Incremental Replacement Work

I have always found the apartment replacement business to be a difficult one in which to make a consistent profit. Yes, there are companies that specialize in this area and seem to do well, but they specialize. Many have formed long-term relationships that have allowed them incremental price adjustments, or they have negotiated “add-on pricing” for floor prep and disposal that improves their standard pricing.

Many a time I’d get a call that went something like this: “Hey Dave, this is Tim over at Ross Brothers, and we’re hoping you can give us a great price on carpet replacement for 1,000 units that we have in Too Tall Towers.”

Me: “Thanks for the call. How soon were you going to do this replacement?”

Tim: “Actually, we will be doing the replacement on an ‘as needed basis’ when we have move-outs, but we do have a thousand units.”

Me: “About how many units would be replaced each month?”

Tim: “We’d likely average at least 15 units a month, perhaps 90 yards of base grade beige carpet, new pad, take up and disposal.”

Me: “Let’s see, that’s about 180 units a year, around 16,500 yards of carpet, pad, and installation. About where were you looking to be for an all inclusive price?”

Tim: “Well, we’ve been using X&Z Company for several years, but we were hoping to get a better price than the $9.85 per yard we’ve been paying.”

Me: “Please tell me a little bit more about what you’d expect us to do in working with Ross Brothers.”

Tim: “As you might imagine, we have a lot of weekend move-ins, so we’d like to be able to call you by mid-week so as to have units ready by Saturday. Of course, you’d have to stock carpet and padding for us. We’d prefer that you bill us once a month for all units done, send out the requisition by the 15^th of the month following, we’ll review and approve, and have you a check by the 15^th of the next month. We’d be a great account for you.”

The first thing I did was ask around about X&Z Company. It seems they owed a bunch of money to their key suppliers and were about to cease operations. Apparently, they had a slow-pay client that was 150 days late on invoices totaling six figures. You guessed it: Ross Brothers! 

The price used above was approximate and is typical of the lowprice levels of this type of work. Carpet and pad; freight; delivery; take up and install, plus overhead and profit, all for under $10 (or $13 today). Due to the base-grade nature of the product(s), there is little or no opportunity to make extra profit from products specified.

Five or six rolls of carpet plus padding would have to be warehoused to meet monthly demands. One or more crews would have to be available to install units with 24-48 hour notice. 

Best case scenario is 12%-17% gross profit if extras are properly paid, and then you wait for 60-90 days to get paid unless there were questions on billing.All the while, you have to pay installers within 10 days and suppliers within 30-45 days. Is it any wonder X&Z Company was headed out of business?

Rehab Retrofit or New Work

Another type of business is for apartment or condo rehabornew work. Typically, this is bid out by a general contractor. While this is a quicker turn, it is frequently spread out over a nine-month or longer schedule; this may even be more complex if there are different buildings.

There may be some potential for specifying products, but no real potential for profit. Change orders for extra work are tough to get approved. There is still the requirement for stocking products; however, the contractor generally expects to pay for stored materials. There is more potential for stringing out payment with a convoluted requisition process.

The other challenge with this type of work is scheduling. Your installers are usually the last people in the area and may be continually interrupted by other trades who are finishing up their work, and in so doing, damaging what is being installed. When other trades fall behind, you’ll be expected to assign several additional crews to complete work on an accelerated schedule withoutany extra payment. This may strain your installation resources to the point that you’re neglecting high profit work.

You’ll likely be generating large volume at low profit, and have to wait 60 days or more for payment. That is just characteristic of this type of business.

Tenant Build-Out

If you are working with several solid property management companies or quality commercial remodeling contractors, this can be a good, steady, profitable business. Often, if you have the range of applicable products, you’ll be able to specify all products and earn a little more money.

In this type of scenario, the prospective tenant will be shown a good, better andbest package from which to choose.

The goodpackage will be what will be provided in the lease.

The better package will have more colors, better style, and enhanced wear characteristics, and of course it will cost more and be an additional amount the tenant will have to pay, usually out of pocket.

The bestpackage will have an exciting range of finishes, colors, textures, styles, and may feature special installation options (border insets or islands and blending of textures). Choosing this will mean a hefty extra payment or big bump on the lease amount.

Typically, when the dealer presents his options, his gross profit may be 18%-22% for good, 22%-28% for better, and 28%-37% for best. This range is dependent on size, location and type of building. The dealer and his client always want to sell the best package. Using this approach, one sells toward the bestand the client’s tenant usually settles for better.In rare cases, the client’s tenant wants to save or spend more money in certain areas; each provides opportunity for the astute dealer.

As you can probably tell, this type of property management business was my favorite.

Things to Remember

Be sure you understand the scope of work. What are the obstacles you’ll face and what is included in your price? May “or equal” products be substituted and, if so, who will approve them? Define the “extras” and negotiate a price. Is there an allowance required for floor prep? How is that defined? Most arguments and shouting come when the client says, “That was supposed to be included in your price!”

Time frames for delivery, access, and installation.How quickly are you expected to perform once you have notice? Make sure you have a reasonableamount of time to do the work without penalty. Look carefully at any clauses which include liquidated damages. How will you gain access to the areas? Are freight elevators available or must a crane be used? A key issue is to always assume other trades will still be working in the areas. How will you handle supervision? Nothing beats a good rapport with a site property manager or field superintendent.

Exact method for payment requisition. What is the format for requisition? What is the name of the person in charge of approving requisitions or payment? You might as well find that out up front. What happens when there are questions; is this handled verbally or by email? How critical is the monthly due date for requisition receipt; is there some leeway? If there is a 25^th of the month due date and you’re late by a couple of days, can it be pushed through or are you going to be into the next month?

Payment terms.How soon will you really be paid? To the buyer, a good question might be, “If you were me, how soon would you realistically expect to get a check in hand?” I’ve had buyers who initially said, “15 days upon requisition approval,” answer that question with, “Figure at least 30 days so as to allow for requisition processing, approval, check run, release, and mailing.”

You have to know what to expect, and frankly, I would always have the person submitting the requisition do two things: Call to make sure the requisition was received and answer any questions; call a few days before check is to be cut and see if it was actually done and see if the check could be picked up.The “check is in the mail” is a frequent excuse, so if you arrange to pick up, then you may have to wait for a while, but you’ll likely get it.

Property management may be just the niche for you, but tread carefully; it can be profitable or a real dilemma that can damage your other business and reputation.