Early in my career, after I realized that real estate was in fact the best asset class in which to invest but before I had completed very many real estate projects, my view of real estate pricing was moderately opinionated:
“Used is cheaper than new and always will be because the seller is selling for a reason.”
If we fast forward from 2000 to the present day; my outlook is different:
“Both new and used real estate are very expensive due to inflation, supply chain disruptions, labor shortages, and bidding wars. In fact, we may be creating another bubble.
However, new construction (or a substantial overhaul) is more valuable to me because I am able to control every facet of the build.”
Previously, my (inexperienced) opinion was influenced by the generalization that “things cost what they cost” because I never questioned what they cost.
(Read my earlier article, “Generalizations, Generally” here.)
Once I became curious about costs and performed my own due diligence, I realized that the world looks different through a different lens. Yes, “trusting but verifying” occasionally creates surprising findings and new realities.
In other words, I realized the value of what’s called Value Engineering. That is, providing the product or end result that is desired but via a different path from point A to point B and saving money along the way.
The principles of Value Engineering were tested with a couple of commercial buildings I constructed from 2018-2020. Not wanting to rely only on others’ opinions, I did my own deep dive into the construction techniques and principles.
I took nothing for granted.
And I saved money.
Big money.
In fact, the building I put up for others realized a 7-figure savings. (If you’d like to read about it, my story is in the #1 best-seller Bringing Value, Solving Problems, and Leaving a Legacy. Send an email to Lee@DrLeeNewton.com and I’ll send you a digital copy).
But Value Engineering concepts can’t stand on their own. They need the concepts of Building Science to perform a reality check.
Q: 1. Why?
2. What is Building Science?
A: 1. So you don’t do stupid things. (Trust me – I was stupid first).
2. Building Science is the physiology of how buildings work, from keeping the outside out to keeping the inside in. The principles of Building Science follow from The Second Law of Thermodynamics, contrived in part by French scientist Sadi Carnot, German scientist Rudolph Clausius, and British scientist William Thomson.
(The concepts of building science are also introduced in the book I referenced above.)
Q: How do Value Engineering and Building Science work together?
A: Let me count thy ways:
Value Engineering says, hey, lumber is expensive now, you should consider steel studs. Building Science responds with, “Have you ever heard of the concepts of thermal bridging and conductivity?”
Value Engineering says, I think it would be a lot cheaper to run those ducts through the attic or crawl space. Building Science says, “Whoa horsey, get a grip, get a clue, and hold my beer.”
Value Engineering says, I don’t need to install a vent for that combustion fireplace. In fact, the manufacturer’s label says it’s OK to use in an unvented manner. Building Science says, “Learn about Indoor Air Quality because that plan is the dumbest I’ve ever heard.”
Value Engineering says, Let’s throw recessed can lights in that cathedral ceiling so you have the highest possible ceiling and headroom clearance. Building Science smirks and replies, “Only if you know what you’re doing.”
Value Engineering says, I am designing this home with 1½ baths because the extra full bath does not justify the cost. Building Science raises its eyebrows and says, “Your water rectangle is in excess of 90% of your enclosure’s footprint. I can design you a home with 2½ baths for less money now and later.”
Are you beginning to get the picture? Yes, either one by itself is better than neither; but their sum is infinitely better than any other way of looking at things.
The answers to the following questions posed to me:
“How did you complete a 9,000 sq ft commercial construction project in 2011 for $375K?”
“How did you construct an 8,600 sq ft office building in 2019 for a 10-cap, a 13% cash-on-cash return, and a total annualized return of 30% or more?”
{If you don’t know what a cap rate is, please visit my earlier article here}
“How are you so confident in your ability to continue to build and develop in this era of exponentially increasing prices?”
“How did you put in the foundation for that 3-bdrm home for $6K?”
…my friends, is the same answer: It is the title of this article.
[which is, Why I love Building Science and Value Engineering]
The concepts and thought processes dictated by both principles don’t work on their own or in a vacuum. They don’t stand alone. They need each other to prosper and thrive.
But when they are able to work together synergistically, watch out!
Because that’s when you attract comments such as “I paid a little more for my new home than I wanted but now my heating bill is only 21.34 per month.”
Or, “I really had a hard time justifying so much insulation in my new medical office, but the staff no longer complains about the comfort of the indoor climate, and we no longer hear unwanted conversations from the next room!”
Or, “My city has atrociously high water and sewer rates. Fortunately, based on the advice given by my consultants, I have instant hot water and my family’s usage has been slashed by 50%”
(Does this sound familiar, my Bay City friends?)
I was asked by a friend, another real estate investor hoping to construct an 8-unit apartment structure adjacent to a 12-unit building she already owns, “What books or resources do you recommend if I want to learn more about this stuff?”
My reply:
“Other than the school of hard knocks, mistakes, failures, and stupid things, there is no universal resource.”
(However, some of my top resources are listed below in the references section.)
This article represents an inflection point in the weekly blog series. Yes, I’ll still talk about real estate investing from time to time. I’ve done that quite a bit. But, with all the inquiries I’ve received on “How to do A without screwing up B,” or “How to accomplish this objective without getting taken advantage of,” or “Where do I start if I want to end up there,” I am re-dedicating the focus of content to these areas.
Q: Why?
A: Because I am putting together a course on all this material for interested parties and inquiring minds. And because I sincerely want to help others…primarily because I was fortunate enough to have been helped by others in my time. And because it is the best way to answer the questions that keep arising.
And yes, the course will be free. I know, you know, we all know…you must question anything that comes with a price tag of “free.”
But I have found that some of the absolute best information out there is, indeed, free.
If you know where to look.
And if you place your trust in the right people.
Stay tuned…a deeper dive on every topic mentioned here is on the way, along with a plethora of equally salient other topics, one article at a time.
Until next time,
Dr. Lee Newton
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References:
