Screw Budget, Be the Best: The New Operating Mantra

If you read the article title, you’re most likely a little confused. Since when has a real estate investor or developer ever encouraged or proclaimed to take his/her foot of a tight budget? If anything, investors and builders are notoriously known for figuring out any imaginable way to cut costs on any sort of renovation or construction work. Though that mentality may have worked in years past, given the turmoil we’ve had in the markets over the last ~12+ months, I’ve been implementing a new strategy in all my projects and recently have come up with a name for it: screw budget, be the best.

Of course, there is some silver lining within this mentality, as if I (or any investor) start recklessly building and not tracking, measuring, and analyzing spend output, trouble is almost for sure going to creep in very quickly. Yet, what this mentality really implies and how it directs my day-to-day decision making is somewhat simple; if I want to have the chance at pushing competitive pricing on my product once its complete and avoid days on market, I must put the best possible product out there that I can without trying to squeeze dollars on every angle. Building the best product also inherently takes away a lot of market volatility risk, as in a slower market when there are less buyers/renters or they have more choice, your product has the best chance of standing out and moving.

I’ll give two recent examples of how I’ve implemented this across two different projects recently. In a luxury single family new construction project, I’m finishing up a project that is in a very desirable city. In the price point and specific neighborhood where my home is located, the standard for finish quality is a bit lower than other parts of the city where homes can easily trade at ~20-30% higher prices. However, rather than build to the standard of my neighborhood, I decided to go with a strategy to put out an incredibly high-end product that would mirror the most expensive homes in other neighborhoods in the city. The thinking behind this strategy is it provides upside while also limiting downside (who w0ouldn’t choose my home over the competing one in my neighborhood if its significantly better).

This ultimately translated into higher quality (and higher spend) on items such as appliances, cabinetry, tile package, fixtures, custom built-ins, and other little details. The result ended up being that I accepted a very competitive offer that beat out the next neighborhood comp by a healthy margin, as the build quality was obviously differentiated. The devil’s advocate of course might say that our cost basis on the project is higher due to our spend, but again given where we are in the market/economy, I made the decision that I would rather incur a higher cost basis during construction rather than take the risk on the back-end.

Another simpler example of this strategy came recently on a gut renovation I’m cur3rently working on when I was considering my window selection. This project is a condo project that is targeted as a starter condo product for younger folks (mid $600k price point for ~900 sq foot city condos), so I was considering where I could cut my costs. One of my initial ideas was to go with a lower-end no-name brand for window to cut down on my cost. After looking at some sold comps and understanding the city condo market is in a bit of a slump, I came to the conclusion that I would only be jeopardizing my back-end value even more with this decision. A brand name window carries weight with any luxury home buyer, and I wouldn’t want to instill any doubt that I tried to slash costs in other parts of my construction if my consumer-facing material selection was questionable. Although it’s a bit painful, I decided to go with an Andersen package and continue with the thesis of trying to make the best product I can.

Though these are good examples, I again do have to caution like I did in the beginning that this is not just a “throw money recklessly” strategy. There is of course finite budgets on every project for the economics to work, and a lot of this art and science is very dependent on your local city/neighborhood and competitive landscape. ?It’s much easier to read or write an article like this than to sign a check for a larger spend on a line item, but ultimately deploying this strategy I think can position projects to capture big upsides while also protecting big losses.