November 20, 2021
Joe Fairless

JF2636: Crooked Contractor on a $10M Project with Joe DiSanto #SituationSaturday


 

Are the general practices of general contractors just unsavory? In Joe’s experience, the contractor on his $10M project tried to take advantage of every opportunity he could get and with hundreds of thousands of dollars being added, Joe had to find a way to make it work. Listen to Joe and Ash discuss enforcing a contract and penalties, working together with an enemy for a year, and how to get accurate references.

 

Joe DiSanto Real Estate Background: 

  • Works part-time as a fractional CFO for 6 companies and 1 family office
  • Portfolio consists of 11 residential rentals, 2 commercial buildings, and 1 piece of raw land
  • Based in Providence, RI
  • Say hi to him at: https://www.playlouder.com/

Click here to know more about our sponsors:

 

Deal Maker Mentoring

Deal Maker Mentoring

 

PassiveInvesting.com

 

PassiveInvesting

 

Follow Up Boss

 

Follow Up Boss

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Joe DiSanto. Joe is joining us from Tampa, Florida. He was a previous guest on the podcast. So if you Google Joe Fairless and Joe DiSanto, his episode will show up.

Joe, we’re glad to have you back. Thank you for joining us, and how are you today?

Joe DiSanto: Yeah, I’m doing well, Ash. Thank you for having me back, man. I really appreciate that. I take it as a vote of confidence.

Ash Patel: Yeah, man. It’s our pleasure. So today’s Saturday. Best Ever listeners, I hope you’re having a great weekend so far, and because it is Saturday, we are going to do a situation Saturday, where we discuss a specific situation that our guest has encountered.

The goal is to give you the knowledge should you encounter a similar situation. Joe is going to discuss dealing with a corrupt contractor on a $10 million deal. Joe also works as a part-time fractional CFO for six companies and one family office, and has a great real estate portfolio.

Joe, before we get into your particular skill set, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Joe DiSanto: Well, I’m basically a longtime business owner, I guess, an entrepreneur. Right now, I took a down kind of shift in my career, I’d call it, I guess, I say I semi-retired, and now I provide, as you mentioned, fractional CFO services for small businesses and higher net worth individuals.

Prior to doing that, and moving to Florida, I lived in Los Angeles and I owned a larger company, a couple of companies, in the entertainment and advertising space, post-production and production companies. We had about 35-40 employees, depending on what was going on. So it was a good sizable business, and we bought a couple of buildings to house our business. Not at the same time, we did them sequentially; bought one, renovated it, were in it for about eight years, sold that, traded up and bought another one, and did full development projects on both of them.

So that’s where the experience of this conversation comes from. I always liked real estate, I was doing it on the side of my businesses just personally, and decided, when we were moving and needed more space for our business that, “Hey, we should own instead of rent”, essentially, and turned our monthly rent into an investment, which paid off quite well.

Ash Patel: Joe, when I hear corrupt contractor on a $10 million deal, if you’re doing a $10 million deal, I’m going to assume you should know better. What happened?

Joe DiSanto: Yeah. Well, the term corrupt is sort of a loose term. I mean, contractors often have a bad reputation for just unsavory business practices. I don’t know that — they don’t necessarily fall into the category of corruption. In my case, luckily, I had to enforce a contract and really hold this contractor’s feet to the fire, but it was difficult, and they just made it a ride from hell, essentially… But they’re the kind of contractor that ultimately gives contractors a bad name. And in my case, to qualify the deal was in total a $10 million project, purchase and renovation. The total final renovation cost is about $2.5 million. So that just qualifies how much the renovation was versus purchase price. But it was a big project, and I only had the money I had available to me plus some extra to get through it. And there was a lot to do and a lot that could go wrong. Some things did go wrong, a lot of things weren’t right.

But my big issue was that my contractor ended up just being my biggest problem. They just seemed to want to screw me at every possible opportunity they could. It’s funny, with my second major sort of commercial renovation, the first being our first building, and the first building we bought in 2007/2008, so we literally closed on it. Lehman Brothers did our loan, we closed, and Lehman Brothers went out of business two months later. That was just like a metaphor for the whole thing. It was a smaller project, our bridge construction financing company went out of business right before we started our construction. I had to scramble to get loans from all sorts of weird places. I had to trim my construction budget down. Naturally, about three quarters the way through, my contractor went belly up and basically misappropriated about $75,000 of my money. I mean, it was just a nightmare, but at least we can blame it on the financial crisis of 2008, right?

Ash Patel: Yeah.

Joe DiSanto: And I learned a lot from that, and going into this, I was like, “Alright, this is going to be so much smoother, the loan’s good, the financial industry is not dying on me right now, I’ve got a healthy budget, I’ve got a 10% contingency…” And one thing I learned in the last deal was I should have had basically an escrow company managing the funds and tracking the contractors’ progress and doling out funds and that sort of thing, where I was just doing it, writing them checks kind of like your average person… And that’s why the money got misappropriated. He was spending and trying to get other jobs done, and then he was hoping that more money was going to come in to deal with my stuff, but then all his work dried up because of the crisis. So he was just—at one point was, “I’m checkmated. I don’t have your money. I’ve got a bunch of unfinished jobs, and nothing’s coming in, whatever.”

So in this case, I had the lender, through my SBA loan, acting as sort of the escrow company. So I’m like, “Great. They’re going to be there for me, they’ll check progress. I’ve learned a lot of lessons, and this is going to be great.” I bid it out, and I got three bids, I went with the middle one, I didn’t go with the cheapest one. I was like, “This is a solid company, good references.” And the truth was they, by all accounts, were a solid company. They were a little bit of a larger contractor, not super mom-and-poppy. But I think what I learned in this one was that the general practices of general contractors are just unsavory. They’re just not in the interest, generally, of their customer. They’re not your friends. They’re basically trying to, at least in my experience with this one, trying to take advantage of you at every possible opportunity and squeeze as much money out of you as they possibly can. Maybe if I was a repeat customer, someone who had lots of jobs, they wouldn’t be doing that to me. But I’m like this one-off guy, basically, so they’re like, ‘We don’t have to worry about getting this guy’s business again… So we’re just going to do our thing and just try to squeeze him to death”, basically. And I got onto it, and then we just ended up basically, the worst of enemies for the next 12 months, and it was really intense.

Ash Patel: What kind of building was this? Was this the warehouse?

Joe DiSanto: It was similar to the first one; pretty much it was originally a warehouse industrial space. We basically did a conversion to office space. So it was a change of use, which for those of you who know a little bit commercial development, it triggers a lot of issues that you got to do in terms of architecture planning, dealing with the city. It’s not a simple, basic renovation permit; it’s a big undertaking.

Ash Patel: How did you find this contractor?

Joe DiSanto: Through my architect. Like I said, I was doing real estate on the side, doing rentals, and that sort of stuff, and I was renovating my own houses. I call it the live-in-flip. But I learned a little design program myself and did my own plans for my houses.

So the way I did it was, on both buildings, I designed the whole initial design of the interior in my home design program. But being these were large projects that needed to go through major city planning, I then hired an architect, gave them my plans instead as their starting point. “Obviously, I want to hear if you guys have improvements you can bring to this, but I know my business. I know what I need. So functionally, it’s better for me to do the first pass, and then you tell me “Hey, this door can’t be this close to this door“, or whatever, those kinds of functional things, and then whatever you can do to plus it up, great.

Ash Patel: How did you qualify this contractor? Did you go look at some of the work he’s done, talked to past references?

Joe DiSanto: Yeah. Basically, I got the suggestions or referrals from my architect. They gave me a couple of names and then I bid out another third contractor that previous person had used. And yeah, I did the basic due diligence. I talked to some references, things like that. I always think, “What’s the point of talking to references?” Who in their right mind is going to give someone that might give them a bad reference? Of course, the person on the call is going to say it’s good, but I do it anyway.

In my opinion now, I was like, “It’s coming from my architect. They’ve done other projects for them and I like my architect, so they’re vouching for them. I’m confident about it.” So we bid all three companies. My architect was involved in that process, and they came in as the middle bid. It’s a lot of moving parts and stuff like that, because you don’t know everything that needs to be done; up at the beginning, things change as the planning process continues on, you get lots of stuff thrown at you by the City.

So there are variables that you know are going to be variables, but you do your best to get a budget you feel confident about, and obviously, in our case, we had our particular construction budget, which was about $2.25 million and then we had a 10% contingency allowance, pre-approved with the bank.

Break: [09:55] to [11:27]

Ash Patel: Looking back in hindsight, were there clues that you should have spotted, that you ignored?

Joe DiSanto: No, it was immediate, almost right away that I was going to have a problem. So I guess I started to see the writing on the wall after the contract signed and we were getting into it. But in the bidding stage, I didn’t have anything that I was particularly raised eyebrows about. And then additionally, what I had going for me in this decision was, my architect had recommended to me hiring a construction management company; and because I had kind of told them my whole story of the first building and how it was crazy and I was doing it all myself and the contractor went out of business, and I became the general contractor to finish it out… I used to joke that I was a goalie basically at the front door of the building, and every time a subcontractor was like, “Oh, man. I’ve got to go back to the Home Depot.” I’m like, “No, don’t go anywhere. I’m going to go to the Home Depot for you. Get back in there.” So he was like, “You should hire a construction manager.” So we talked to this one that was kind of partly connected to their firm, and they had worked with them, and they were like, “Okay, we had a fine experience.”

So again, it’s like, not like this guy was some shyster that just took my money and never showed up. He was a legitimate contractor, and I was feeling generally good going in; good references from the construction manager, from the architect, and middle bid, I’m thinking, “I’m not being cheap about it. I’m not going to be super chancy. It should be good.” I was optimistic.

Ash Patel: Do you think that if you hired a construction management company, things would have gone different?

Joe DiSanto: Well, I did. That’s what I’m saying. I hired a construction manager. In the end, the funny thing about that was – I liked the owner of the Construction Management Committee. She was really nice. And her construction manager that was on my project was also nice. But my problem was that I felt, from the beginning, that we were getting a lot of what I considered concerning things from the general contractor, and I felt like the construction manager felt like their role was pretty much just to make me feel better about the things that were happening, that I didn’t like. He would tell me that, “This is normal. This is how it goes. This is what happens.”

Ash Patel: So you need somebody not so nice?

Joe DiSanto: Yeah. “I don’t understand. I’m glad you’re thinking this is okay-ish, you know, but I don’t think it’s okay, and I’m starting to get skeptical about listening to you.” So what ended up happening – because some things happened with the construction manager where “I don’t think you’re against me and I don’t think you’re working for them, I just don’t think that you care enough. I don’t think that you understand that there’s a lot of money at stake here, and I feel like it’s a situation where it’s not your money, so you’re not that worried about it.” And I’m like, ‘Maybe this just isn’t the right situation for a person like me.”

And then of course, as things were getting weird with the contractor, of course, the schedule was going to clearly start to expand out, and the construction manager was like, “By the way, we only bid this for six months. We’re looking at 10-11 months. We’re going to have to charge you more ourselves.”

And I said, “Well, I’ll tell you what. Why don’t we do this? You stay on to just do the billing and deal with the SBA and the bank and all the paperwork involved in that”, because there is a lot of paperwork involved in doing all the progress reports and doing the draws from the bank and making sure all the i’s are dotted and t’s are crossed… I was like, “You just do that.” You can release the guy that is being my construction manager right now, and I’ll just do that myself, because I just know that I need to just do it. I just think it’s better. So I was like, “We’ll keep our budget for you the same. You’re going to work longer, but all you’re going to do is billing.” That actually worked out well, and I liked the owner of that company. She was very nice, and she was sympathetic in the end and when I was like — she was seeing what was going on.

Ash Patel: Yeah, a couple comments here. So it should have been the construction management company’s mission to keep you on time.

Joe DiSanto: Yeah, I know. You would think that, right?

Ash Patel: Right. So for the Best Ever, listeners, if you do hire a construction management company, they need to be accountable to that timeline, and there should be penalties, just like you would for a contractor.

Joe DiSanto: Yeah.

Ash Patel: Now, with references, I agree with you. It’s silly to ask for references. It’s better to ask for references from their last three jobs, right?

Joe DiSanto: That makes sense. That’s a good point.

Ash Patel: And then you qualify that when you speak to whoever, you make sure the job was done within the last X number of months. So it’s not somebody from five years ago and it wasn’t the last three jobs. And I love when a lender is responsible for draws; because they’re very strict and they’re very conservative, right? So rather than you or I happen to hear the sob story from the contractor, “Hey, listen. We’ll get this done, but we’re a little behind. Don’t worry, it’ll be done by Friday. Can I get my next draw?” The lenders are going to say “No. Send us pictures, we’ll send somebody out to look at it.” So I love that.

Joe DiSanto: That was huge. And if you don’t have a lender doing it – not many people would – you borrow money from creditors, you can hire basically kind of like an escrow company or a bond company, whatever you would call it, to be that person for you. And that’s probably worth its weight in gold.

Ash Patel: Yeah, I did not know that, and that’s great advice. What is something else that you could have done differently to nip this before it got so out of control?

Joe DiSanto: Well, it’s hard to say. Let me get into what the issue was — and ultimately, really, the issue was really kind of one… Well, not just one. Mostly one issue. And the problem with this issue is if their clients don’t have someone like me, who it’s their money, and they’re concerned, and they’re actually looking at everything and checking the information they’re getting, and whatever, they could be the greatest contractor in the world, because they’re just getting paid what they want to get paid, and the person who’s signing off on the stuff – it’s not their money, so they don’t care how much it costs. And that’s why you always have construction projects going so over budget.

But basically, what starts happening is they bid the project reasonably, and as you would expect, to get the job. And basically, it was, list all of the items we’re going to do, and they’d give a cost for that, and then on top of that, they’d add a markup. On top of that, they would add general conditions, which is basically, not just marking up the stuff, but their time, like having their superintendent on there, having however many of their team on there.

So those are the kind of the two ongoing extras. It’s like the markup, which is always moving, and the general conditions is basically by the week; I think was like 4,500 bucks a week or something like that. And none of the stuff in the breakdown of the cost of the subcontractors, plumbing, you know, millwork, whatever, seemed out of line; they seemed reasonable.

Now, obviously, they say, “Oh, that’s our cost. We make money on markup in general conditions”, and I’m like, “Sure,” but obviously, they’re making money on those line items. We all know that. That’s fine. I can accept that, but they seemed reasonable. It wasn’t the lowest bid, it wasn’t the highest, and it all seemed relatively reasonable. I’d done a handful of major renovations at that point, so I had a pretty decent understanding of what stuff costs. And they get the job.

I think this right here is the mentality of the general contractor, is that “We bid it appropriately to get the job, and then once you’re in and you’re locked in with us, every time there’s an overage, we just blow you out of the water with inflated fees.” And at that point, there isn’t in their mind and probably in most people’s minds, there isn’t much you can do. If you’re doing $100,000 renovation, that’s not going to add up to that much. You’re going to be bummed, because your job’s going to be $150,000 probably but a scale is smaller. Well, times that by 20, and every time they just tried to completely screw you on an overage, that adds up to a ton of money when you’re doing a multimillion-dollar renovation. And right off the bat, it started. It was crazy.

So we had a single floor space, but it was tall ceilings. We were going to build 4,000 square feet of mezzanine space in there to increase the square footage, both for our needs, but also to make the whole project financially valuable project. And it was always discussed that those are going to be steel mezzanines. We had a number in the budget, like a hard cost to build this structure and put the cement deck down. It was about $100,000 just to build those; and it was always going to be steel. And we’re having our first initial call after I award the job to them. We haven’t even met. We’re just doing a phone call to kind of get organized, and he goes, “Well, about the mezzanines… I’m thinking that with what we have in our budget, we really can’t do them in steel. We can do them in wood.” And I’m like, “Well, one, we’ve never talked about doing it in wood, but two, I don’t want them done in wood, because I want those structures to be absolutely permanent. I want them to basically be – you can build above them and below them, and if I decide to close my business and rent it out to another business, they can come in and wipe out my TI’s, and we’re not going to lose the second floor because you built the second floor out of wood on top of my room.” It’s not even a consideration.

I’m like, “So how much more are we talking here?” He goes “I’m thinking probably steel mezzanine is going to cost about $300,000, just for the mezzanines.”  And I’m like, “Wait, so you’re saying, this is our first phone call, get your checkbook out to the tune of $200,000 extra for something that we’ve always talked about being steel.” He’s like, “Yeah, I just want to keep your expectations. I think that’s what it’s going to cost.” And I was like, “Well, are you going to bid it out with multiple vendors?” And he’s like, “I don’t know. We have this guy we work with and…” He’s like, “We’re going to bid it” but he’s like, “I need full shop drawings for it, so I’ve got to get that done to do the bid.” And I’m like, “You know, I don’t know that you do.”

I mean, it’s 4,000 square feet of steel mezzanine. This is kind of almost like an off-the-shelf product. You could get a general idea. Because now, [unintelligible [00:21:38].26] full set of shops and all this, and I was like, “You know what? We’re going to shelf that, because I’m going to go do some research on that.” Okay?

So we get off the phone. Within literally two Google searches, I find American Mezzanine Installers Inc, 50 miles outside of Los Angeles. I call them up. I go, “Hey, I’ve got this project. We’re putting these mezzanines I’m trying to get what the contractor is talking about. [unintelligible [00:22:05].13] If I just show you my basic drawings, and you know, it’s 4000 square feet, can you ballpark it?” He goes, “Oh yeah. It’s 50 bucks a foot, pretty much, installed.” He’s like, “Depending on what kind of concrete you want on the top. Not even 50 bucks.”

Basically, the price came out to, with the concrete on top, which was a tag on our bid anyway, $108,000. I’m like, “Wow. I just literally went on Google and looked up prefab mezzanine and I got a quote over the phone, based on square footage, because they’re like, “We only build them one way.” That includes the shop drawings. They’re very basics, steel pole, blah, blah, blah, blah, blah, you tell us how big, whatever, we give you the shops, you approve them and it’s like, it generally falls within our square footage plus or minus 5%. And then the only add-ons are like, we have a couple of railing options. Some are more expensive than others, because they’re construction, and you get either lightweight or heavier concrete.

So I called the contractor back, I’m like, “I don’t know what you’re talking about, dude. I just got a price literally on paper, including shop drawings, for like 108k, including concrete.” And he’s like, “Wow, good for you. That’s fantastic. Well, I’m really happy that it’s working out, yeah. Awesome. I guess that issue is solved.” “Yeah.” “And they’re part of the [unintelligible [00:23:27].03] steel mezzanine, whatever Association, they can inspect their own mezzanines, because that’s all they do. They’ve done thousands of mezzanines across southern California.” I’m like, “This just didn’t take any time at all.” I’m like, “Wow.” Okay. And I’m like, “Alright. I’m just going to give him a pass on that one. Maybe he just hasn’t done mezzanines. I don’t know.”

Ash Patel: So that’s one of those issues where I’ve been in similar situations where I wish I did change orders on everything. I wish we’d documented everything. Do you wish that you had an attorney write up a proper contract on this? Because often, we just sign the contractor’s agreement, without giving it a whole lot of thought.”

Joe DiSanto: Yeah. Well, truth be told… The funny thing is — because it starts to get worse, and this is a really important point. The contract you have is really critical, and you kind of, in a way, feel like when you’re signing it, that it really benefits the contractor, but I learned that that contract saved me. And it really was their contract. I, of course, had my lawyer look at it, we made a few changes, but he’s like, “It’s pretty standard. “The contract actually forced them to keep working after they threatened me to stop working until I signed their change orders that I didn’t agree with.

So I got my lawyer out pretty much after about the first month, and I said, “Hey. Well, I want to introduce a new member of my team. His name’s James. He’s also my attorney, and he specifically does work in the construction area, and he’ll be on every single email going forward.” And of course, that sparked lots of other issues, but back to the mezzanine.

So three times the cost… So originally it was going to cost 100k plus markup, now, it’s 300k plus markup. But I solved my own problem. We get it under contract with this subcontractor for $108,000, including concrete. So I actually even saved money because we had $120,000 in the deal, including the concrete, because it’s 4000 square feet of concrete. I’m like, “Alright, let’s just see what happens going forward”, because we had other items that were TBD, essentially. So the next item, and I’m like, “Alright, three times hard cost.” That’s really being piggish about making money inside your subcontractor line items. I could be with 20%, 25%… Not 300% or 200%.

Next one is low voltage conduit. We’re a post-production company, so we had tons of low voltage conduit, both for phone lines, but also for video, audio, all sorts of stuff. And I didn’t have a plan for that when they originally bid it, because we were still working out the configuration of everything, what we were going to do for equipment… It was very specific, and I was like, “We’ll just TBD that amount. It’ll be an add-on, and we’ll know what’s coming.”

So I do the schematics myself for the low voltage conduit, because it’s not very permit or city-specific. All they want to see is that the low voltages conduit in the wall. So I do a basic schematic on top of the architect’s plans. I give that to the contractor and I’m like, “Can you bid this? Here’s the low voltage conduit we need.” He comes back with a bid of $60,000. And I’m like, “That just seems high. That just seems frigging high. What are you talking about?” And he was like, “It’s what it is.” I’m like, “All right. Let’s shelve that. I’m going to go check it out.” I’ve talked to my electrician that I’ve used for my house and other construction projects. He bids it out $20,000. I’m like, “Alright. That’s number two, with 200% markup on my extras here. That can’t be a coincidence”.

Ash Patel: What was the verdict of that? Did you just give him another pass, and say, “I got this one, too?”

Joe DiSanto: Well, this is what happened at that point. I go, “Alright, well, whatever, dude. It’s not in your budget. Obviously, I’m not going to give you $60,000 when I can give the guy that I really know and trust $20,000, and it’s not permit-specific… So I’m just going to get that done myself using my guy, Jesus. And he’s a licensed commercial contractor. The whole thing. He’s a legit, dude.” So he’s like, “Okay, yeah. Sure. It makes sense. Alright.”

So next one comes up, millwork. So the budget’s growing obviously, we’re adding on different things, which I expected, but I’m trying to make sure I stay in [unintelligible [00:27:44].28] and I’m talking about millwork. He gives me this price for millwork. It’s like $108,000 or something. I’m like, “Okay, seems reasonable.” But I’m like, “Hey, listen. I need to save some money, and we bid out all this millwork, but I’m thinking I might just take some of it out to save some money.” And he’s like, “Okay. Well, that’s not going to change the price that much though, because it’s like a package price, you know, and they kind of like, bid it with everything in mind, and it’s like, if they’re going to do less, they’re going to want to charge more for each item.”

Ash Patel: That’s rough. Man, that’s rough.

Joe DiSanto: And I’m like, “Okay. Alright. Okay, okay. Well, let’s shelve that for a sec.” I remember him saying, “It’s not like a menu, where you can just take this one out, and it goes down by this amount. It just doesn’t work that way.” I;m like, “Oh, really? Okay…”

Break: [28:33] to [31:26]

Ash Patel: Where is your construction management company at this point?

Joe DiSanto: Well, at that point we’re a few months in, and like I said, I already released the guy who was being the manager and I was like, “I’m going to do it.” Because I just don’t believe you’re going to do what I’m going to do. Because I am going to make sure that I don’t go out of business doing this, and you’re not.

Ash Patel: It sounds like you’ve been a pretty lenient guy.

Joe DiSanto: And like I said, we knew it was going to go on longer; they were going to want more money. I wanted to save money, so I said to the owner, “Do the billing. I’ll pay you your exact contractor price, but know you’re going to be doing billing for four more months, and let’s call it that.” And she was like, “Okay, I can do that if you want to do it.” The construction manager dude was not liking me at that point, because I was getting frustrated. So I was like, “Don’t worry, I’m just going to deal with it”, because I knew that construction manager was not going to go do all these things that I was doing. I just knew it. Maybe that’s what they’re supposed to do. That’s what I thought they were supposed to do, but he was not going to be doing that, and I don’t know why.

So anyway, I go find a millworker. I gave him the list of everything. Same stuff I gave the other millworker, and he comes back with a cheaper price, but lo and behold, it’s all broken out itemized. He’s like, “Yeah, for that desk, it’s $4,000; for that desk, it’s this; for that desk, it’s this.” And I was like, “Oh, well, can I just cut the list down? What if I just take out four of these items? Do I not get as good a deal on the other items?” He’s like, “No. You see the individual price for the item, and take it out, and you don’t pay for that item.” I’m like, “So it is a menu, actually. It’s totally fine. I could just take out an item and I should get properly prorated price reduction.”

Apparently, that’s not how the general contractor’s millworker does it. So now that’s number three, and I’m like, “Okay.” Otherwise, what’s happening? These three items happen to be things that were not—like, the mezzanine was permit-specific, yes, but the mezzanine contractor we found did their own shops and they were like this self-contained thing, and basically they kind of fit in to the general contractors permanent world, and they were fine with that. Conduit was not permit-related. Millwork is not like permit approval contingent stuff. That’s basically furniture. So I’m like, “Well, I guess I’m taking over millwork now, too.”

And then while that’s happening, other things were going on. Like, we were starting to do a lot of structural work for the mezzanines, and they’re like, “We’ve got to get a soil compaction study.” I’m like, “We do? Are you sure? I mean, no one’s asked for that.” But yeah. They’re like, “Well, we’re going to need it. It’s definitely pretty standard op.” I’m like, “Okay.” So I pay for the soil compaction study. It’s like $6,000. Lo and behold, it comes back and they’re like, “Oh, yeah. You’re going to need tons of base under these giant footing, blah, blah, blah,” and they’re legit, whatever. And all of a sudden, getting base under a whole bunch of footings is costing me $25,000. I’m like, “What?! What are you saying?” But certain things like that, they had me over a barrel, because they were so embedded in the structural components of things. They were legitimate requirements as it turned out, and I couldn’t insert my own contractor into that process without them kind of legitimately saying to me, “No, we can’t basically have you just poking in your own face. You can’t do that”.

So what ends up happening is a bunch of those kinds of things add up where I really can’t insert myself as easily as I could with millwork or the conduit, and they send me an overage, a change order on paper for $130,000 and I’m like, “What the f**k is this?” I mean, it’s like base, it’s a handful of other things, but it shouldn’t be that high. It’s obvious.

So I call the owner of the firm and I’m just like, “This is insane! Come on, dude. I know — you are proving to me at every turn you are just going to squeeze the shit out of me on these overages. Like, you’re giving me stuff marked up 200%. I make one phone call and I’m saving 40 grand. I make one fucking web search, I’m saving $200,000. I know this change order is jacked beyond belief.” I’m like, “25%, be cool. Why are you doing this?” He’s like, “I don’t know what you’re talking about. I’m glad you figured out some ways to save some money, but this is all standard stuff.” And he’s like, “I tell you what… We’re going to stop construction until you sign this change order. So you can stall it all you want.” And he’s like, “The longer we are on this job, every week longer we are on this job, that’s $4,500 per week in general conditions. So if you want to sit on this change order and let us go do other things, you can do it. But you’re going to get a bill for 4,500 bucks a week, for as long as it takes us to get out of this thing.”

Ash Patel: Is that when the lawyers got involved?

Joe DiSanto: Yes. So I tell my lawyer and he’s like, “They can’t do that. They can’t basically extort you to sign a change order. All they can do is not do the work you are not willing to sign off on on the change order. They have to continue to do all the other work that they are contracted to do, in the way that they bid it.” So I got [unintelligible [00:36:32].05] we fashioned up a nice, long letter threatening to report them to the state licensing board and all that, and lo and behold, they showed up and they kept working, and they were like, “Fine. We’ll keep working.”

Ash Patel: How does this story end? And what’s the total overage on this project?

Joe DiSanto: Okay, so if you don’t want me to get the hour’s worth of therapy out of this, Ash, okay? [laughter] If you want me to cut to the chase—

Ash Patel: We’re already over on time.

Joe DiSanto: Okay, I will cut to the end, actually. I would say in the end, I think I took over about eight trades myself, because every single change order they gave me ended up being marked up 200% or 300%, all eight of them. It was just standard operating procedures. So I took over, as we know, the pricing of the mezzanine, low voltage conduit, all the millwork, all the finished carpentry; painting, I took over. I was getting new electrical service put in, which was a whole other nightmare that I learned a lot about; not necessarily a problem of the contractor though, the contractor was not writing Southern California Edison to the degree that I was. I took that over under its own permit, with my own electrician, and saved gobbles of money.

I took over the entire parking lot asphalt and car lifts, which was under its own permit and I worked directly with the car lift installer, because basically, when the final approved permits required pervious asphalt, all of a sudden I had to pay an additional $90,000 to basically trade up the pervious asphalt. Of course in the end, I only paid an extra $30,000 for that, but I took that over myself.

So all in all, I took over about eight trades, all of which were not permit-reliant. So they kept doing all the stuff that was like super critical, permit-reliant, electrical, plumbing, structural, blah, blah, blah, blah, blah. And I basically put a folding table right next to their superintendent on the job site, and I sat there and was my superintendent number two.

I had my trades I dealt with, and I’ve said the one thing that thank God this was the case – their superintendent that they provided me, Dave, was a really cool guy. He toed the company line, but he was basically always looking at me being like, “I’m sorry, I don’t know.” But basically, I made these people so mad because I was getting in their way of doing their squeeze routine, that it just became this adversarial relationship to the very, very last day. And I even tried to smooth it over. I took out the guy who was my project manager — after the mezzanine thing and the conduit thing, I was like, “Hey, how about I take you out to lunch and hang out, maybe we get to know each other. It should be fun, it doesn’t have to be hard. My business is at stake here. I only have so much money, and if I can’t get this done, I can’t move in here.”

What makes this worse is when you move your business and you do something like this, all of a sudden you’re a ticking time bomb, because you release your lease on your old space, because you have too much crossover, because it’s cost me $30,000 extra a month to have both places going. So you’re like, “I released my lease, I have to leave there. They’ve got someone coming in behind me. But if I can’t move in here, I go out of business. It’s that severe. All my employees lose their job. I end up with a building unfinished, unprinted, no certificate of occupancy and now I’m trying to sell this thing to save myself at a major discount. It’s a disaster. So you have to look at it from my point of view. I don’t have all the money you’re trying to squeeze out of me.” And he’s like, “Okay, whatever.”

But in the end, I took over eight trades. I conservatively saved $700,000, and if I had gone down the road and signed all their change orders, that number, no question, would have been higher, because I’d be further down the road trapped in their bullshit setup. Probably, it would have easily been a million. I ended up coming in just about $50,000 over my 10% contingency, so I was out of pocket about 50k, got it done for 10% over budget, which was reasonable. I can live with that. But if I hadn’t done it, literally, I would have lost my business. It’s that simple. I just didn’t have 700 extra grand to come out of pocket, and I wasn’t going to get any more money from the bank.

So it was literally kind of life or death in my mind, because it was “My business dies, now I’m filing bankruptcy, and it’s just a chain of unfortunate events.” So it was just so mission-critical that I got this done, and I just thought I was going into this — I selected the middle bid guy, they seemed cool. They were referred to for my architect. I’m well funded here. I’m not asking for cheap, whatever… I’m like, “It should be pretty smooth.” But—

Ash Patel: Joe—

Joe DiSanto: It just was brutal, but I survived. All’s well that ends well. We got it done. We created [unintelligible [00:41:32].24] flip for the mezzanine, we created about $4 million of value, so we pretty much doubled our cash investment pretty much the day we walked in. So it got done. I had to devote a year my life to it, but—

Ash Patel: Joe, I’m glad this story had a happy ending. Thanks for sharing some of the heartache that you went through; some good lessons with the escrow company references, construction management company… How can the Best Ever listeners reach out to you?

Joe DiSanto: Just go to my website, playlouder.com. You can email me at joe@playlouder.com. Probably, LinkedIn is the place I’m most on social media, but I don’t do too much social media. So just email me or whatever if you want any advice in this arena. I guess my biggest piece of advice is don’t be afraid to go get bids from other subcontractors for your overages. Just go do it. You can take over some of your own construction project if you need to.

Ash Patel: Thank you again for spending your time with us today.

Joe DiSanto: Yeah, man.

Ash Patel: Best Ever listeners, thank you for joining us. Have a best ever day!

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com

Share this:

    Get More CRE Investing Tips Right to Your Inbox

    Get exclusive commercial real estate investing tips from industry experts, tailored for you CRE news, the latest videos, and more - right to your inbox weekly.
    pattern-001