Join me as I talk to Aaron Gordon of Aaron Gordon Construction AGC, 415 Remodeling and Heirloom Builders, who answers our questions about what’s been going on with residential construction and prices in San Francisco.
Ruth Krishnan:
Hello. I am with Aaron Gordon of Aaron Gordon Construction, AGC. Aaron’s been a close friend of mine for a long time. He also happens to be one of the best contractors in San Francisco. People are always wanting to pick my brain about construction. I get a ton of questions from my clients and friends, especially because I used to be an interior designer. I thought I’d bring in the real professional to answer some questions about what’s been going on with construction and prices in San Francisco. So, I thought Aaron could tell us some of the things that are happening. Hey, Aaron.
Aaron Gordon:
Hey, how’s it going?
Ruth Krishnan:
Good. Thanks for being with me today.
Aaron Gordon:
Thank you for having me.
Ruth Krishnan:
One of the things that I’m seeing out there is how expensive things are. What’s going on with prices?
Aaron Gordon:
Well, it’s mostly a factor of labor, supply, and demand in terms of the labor market. There’s a shortage of housing in San Francisco for your general working class, so people are commuting and it just creates a shortage. The majority of the cost increases we’re seeing is really around labor.
Ruth Krishnan:
Got it. Is this true? I’ve read multiple times that the cost of construction has increased 30% per year for the last three years. Does that sound accurate?
Aaron Gordon:
That seems a little higher than I’ve seen. It’s substantial year to year. It even surprises me year to year when we’re doing estimates and looking back. It’s somewhere between 15% and 30%, I would say. It’s hard to say across the board, but we are seeing subcontractor pricing go up very, very quickly and it hasn’t stopped or slowed down. I think it’s leveled off a little bit, but I think it’s going back up again because there’s really no shortage of work in this area.
Ruth Krishnan:
Got it. Is there a time that’s a more seasonal time to get a good price from a contractor?
Aaron Gordon:
Not really. There’s a little slowdown around the holiday season. People don’t really want to spend a lot of time getting into construction, so there’s a little bit of a dip on smaller projects. on a kitchen or bathroom-type project, we’ll see some seasonality. On bigger projects, it takes two years to get a permit, so people build as soon as the permit’s done. That’s usually the holdup in construction on larger projects.
Ruth Krishnan:
Got it. To set the context here, we should probably say there are a lot of different kinds of contractors out there. In fact, you actually have three different companies to respond to that. Can you say a little bit more about that?
Aaron Gordon:
I have Aaron Gordon Construction, which tends to specialize in bigger, more expensive remodels.
Ruth Krishnan:
What does that mean? Tell everybody what that is.
Aaron Gordon:
Maybe a million dollars to $20 million. We like the bigger, more complicated projects. We do have a small projects division inside of AGC where we’ll do smaller things if it’s the right fit or we’re working with an architect or a designer that we want to support while also supporting our existing clients in smaller stuff. Then we have 415 Remodeling.
Ruth Krishnan:
So the $20 million you’re talking about is after they own the house? That’s what they’re spending on construction, correct?
Aaron Gordon:
Correct. Or if it’s a new build and they buy land.
Ruth Krishnan:
Okay. You’re probably not doing a ton of those every day?
Aaron Gordon:
No. We usually have one of those large projects at any given time. Currently, we have one going on now for $17 million. It’s an interior project in a high-rise.
Ruth Krishnan:
Amazing.
Aaron Gordon:
Yeah, it’s pretty fun.
Ruth Krishnan:
Okay. That’s awesome.
Aaron Gordon:
It’s not unusual for people to spend $20 million on a remodel in San Francisco. When you say remodel, it’s not really a remodel, it’s a brand new house. You’re stripping the majority of it down and rebuilding almost the whole thing.
Ruth Krishnan:
Okay, then 415 is for the commoners like me?
Aaron Gordon:
Yeah. So, 415 Remodeling is a design/build company. We found that when people want to do a kitchen or a bathroom, or a kitchen and a couple of bathrooms, there’s kind of a gap in the market where you need a design. Every project needs a design. You’ve got to put it together. You’ve got to pick your tile, counters, flooring, and cabinets. Homeowners think, “Oh, I can design it.” The truth is, almost all homeowners need help with design. Then you have to put it on paper and have a set of blueprints, a plan in order to price it. We found that we weren’t really able to sell into that market because it’s hard to find a designer to just do a kitchen or just do a bathroom. The economies of scale don’t usually pencil out. So, we decided to hire a designer and bring them into AGC. At some point I realized that work is so different than what we do under AGC and it makes sense to create its own company. So Bill Johnson is the President of 415 and half owner. We broke off AGC into another company.
Ruth Krishnan:
Got it. What do those projects range?
Aaron Gordon:
Oh, $25,000 to half a million, I’d say. They’ve done up to a million dollars in a single project.
Ruth Krishnan:
A lot of times clients call me when they’re getting ready to do things or when they’re in the middle of things and they’re always really perplexed. Suddenly they’re realizing that the contractor is not picking the tile. There definitely seems to be some lack of education and a lack of consumer awareness around. What is the process? Who does what? I like that you guys are bringing that in-house because I think that people just want it to be easy. And if they can have less people that are doing more of their project, I think that is preferable.
Aaron Gordon:
Yeah. When you’re doing a small project, you don’t really need a big design team. It’s kind of nice because our designer stays with the project, manages it, and works directly with the homeowner, the guys in the field, and makes sure that the guys are building what she has drawn and talked about with the client. On a small project, design/build is absolutely the way to go. If it’s half a million-plus, there’s an argument either way. It really depends on the house and the homeowners and what they’re looking for. But yeah, for that type of stuff, bar none, design/build’s the way to go.
Ruth Krishnan:
It’s actually pretty rare though. I think there’s only a few companies in San Francisco that even do it, isn’t that right?
Aaron Gordon:
That is true. Most contractors don’t want anything to do with design. It’s a field that we’re not very good at usually. We’re good at putting it together, but when it comes to picking color, tile, and all of those things, most contractors, they just want to build. At AGC, we don’t do any design. I don’t want to get into the design world on our projects. I want to make it look like the picture. I just want to build what’s on the set of plans. With the design/build small projects, it’s the best way to move forward and there aren’t a lot of guys doing it.
Ruth Krishnan:
Who do I call first?
Aaron Gordon:
On a big project, you need an architect, engineer, designer, sound engineer, and construction manager or a project manager. In that case, I always say call the general contractor first.
Aaron Gordon:
When I put the team together, it runs really smoothly. If there’s an architect that’s difficult to work with, I can’t control that process, but if I know that we’re bringing in an architect that I get along with, that really draws great plans, and is a partner that works well together, then the project usually goes a lot better. I always say, “call me first.” Yeah.
Ruth Krishnan:
Yeah. I think it is definitely good, no matter who you call first, that you probably rely on the person who you choose to help put the team together. Because to your point, if those people are not trusting each other, then it’s just going to be a finger-pointing game through the whole thing, and the client’s going to end up being the referee for people blaming other people.
Aaron Gordon:
Yeah and it’s no fun when you get into the finger-pointing thing. I’m sure that when you talk to a project manager or an architect, they’re going to say call them first too. I think we all feel the same way. Whoever gets about the team together is going to put together a team of people that they work well with.
Ruth Krishnan:
Right. One of the things that I’ve heard is that a lot of the developers are actually pulling out of the city right now. Which may be happening because the real estate market definitely just shifted dramatically in January and is really heating up. For the higher end by real estate standards, that the developments that are coming out in the $10 million range, those developers are basically saying until it hits $2,000 a square foot on the resale, they can’t keep up with the build cost.
Aaron Gordon:
Yeah. I think that’s true. When you buy a piece of property and it takes two years to get a permit, two years to build it, and you’re holding it for four years, there’s a lot of risk. I don’t do development like that because I don’t like that risk and it’s hard to build something you’re proud of and make a profit. It doesn’t seem like there’s as many developers out there building right now because of the upfront costs and then the timeline around getting permits and putting it together. It’s a tough thing to do.
Ruth Krishnan:
What’s going on with the permits? I’m hearing just even getting a window permit or over the counter permit right now is months. Is that true?
Aaron Gordon:
No. Just for something simple like a window or if you’re replacing in kind, which means you’re rebuilding a bathroom or kitchen exactly how it was, you can get that in a matter of days. If you’re moving a kitchen or making major changes to any of the project, then you need to submit plans, and that can take four months to get an appointment right now. There are architects and different people that have tricks and already have appointments set up that you can grab, and architects are trading appointments with each other. So there’s a lot of tricks that people are using to expedite that process. Right now we’re seeing a permit that would take one hour to get, or one day let’s say, at the building department is four months just to get an appointment now.
Ruth Krishnan:
If someone’s planning on building up in Noe Valley on their home there, then they have to wait four months for the appointment, and then it’s approximately two years to get through the neighborhood review. Is that still true?
Aaron Gordon:
Well, it could happen in nine months. That’s the fastest it can happen. I’ve never seen that, but architects still say it’s possible. It doesn’t have to take two years.
Ruth Krishnan:
They probably also still say it’s possible to build for $500 a sq. foot.
Aaron Gordon:
Yeah, that’s true and that is not possible anymore. It tends to take a year and a half to two years, and if there’s a neighbor who really wants to contest it, you have no idea how long it can take at that point.
Ruth Krishnan:
Got it. Okay. So we were talking about who to hire when, so we call Aaron first and then he’s going to put together the team on a high end project. What are the things that you think people should know before they start a project or they wish they would’ve known when they get to the end?
Aaron Gordon:
Yeah. It always takes longer and costs more. I think everybody sort of knows that, but they don’t want to believe it.
Ruth Krishnan:
How much longer and how much more?
Aaron Gordon:
Twice on both of them. An average bathroom remodel for us is around $65,000. If you want a steam shower and a big master, it can go to $100K plus. People are like, “$65,000? I thought a bathroom was like $30,000.” A lot of Real Estate agents when they’re selling a house will say, “Oh yeah, you can rebuild that for $30,000. No problem.” And there might be guys out there that can do it, but you’re getting the guy in his truck that doesn’t have workers’ comp and liability insurance, and uses really inexpensive materials and the quality leaves a lot to be desired. So that’s something that’s surprising. A kitchen remodel is usually $100K plus to do, a nice kitchen remodel, and that’s with design/build and the whole nine yards. A bathroom remodel can take two and a half to three months, and that always surprises people. They’re like, “It’s only six by six square feet,” but there’s nine inspections when we’re doing a bathroom remodel and DBI slows that down. Everything happens in sequence, so framing, sheet rock, tile, finishes. So kitchen is usually about four months, three to four months.
The other thing people are surprised by is how long it takes to get into contract and ready to work like, “Oh, can’t we just pick out finishes and get started in a couple of weeks?” It generally takes four to six weeks to really put all that together. The more documentation you do upfront, the more clear the contract’s going to be, and when you’re tying a set of plans, which we do, we like to draw out the plans and then tie the contract to the plans so everybody’s really clear on what they’re buying. It’s far too often in this industry, somebody’s like, “Oh, we’ll do your kitchen for $65,000,” but what kind of cabinets are you getting? What kind of faucets? What kind of sink? What kind of pulls and handles? And what’s included and what’s not included? And if the contract and the scope of work isn’t very well detailed, then it’s hard to understand what you’re paying for and that’s where change orders and that kind of thing happens. So people are always worried about change orders.
Ruth Krishnan:
So, when you say it’s going to be double, is that double even when you’re working with a contractor that had detailed out that you’re getting Studio Becker cabinets?
Aaron Gordon:
Well, I say double because people always expect a kitchen to be $50,000, but they’re not thinking that, “Oh yeah, when I add up all the appliances, the appliances alone can be $35,000,” if you’re going with high-end appliances. In a lot of these homes, you don’t want to put in Kenmore appliances, you want to put in Miele or Sub-Zero or Wolf-type products. You never want to be in a situation where the contract price doubles if the scope of work doesn’t double. So we’re very diligent about really getting the scope of work detailed in the details written out and all of the products selected and firmed up before we go into contract, that way when we’re building, the homeowner’s clear on what they’re actually getting and what’s included and what’s not included. Then there’s no surprises when it comes to change orders. If we open the walls and the framing is bad, sure, there will be change orders, but in a perfect world, we can detail it out close enough to what we’re doing and minimize the amount of changes there are.
Ruth Krishnan:
Yeah. Having gone through a few projects myself, I think changes come from two different places. One is going to be your fault, right? The contractor didn’t put in the right allowances. Even though I said, “I want this kind of style,” they threw in a cheap garage door, which didn’t go with that style. Then it’s like, “Oh, that’s surprising. That’s another $15,000.” Then the other one is from the client, right? Which has happened to me every time, and I think it happens to everybody. Once you get that contractor in your house, you suddenly start having these new ideas. You’re like, “You know, now that they’re here, some nano doors here would just be great,” and your house is torn up. And then there’s that change order where it’s like, “Okay, now there’s this whole structural thing, and now we’re talking about another $100,000 to give you that bigger view and open up that wall more.”
Aaron Gordon:
Very common. It’s the, “While you’re at it,” and, “You might as well.” Right? “Well, we might as well.” We already have the wall open, and it’s true, there’s economies of scale. If we’re already there and there’s somebody that’s on-site managing the project, it’s not that much more to just throw stuff in here and there. If it doesn’t increase the duration of the project, then there’s economies of scale. That’s very typical. The earlier you define the scope of work and agree to pricing, the better off the homeowner is. Changes during construction are more expensive than it would have been before, and there’s several reasons for that. One, you’re adding new work that’s out of sequence, so had we had that scope of work in earlier, we would have sequenced it into all of the work and the duration of the project would be shorter. So you generally throw off the sequence and you add duration to the project, which duration is dollars. The other thing is subcontractors, if they’re competing for the work and the scope of work is in as they’re doing their estimates, they’re going to keep their pencil sharp on that scope of work. Once they’re in the house, no matter how honest that subcontractor is, you know, they’re in business to make a profit and they won’t need to sharpen their pencil as much because they’re already there. You’re not going to replace the electrician to bring in a new electrician to add four plugs, but at that point, if the electrician hasn’t really been efficient or underbid it to begin with, they’re going to make it up on the backside. Even the most honest subs and GCs, they use that as an opportunity to maybe make up for lost work, and it’s really inefficient to do change orders. So a lot of people really think like, “Wow, you guys are overcharging us for a change order,” where I’ve actually lost money on it. And it’s a dynamic that nobody really likes, so try to figure out as much work early and get it into the original estimate, and it’ll be certainly less expensive than doing it halfway through the project.
Ruth Krishnan:
I think one thing too is sometimes people that maybe want to do a kitchen remodel, but down the road, they might want to do an extension, and actually going ahead and going through the whole design process with the architect to see it out, even if it’s going to be later. So that way, if there’s things that you can do when you’re doing that kitchen remodel to maybe reframe the wall to add some structural, otherwise, it’s going to be like, “Oh, we’re going to tear out the kitchen in order to do this.”
Aaron Gordon:
That’s a really good point. If you have ideas about building out other stuff later, designing the whole thing early and then phasing it does make sense.
Ruth Krishnan:
So I know you’re at the high end of the range in price and services, of course, and there’s a big range in your field. So we talked about bids and budgets, and actually knowing what you’re getting and getting more accuracy there. What else can clients be prepared to deal with if they have the guy in the truck without a license versus your team?
Aaron Gordon:
So a lot of times, the only way we can talk about pricing is price per square foot, which works for luxury models, but not for bathrooms and kitchens. You never think about a kitchen per square foot. But if we’re thinking about … there’s a developer in the city, I don’t want to name their name, but when they’re building for themselves, they’re around $450 to $500 a square foot at their cost. And they buy and develop homes and put them on the market. Nobody has workers’ comp, very light on design, light on quality. It’s kind of the bare minimum with the least expensive subs. So they’re in that $500, $450 to $500 range. A really good contractor, somebody that’s at the top of the playing field, we like to say we’re around $1,000 a square foot. We can get down below that depending on the design, and if that’s a client’s goal, we can work with them. Maybe down to about $850ish. And then we’ve done projects at $2,000 a square foot and even $5,000 a square foot. So really, when you’re getting into that uber high-end, prices can kind of get way up there.
Aaron Gordon:
I have a third company that we didn’t touch on yet called Heirloom Construction, and we’ve been in business about six months. And the reason I created that company is there was a guy named Zach Heir who I really liked and wanted to work with, and I knew he wanted to be a contractor. And there’s that market that AGC doesn’t really service well, and it’s in that $750 a square foot market where somebody has a home, they want to do a largish remodel, but they’re not looking for uber high-end finishes and price is definitely a concern. So we started this company and we’re really trying to keep our overhead down. With Zach being in the field 100%, he can be really efficient. When an owner’s in the field and they’re watching over everything, there’s an efficiency to be gained. So that’s the reason I started the company, and it’s working out really well. Zach is doing a great job.
Ruth Krishnan:
Now, are they doing design/build as well?
Aaron Gordon:
Nope, not design/build. So 415 is design/build, Heirloom is sort of that middle ground price point, and AGC is the higher end. Yeah.
Ruth Krishnan:
Heirloom is in between the two that you had before, is that right?
Aaron Gordon:
Exactly. Yeah, but it’s not design/build. It’s not low-end.
Ruth Krishnan:
Got it. Okay.
Aaron Gordon:
Really, the goal is to produce quality and process at the level AGC does, it’s just bringing it into a lower rate. And it’s because Zach, as an owner, is in the field. And the size of the company, Heirloom’s a small company so they’re able to be really efficient.
Ruth Krishnan:
When I was doing my remodel, somebody told me my contractor should swing a hammer. So that’s based on the price of stuff that we wanted to spend, it’s like, “Okay, that’s going to have the least amount of overhead. It’s not a CEO running a company, he’s the guy and he cares about the craftsmanship.” Is that kind of what you’re saying is happening here?
Aaron Gordon:
No. He’s swinging a hammer a little bit. The problem with the contractor swinging the hammer is if they’re doing one job, it works great. If they have two jobs, it kind of falls apart because then you need to have somebody else on that job while you’re gone. And if that person isn’t a site super or a lead, things don’t go well. So the GC that does swing the hammer and truly does one job from start to finish at a time definitely can bring in costs at a lower rate. And generally those general contractors, they’re not making much money. They may have bought a house 40 years ago and they have low overhead and the family’s already moved on and the kids are out of the house and in school. It’s rarely the younger guys, it’s the older guys that have the ability to do that. But you want to be careful because if they have three jobs and nothing happens without them being there, then you have the typical GC, like, “How come you weren’t here today?” “Well, I was at my other job.” And if he’s not there, then nothing happens on the project. So it’s a balancing act.
Ruth Krishnan:
Got it. So what else? What else should I be asking you that I’m not asking you? What comes up for you?
Aaron Gordon:
The advice I give to people that’s rarely listened to is, take your time. Don’t rush into it. And with a lot of your clients, they buy a house, they’re really excited. Maybe their first house. They want to do all of this work before they move in. They’re paying rent somewhere and now they have a mortgage, and they’re like, “Okay, our new mortgage is $6,000, our rent’s $3,800. We’re motivated to get this done as fast as possible.” And it forces them into making choices that they wouldn’t have made had they taken the time to do it. A lot of that is design. Once you make a design decision and it goes into place, that’s it. Your counters are going to be the green marble that you thought you loved, but it might not match the rest of the finishes. So really stopping, taking a minute to really think about your design. Sometimes it’s good to do your design and then not look at it for two weeks. Then come back and look at it and make sure that you’re really going to be happy with it. So that’s the best advice I have. Move into your house, think about what you’re going to do, hire the team that’s really going to work with you, that’s not pushing you to start immediately, and get the whole design in place, get it priced out, try not to have a lot of allowances. And so, in allowances, if we don’t know what something’s going to cost, we just guess and we’ll say, “Okay, $5,000 allowance for this.” If it ends up being $10,000, then you sign a change order for $5,000. If it comes in less, then you get money back. So the more allowances that are figured out in advance and turned into real costs, the better off the homeowner’s going to be and the more clarity you’re going to have around what the total price is when you’re done. If you go and start and you’re rushing to get it done, there’s a lot more risk in terms of what you may spend by the end of the project. And typically, the design suffers for that. And then about living in the house, you can live in a house during a remodel. Most of 415 Remodeling’s clients live in the home, so they’re really accustomed to working with people in their home. Sometimes we’ll set up a kitchen for them in the garage or help them figure that out. It’s no fun. It’s loud. You have a lot of people coming and going. It’s possible. On larger remodels, we absolutely don’t allow the tenants to live in the house during a big remodel. It just doesn’t make any sense. It just can’t happen. But with small stuff, you can. Most people after it’s over say, “Wow, I wish I had moved out,” especially now that we’re all working from home. It’s a whole different dynamic. So if there’s a place to go, great. Or rent a house for a couple of months. At least through the majority of it move out, move your stuff. It’s more expensive when the client’s at home because we have to work around them. So when I’m quoting prices, we’re assuming people are going to be at home. When there’s only one bathroom in the unit, it gets a little dicey. People use the gym and we’ll leave the toilet in place during the evening hours and take it out when we have to. They shower at the gym. So those are people that really should have moved out, but every situation is different. It depends where the work is going to be. If it’s near the front door, it’s a lot easier. Or near a garage, it’s easier. If it’s upstairs and at the end of the house past all the bedrooms makes it a little more challenging.
Ruth Krishnan:
One takeaway that I would have from this conversation based on my work is that if you’re saying that construction is between $750 and $1,000, realistically, if someone is paying … the average price per square foot in Noe Valley right now is $1,300 a square foot, so if you’re going to buy a house and you want to do a down-to-the-studs remodel and it’s $1,000 a square foot, then please plan on keeping it for a while because catching up to that $2,300 a square foot to make money or break even is probably not possible. At least not for the short term.
Aaron Gordon:
Yeah.
Ruth Krishnan:
So plan on staying there and building a house that you love and holding onto it. I think there’s a lot of misconceptions out there where people say like, “Oh, I’ll get a better deal by buying a fixer,” and the reality is right now that you’re actually getting a much better deal by buying something that was built even three years ago, because it was cheaper to build three years ago than it is today.
Aaron Gordon:
That is true. So it’s definitely a scenario where if you want a really nice newish house, if you can find something that somebody built two, three years ago, not a developer, but a homeowner, that’s where the deals are. And you can tell by the finishes. Most of our client’s ROI is not that important at the onset because they want to build what they want, and they know that they’re going to be there a long time. So the ROI on that is really important. If you think, “Oh, we’ll buy a house and then we’ll add a third floor,” adding a third floor to a house is extremely expensive. ROI usually doesn’t make sense. You’ve got to move out, the permit takes two to three years. Or a year to two, could be three depending on your neighbor situation. So I try to talk people out of adding a third floor on an existing two floor house because not only are you adding a third floor, but you’re probably remodeling the rest of the house at the same time. That’s sort of how you do it. So definite misconception about what makes sense to do in terms of a remodel. You have to be committed for that to make sense.
Ruth Krishnan:
Awesome. Thank you for your time today, Aaron. If anybody has any questions about remodel, it sounds like there’s no project that Aaron can’t tackle.
Thinking of buying or selling? Call the Krishnan Team at 415-735-5867 for a no-obligation consultation. You can also email us at info@ruthkrishnan.com.
