debt load, collectively or individually? How long have they been owned? What was the ‘profit’ collectively or individually for their properties?

    Is this an unfortunate case study of potential failure points that can harm even the most experienced or is it a case study of over-ambition?

  3. Is the lesson here that you should probably just do the bare minimum of cosmetic improvements, sell and move on? I’m guessing that that the buyers probably don’t care that much about LEED certification.

    1. You can build a LEED building without excavation and installing a car elevator. I think that is the lesson. If you are going to build things your average building doesn’t have you had better have really really deep pockets. That’s not going up one level in difficulty, that’s going up to the top.

  4. No substitute for a good construction manager onsite making sure these contractors do what they are supposed to do. Someone who notices when wiring isn’t up to code or when pipe is improperly installed. Someone who tracks the progress daily with eyes on rather than relying on what the contractors say. The worst construction disasters I’ve seen could have been prevented if the site owners had fired bad contractors early on after a few obvious mistakes and burned a few weeks replacing the contractor rather than trying to navigate the minefield of incompetent work.

    1. Heh–That sounds like what my boss’ boss should’ve done when downsizing and renovating our work place. He would hear about every problem the contractors left behind or what they were not doing and he’d be like “I’m never using these guys again.” Well, I heard that he apparently uses these guys all the time and is using them on another renovation project. Why? They’re cheap. And he’s cheap, so it works.

      The problem is everything should’ve been finished and approved by the new year and we’ve still got things that need taking care of and they haven’t been back except in two hour chunks every couple of weeks. We’re all sick of hearing about these guys not getting the work done, and the owner calling when they’re supposed to show up to grill us about the progress (or lack thereof). If he’d found somebody else, it would all be taken care of by now. Sheesh. Do it right the first time, peoples.

  5. Speaking of skinned knees, the Bay Area market may be softening. I keep an eye on various cities that aren’t sexy but are safe and livable (with a car, anyway) and I’ve noticed a flurry of sub 400k listings this winter. I haven’t seen that for years. I’m talking about places like Concord and Rohnert Park.

    1. One of the seasoned high end contractors I spoke with is a friend I’ve known for 25 years. He told me he’s not taking on any new projects. He sees all the warning signs of a market correction and he’s quietly wrapping up his existing work and stepping out of the game for a while. The reason he’s still a successful contractor is he noticed the signs of the last couple of on coming crashes in 2007 and 1999.

  6. That’s a sad story but an indication of the speculative nature of San Francisco today. I just can’t believe it has gone on for this long this time…

    Not a flipping story per se but I had a co-worker who leveraged (in an LLC) a house in the Outer Sunset ( He lives there and rents out the rooms out to cover the considerable mortgage & escrow and still make a tidy profit. Since they’re technically roommates and not tenants, he can and does kick people out if they’re ruining the vibe of the “collective.” Obviously the irony of operating what is essentially short term corporate housing and then calling it a collective, in San Francisco of all places…

    I can’t fault him for his hustle, but when an entire state’s housing stock becomes a hustle a lot of people are collateral damage. That could mean your friend’s parents losing their legacy to homeless camps to everything in-between.

  7. Johnny
    I love to read your material and am interested in the new posts as they come along. Please keep it going! Living here in London (UK) we have our own set of challenges as well as the general lack of affordability problem in a very over populated city.

    The boom bust cycle is something we can easily tend to forget especially when the up-cycle is protracted and may even last decades. People will always have reasons why this time it’s different etc.

    An interesting observation where I come from originally (Northern Ireland) where prices rose 50% year on year up to 2007 before the crash. Unlike other regions however, today residential house prices there are still 40% lower than in 2007. And there are further economic and political challenges which mean closing the gap does not look close if at all likely to happen. The extent of ‘mortgage prisoners’ there is extreme due to the resultant negative equity created. My point really is that although we talk about cycles, I do think there is no guarantee that prices necessarily go back to where they were at the height of a boom even in time. Perhaps a correction like 2007 moves the whole curve downwards.

  8. It’s where San Francisco is as a society is, anyway, along with Hong Kong, Vancouver BC, Sydney NSW, London, Honolulu: all hot real estate markets where housing prices are eight times or higher median annual income. The politically influential residents of those metro areas built those societies.

  9. Johnny,
    I’d disagree that you “have no skills”. At this point in time it’s very important (I believe) to not be “chronocentric”, to borrow Greer’s thoughts, about where we are in large AND small cycles.

    You display the ability to see the 30,000 foot view AND creatively weave into into pragmatic action on the ground. By such actions you inspire a great many of us, as well as produce interesting posts that distill learning out of complexity.

    The photographs are wonderful, too.

    Living in the Appalachians bordering West Virginia, I have a different view but am able to distill a great deal from your stories.

    Thank you for taking the time!!


  10. “Individuals are well advised to think long and hard about where we are in that cycle.”

    Right. I wrote about that recently here.

    In my view it only appears that there is more opportunity at the top than at the bottom. At the top, lots of debt is required just to get into the game. That means payments off the top, and those payments mean you don’t have the luxury of time. The luxury of time is what you need to do anything new. High asset values aren’t necessarily good, and low values aren’t necessarily good. They are good and bad for different people.

    In the bust you have two kinds of opportunities. The first is like the buyers of this property, who will take it over, turn it into exactly what it was going to be, and perhaps make money due to the lower entry point, and the general prosperity of San Francisco. Same thing on $billionaire’s row in Manhattan. After the bankruptcy, the high-end multifamily housing will be high-end multifamily housing that is somewhat less expensive.

    The second is the obsolete building/place with no value, where the entry point is low, but you have to create the value yourself. To me that is more interesting — though as your Apple Market post shows, it doesn’t always work.

    1. “…those payments mean you don’t have the luxury of time. The luxury of time is what you need to do anything new.”

      That’s an excellent observation. Borrowing means you’re on someone else’s clock*. It also means – if you’re leveraged – that you don’t have any real margin of safety to deal with problems, since you’ve already tapped what you can and made people nervous about your ability to pay it back.

      * and in any hot market, you can expect lots of problems that can delay you. Everything from incompetent contractors (because there’s way more work than the competent ones can do), to inspection delays (because the inspectors have way more projects on their plate than they can handle in a timely manner), to flat-out regulatory ambushes from a community fed up with all the construction, growth and change. I don’t know if any of that happened here, but it’s certainly happened plenty of times before.

  11. (Assume a William Shatner delivery) ”Over….dosing on schaden….freude , must pre…tend to feel bad”

    If you’ve ever been the beta-male who just settles for “m-eh” a story like this is very dangerous for your self-image as a decent, caring individual.

    1. Yep. Cousin of mine was a mortgage broker in Portland in the earl 2000s. By 2006 or so she had leveraged up to about 15 houses in the greater Portland suburbs, mostly the Beaverton area. Flips and rentals and I don’t think she actually know all what. Just kept leveraging to buy the next one as fast as possible. Of course when the musical chairs stopped she lost them all, including her own house and was millions upside down. Only in America can you get underwater by millions of dollars when never actually earning more than about $50,000 a year.

      She now lives in a one-bedroom apartment with her grown son and teaches yoga for a living. I have no idea what her finances are but I don’t think she is planning to ever be able to retire.

      1. Kent, she should meet Johnny for an interview!
        Her story reminds me of the discussion that took place in the comments section of The Atlantic article “The Secret Shame of Many Middle-Class Americans”. The comments took on a life of their own. The story of Linda Lee sounds similar to your cousin (I’ll link below, if allowed) and I wonder what happened to Linda since.

        1. Unfortunately, the Atlantic stopped allowing comments a couple of years ago. Don’t think they there old comments up either but I’ll check it out. Would love to see that discussion!

        2. I read that article, and here is what I thought. The guy should have been a little thriftier, and engaged in less conspicuous consumption. BUT…

          He’s still married to his wife, is still close to his children, is not starving, is not homeless, and still wrote all those books, and did that other good work, which is still out there. He’s had a great life, which will soon be over.

          So how important is it that he doesn’t have lots of money to blow on consumption now? Not very. He has little to apologize for, and that fact that he feels that he does shows why he got into that situation to begin with.

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