Marty Sadlier is an expert Quantity Surveyor and Founding Director of MCG Quantity Surveyors. In this shamefully incestuous interview (Marty is Mike’s business partner), I chat to Marty about all things estimating. From sinking funds, to contract milestones, disputes and insurance.
Mike Mortlock: Welcome to Geared for Growth. This week we’re chatting with Marty Sadlier, who is a co-founder and director of MCG Quantity Surveyors. So he happens to be my business partner. Now I wasn’t going to get him on the show for that reason, but Marty has such a breadth of experience that I thought that was a little bit of a waste. So, Marty is a quantity surveyor and construction cost estimating expert, so we have a chat to him about milestone payments with building contracts where contracts and work with builders can go wrong, and escalate into expert witness. We talk about strata seeking funds, and replacement cost estimates for insurances. So it’s a great interview. Marty’s got a wealth of knowledge on those topics. And I hope you enjoy. Cheers. Marty Sadlier, thanks for joining us.
Marty Sadlier: Thanks for having me.
Mike Mortlock: So full disclosure. Marty you are my business partner. We happen to be in the same office at the moment. But, so the listeners get a background of you. So who are you and what do you do?
Marty Sadlier: Yes, so I guess I’m a quantity surveyor. I tend to do more of the traditional side of things with quantity surveying with cost estimation and those sort of things. I’m a father. I’ve got a couple of kids. They’re at school, so we’re into that phase of their lives. Prior to fatherhood and quantity surveying I was in building, so I spent a little time on building sites, and I think that helps when it comes to being rounded in something. Being sort of … you’ve been on both sides of the fence, so to speak, from a physical sense on sites to then an office-based type role. Analysing and looking at things that you wouldn’t’ve ordinarily in the past been directing or working on.
Mike Mortlock: Yep. Now a little bit of dirt on the real Marty Sadlier. What were the posters on your bedroom wall as a youngster?
Marty Sadlier: Yeah, I shared a room … I’m a twin, actually … I’ve got a twin sister. So I would’ve shared a room with my sister for the first couple of years, and then she got promoted to her own bedroom and I shared with my older brother. So I think early on we probably were sharing, maybe Voltron or Astro Boy or Care Bears or something posters. But then when I think it became a little more manly, it would have been … adolescence, it was probably INXS … that was probably my brother. I was probably more Rockset or something. And probably a couple of Australian cricketers, probably Bearny, Dean Jones, or some of the real legends of … moustache wearing.
Mike Mortlock: And one could run incredibly well between wickets. The other is alleged to never have run at all.
Marty Sadlier: Yes.
Mike Mortlock: So how did you first get started in property, and what was your first investment?
Marty Sadlier: Getting started in property was, we invested in Thornton in New South Wales. And I guess, it’s probably slightly uneducated to a certain degree, in that we bought looking for a place to live. We’d been renting in the area for some time. Probably the smart thing we did was we wanted to live in the area so we rented for a few years. We rented for about four years, two houses, a couple of hundred metres from each other, and then bought a house about 50 metres or thereabouts from our second house that we were renting.
So we knew the area, I think that was probably the only thing that was in our favour in regards to … because when we first bought we weren’t looking at it from an investor’s point of view, and it was before I’d really gained the knowledge on property. It was when I was still on the tall building and just wanted to get a family home. I guess the advice we took from some friends at the time was renting in the area to see if you even like it.
Mike Mortlock: Yep.
Marty Sadlier: And that really worked for us, and that probably was our principal place of residence for some time. I think that’s where we got started, and maybe we’ve been lucky with that. Certainly knew what we wanted because we experienced the area.
Mike Mortlock: Yep, and I think it’s been a pretty good investment for you. For those that don’t know, I guess it’s sort of somewhere between Newcastle and Maitland, heading out towards the wineries in the Hunter Valley. You’ve done pretty well out of that.
Marty Sadlier: Yeah, we have. When we actually bought it, the agent and a little bit of data that were going around at the time was indicating that in the next five years, or between five and ten years, the area would be expecting about a 20 percent growth. I don’t think we’ve necessarily achieved that. We’ve had that property longer than that 5, 10 year mark, but it’s certainly fairly close. It would be in the high ten’s certainly. So it has been a good investment for us.
Mike Mortlock: Awesome. Now let’s get into the nuts and bolts of what you do. I guess for a while I kind of thought, well I won’t get Marty on the podcast because I didn’t want to be that sort of greasy self-promoting sort of thing. We won’t be hammering anyone with any sort of sales about our business or what we do. But I thought it crazy not to get you on as a guest, just because of the expertise that you’ve got.
I mean you’re an accredited expert witness for the Royal Institute of Chartered Surveyors, and there’s not many of those in Australia. Member of the Australian Institute of Quantity Surveyors, and Royal Institute of Chartered Surveyors, and you’ve got a big, long background in everything from shop fitting to building to of course quantity surveying. So how did you actually become a quantity surveyor?
Marty Sadlier: I was building. I was playing football in Sydney, and I had a few injuries. I noticed that I was more sitting at the bottom of the ladder holding it for someone, than being on the top with a nail gun a lot of times because of just injuries and those sort of things. And then as I then finished my apprenticeship and was lucky enough that I was, in about my fourth year or third year I was a leading hand for the particular company I was working for. When I finished my apprenticeship, I was almost like a foreman for those sites. Then, the side promotion to that was, “We’re a bit short staffed in the office. Can you help with some estimating or contracts admin, and those sort of things?” And double checking some tenders coming in from subcontractors.
So my role started to move away from swinging an S-wing on site and wearing a nail belt, to shuffling papers anyway. And it was a fairly good mix, because I could do some of that paperwork, still go out on site, walk around, help out, jump in when needed. I think that was just my organisation, why I was in those positions because there were guys on the site that were certainly more experienced than me and knew a lot more about building, but maybe at the time weren’t thinking of three hours down the line or three days down the line. Looking across and going, “Oh, you know what. That sands getting a bit low. We’re going to need to order more sand.”
So I think it was just some of my … sort of the logistics of looking at things and going you know what, we’re going to need that, we’re going to need … and looking ahead. I think that’s what sort of got me moved into more of an organisation of trades as opposed to just working on the site. And then I really took an interest to it. I started to get involved in pricing up some of our quotes for works. Like for decks, cottage rebuilds and those sort of things.
And I really had an interest in them, I guess. I wanted to progress a little bit further in regards to learning so I decided to go to uni. I didn’t go straight to uni from school. I did my apprenticeship. I sort of had a little bit of thirst for knowledge back then, and wanted to do something else. So, I did my bachelor of construction management, and then started working while I was at uni with a quantity surveying company.
Like most quantity surveyors, I started a career just being an estimator. Getting in there and ripping the quantum’s off the plans, and marking them up. Really just enjoyed it. I love being able to get a big set of plans, and put some music on and work through it.
Mike Mortlock: And I guess seven years ago you were unfortunate enough to bump into myself and have the crazy idea to start MCG. And that brings us to today. With cost planning, or I should say quantity surveying, I guess there’s a little bit more education amongst property investors that quantity surveyors do tax depreciation, I guess. It’s a little bit more of a heavily marketed sort of thing. But, tax depreciation is a relatively new service for quantity surveyors. So what is that you do?
Marty Sadlier: I think tax depreciation is probably on the lips of people because it’s potentially the last service that you would get from a quantity surveyor on a property. The job’s built and it’s now rented. Whereas, when we go back to the very start on a job, the quantity surveying is seeing whether these drawings from a feasibility point of view can even be built for a certain budget. What we do, I guess, some people liken us to the accountants of the building world. Bean counters of bricks, and studs, and noggins.
When we look at the big picture of things, we’re more of a consultant in regard to cost. So we have investors or developers that are looking at wanting to buy a block of land, or an old house, and they want to knock it down and they want to build something. They don’t even know whether they’re going to be able to afford this, whether they’re going to have to get money from a bank, or what that number is going to be. So that’s where a quantity surveyor can help with that. So we would measure up … and it could be a drawing almost drawn on the back of a serviette. Because they haven’t really wanted to go and spend money on full design drawings done by an architect.
Mike Mortlock: Yep.
Marty Sadlier: In the same token, we do a lot of work with architects, because a client will go to an architect and say, “This is my home I want. I have a budget of a million dollars. Can you please draw me something, design me something to that budget.”
Mike Mortlock: Yep.
Marty Sadlier: So an architect doesn’t want to go back to that client, and have got their hopes up and shown them this wonderful design that’s going to cost 1.5 million. Can’t do it. So we get a lot of architects who will send through drawings and say, “Can you please give us a budget on this?”
Mike Mortlock: Yep.
Marty Sadlier: Those sort of … both those services are at the start of a job. There hasn’t been a digger on site, or a bit of rio mesh put down yet. It’s all in regards to let’s cost out a design to see how much it’s going to cost, and if we can afford that do we have to go to a bank or give it some sort of a loan, or we need to save more. Or, let’s redesign it to get it down under budget.
Mike Mortlock: Yep. And I guess there’s different types of reports, depending on what they’re trying to achieve or how sophisticated or far down the line in that development process they are?
Marty Sadlier: Yeah, absolutely. If you were looking at wanting to get a cost plan done on a property that was pretty well now finalised and designed, and you wanted to be comparing some builders’ pricing that was coming in … depending on how you’re going to get that builder’s pricing coming in, you may want some more meat on the bones. So we would do more of a detailed cost plan, where we would be counting toilets and taps and how many actual square metres of wall tiles, and floor tiles, and carpet. So, you can really see where the money is in that budget.
Now, if it is an organised tender, that there is a compliance in regards to how it has to be submitted, the builder might have to break up certain costs against certain trades. That’s a much easier apples and apples comparisons when you’ve got a detailed cost plan done from a quantity surveyor in the same breakup. But if you’re getting a lump sum from a builder that says, “I’m going to build this house for two million dollars for you.” You’re none the wiser to know where that two million dollars is. Is it in the ground? Is it the roof? Is it the specialised glazing that’s going in?
So, by being able to break up that two million dollars into what is going to cost for those individual trades, can help you make some more rational decisions later on in regards to what you may need to compromise on or not.
Mike Mortlock: And that’s a process that you run through with the architects as well, right? Because an architect might build you your dream home and then you realise, well if we change one or two elements we can adjust the cost by hundreds of thousands of dollars perhaps?
Marty Sadlier: Yeah, exactly. And a simple one, maybe just glazing. There might be 400 square metres of glazing in this big house, and that doesn’t want to change because of light and those sort of things. But we can say of that 400 square metres of glazing you’ve got 30 or 40 square metre of bi-fold doors that are much more expensive than say doing some sliding doors, or a couple of fixed panels and a swing door, or what it might be. So there can be a bit of a reconfiguring of even just the exact same square metres of glazing, but different types in different areas.
Mike Mortlock: Yep. Now you mentioned banks before, and I know that banks are one of your biggest clients. Which banks are you working with, and what is it that they engage you to do?
Marty Sadlier: Yes. So we work with quite a few banks of various sizes. So I guess when you look at the big banks, we do a lot of work with Westpac and St. George in New South Wales. And then when you go to Victoria, there’s a bit of a mix there where we also do the Bank of Melvin and Westpac and St. George. And we’ve done reports for ANZ. So, when we talk about a panel QS, or a panel quantity surveyor, a bank will have a panel of quantity surveyors that they have vetted, that suits their criteria. So a developer may go to a bank and say, “I know I need to get a quantity surveyor’s done. Who’s on your panel?” And vice versa. A bank might say, “You need to use a QS. These are the guys that are on our panel.”
So, predominately they’re the banks that we’re working with on the large scale. And then on the small scale, there are smaller … Agility Finance, and Australian Securities Limited. And these smaller patent finance and those sort of things, we do just as much work with … and they just do a little bit more boutique.
Mike Mortlock: Yep. And typically what are they getting you to do for the projects?
Marty Sadlier: So from a bank’s point of view, they want to make sure that what they’re lending for the property is what the property will be built for. They don’t want to fund a job that isn’t going to get the job to completion. And that’s a risk mitigation. They don’t want to fund 500,000 dollars on property that’s going to cost a million dollars to build, because if something goes wrong there’s not enough money to get the job finished up.
Mike Mortlock: Right.
Marty Sadlier: So they’re wanting to make sure that what the criteria the developer or the client wants, the funds are there in pre-approved buckets, so to speak, to get the job finished. And then it goes a bit further in regards to … the bank also wants the quantity surveyor to check the plans, there’s enough accuracy in them in terms of data. They’re not just the plans that are sketched on the back of a serviette. And provide commentary on that. And provide commentary on a builder’s resume. Has he done these sort of jobs before? Has the developer done these jobs before? It might be good and well that a developer is coming to a bank and saying, “I’ve got 30 years of experience in building. I’ve always built shopping centres, and now I want to build residential towers.” There’s a bit of a difference there.
Mike Mortlock: Yeah.
Marty Sadlier: You’re using different trades, different methodologies. The big thing there is they’re looking at getting the quantity surveyor to be their eyes and ears on the documentation that they have thus far, and to provide their opinion on that. And then if it goes through to progress claims and monitoring of funds when it comes to payment for builder’s works, also looking at the insurances are up to date. Mandatory inspections are being completed, and the costs that are being claimed for works being done are relevant to the work being requested for payment.
Mike Mortlock: So, I guess you’ll do your initial checks on the builder themselves, and make sure that you’re recommending that they’re able to complete that project. And of course complete that project for what they think is a reasonable sum, which you’d sort of double check. And then as you mentioned progress claims, so when the development has been given the green light the banks don’t want to just say, “Here’s your ten million dollars, good luck with that.” Because people tend to buy Ferrari’s and go to non-traditional countries I guess.
Marty Sadlier: Yes.
Mike Mortlock: So, how do those progress claims work and how do they differ from, say a residential contract where let’s say you get GJ Gardner or one of those types and they issue … you pay them based on milestones. What’s the difference there?
Marty Sadlier: I guess there’s a couple of parts to that. And that is that there are three main players in the process at that point. There is the funder. There’s the developer. And the builder. Now, in its simplest form there’s going to be a couple of different contracts signed here. There’s going to be a construction contract signed between the developer and the builder, which is going to be the contract or the Bible for the build. With the specifications of what the quality of the finishes and those things are going to be. That’s what’s going to control the site in regard to timings of things and that sort of stuff. And that would break out a payment plan, whether it be the builder’s going to claim on the 25th of the month. And if there’s a late payment there’s a certain percentage that’s owed to them. And that they’re going to be paid for materials in a fixed aside or they’re going to be paid under a milestone, or a staged method.
Mike Mortlock: Yep.
Marty Sadlier: And the other side to that is there would be a contract signed between the developer and the bank or the funder, the financier. And that is the financial agreement of the loan criteria in terms of money. So what interest rate that person’s going to be paying for the borrowing of this particular sum of money.
Mike Mortlock: Yeah.
Marty Sadlier: The issue is that the fine print on those contracts don’t necessarily line up. In a lot of cases the agreement the developer signs with the builder is going to be for, in that instance, a milestone. So when he finishes base stage …. when he’s got all his slabs down … and then the next stage would be frame stage … and when he’s built his timber frames up.
Now, the issue that you would have there is … that the problem is that the developer’s relying on funds coming from another party, so a bank. And that agreement that has been signed is that the bank is going to pass funds to the developer for materials fixed aside. So, you instantly have a bit of an issue there, where the money the developer is getting hold of is only for work being done to site, whereas a builder has signed a contract with the developer saying it’s on a staged process. Now that’s going to have been including a deposit, so there’s five percent that’s already been paid to a builder and no work has been done on the site. That’s not to say that money isn’t being spent wisely. It would be making sure insurance is being placed, and site fencing in the establishment is being done. And paying for deposits for long lead items, windows and etc.
When it comes time to payment, there’s actually nothing done there so the bank isn’t going to want to give that sort of money over. So, they use quantity surveyors to help track that and provide opinions on how that is best managed. It doesn’t always go smoothly, but as long as you get all the parties in a room and you explain the process, I think people are a little more comfortable with it.
Mike Mortlock: Yep. And I was going to ask some of the typical issues that you sort of come across with progress claims. Obviously if a builder’s saying I spent two hundred grand on windows, but they haven’t been arrived and fixed aside there’s going to be a discrepancy with the funds available, and that sort of thing. With residential investors and builders in mind, have you got any advice on how they can structure their contracts around those milestones and maybe some of the cheeky things that builders do to front load the expenses there? And just any important comments that you might have on liquidated damages and time delays and how those sorts of things are managed?
Marty Sadlier: Yeah. I think you’ve got to go to the table with an open mind, and put mindable hats on whether you’re the developer or the builder. Just see where the other side’s coming from. Early in a contract, a builder’s going to propose a staged payment plan, so base-stage, frame-stage. Now, he’s going to front load that, as you said before. It’s not that he’s doing anything untoward at all. It’s that he’s not the bank. So he knows that he’s going to have to … he might 20 percent for base stage, which on a million dollar contract that’s not going to be the total amount of concrete that’s required on the site. It’s going to seem that he’s claiming a lot more for the value of works that’s being done. But he’s also getting some extra money there, so that he can put deposits on long lead items and pay for those windows to be getting manufactured off site. Because he’s going to have to pay for those before they come to site –
Mike Mortlock: So, there’s nothing typically wrong with that in essence. And as long as your bank’s happy with those milestones, they’re going to pay the money anyway?
Marty Sadlier: Well, they may not pay the money anyway. They may pay only for the materials fixed to site, and it may be that the developer’s got to make that shortfall. And that’s where it’s important to understand how that’s broken up. And I think a developer should be … if he was using a quantity surveyor at the start … can have a look at the time of the contract signing, saying, “We don’t really think that 20 percent is a fair amount for base stage. I think it should be closer to 15.”
And the real cost might actually be 10 percent. But there’s then a bit of a compromise there that, “We’re giving you 15. We’re also giving you a bit of float there for long lead items. And you’ll already have a 5 percent deposit, so that should see you in those early stages in good standing.” As opposed to it being 20 percent, plus the five percent for the deposit.
It comes down to exposure, and I guess the bank is looking at it that, we’re funding this job and if we’re going to pay out 25 percent on a milestone, and the building work stops and they don’t get past base stage and the relationship breaks down, there’s not enough money left to finish the job.
Mike Mortlock: Right.
Marty Sadlier: Because we’ve already paid out 25 percent of the … and we’ve only actually got on site 10 percent of that. So, a developer needs to understand why that’s in place. I think where you tend to get more of the issues is when all three parties are on their own in regards to an understanding on that. The bank is quite clear on why they’re releasing money in that way. A developer’s just wanting the builder to get paid, just wants to be able to get his money when he wants it, she wants it. And the builder is wanting to get paid as per the contract otherwise he or she is going to go and build another job somewhere else. But, if you all get on the same page as how this money is going to come, and the timings of that, people can work through it fairly well.
Mike Mortlock: And obviously that doesn’t always go terribly well.
Marty Sadlier: No.
Mike Mortlock: And you do a lot of expert witness … there’ll be a solicitor or a barrister that’s engaging you as an expert on a development project from a costing point of view, and a programming point of view. Typically, what goes wrong, and what’s your role in that side of things?
Marty Sadlier: I think a lot of it is communication. Some of these builds are going for over a year, and certainly big residential unit developments are longer than that. People get tired, and communication breaks down. In a lot of cases, when I do expert witness, you meet up with the parties and they were almost best friends for three quarters of the build but towards the end there are stressors in life that change. You’re also then in bed with the bank with quite a lot of it … from a developer’s point of view, with quite a lot of money. Or if you’re the builder, you could be owed quite a lot of money.
And when you’re getting towards the end, it’s just that increase in stress and the communication tends to slow up a little bit because everyone’s a bit busy. And the problem is it comes down to one party feeling that they either paid too much or one party feeling they haven’t been paid enough. Sometimes the straw that breaks the camel’s back in that regard is the really small one. It may be over something that is a small thing, like the quality of a driveway, or the quality of a paint finish in a room. And it all just breaks down.
What we try and do in that instance is get them in a room and say, “C’mon, look it. It’s no good for anyone at this point. If the builder leaves site or the developer wants the builder gone, it’s going to cost a lot more money to fix this up.” And if you’re the builder, you’re going to miss out on some profit and those sort of things. So try and get people to work through it. It’s better if the person that starts the job finishes it, just with sign offs of services and those sort of things.
Mike Mortlock: Yep.
Marty Sadlier: But it comes down to, in a lot of cases, just trust seems to wane a little bit between the two parties. Sometimes, it’s just some people are … either those parties are a bit worried about being completely honest. And I think if people were more honest in a lot of those situations, it wouldn’t escalate. An example of that would be the builder is going slow on site, and he’s starting to really slow up. The developer would be saying, “C’mon what’s going on? We’re meant to be finished in a month and we’ve still got heaps to go. What’s going on?” And the builder will be like, “Oh yeah, it’s all right.
It’s just been a bit rough the weather,” or what have you. And it’s not. But if the builder potentially said, “You know what, I’ve got another job down the road and it’s hit a real problem at the moment. And I’m using a lot of my resources on there just to get it through.” The developer may not be happy with that, but it’s more of an honest answer as opposed to the builder saying, “You know everything’s okay.” And the developer drives past and there’s no one on site again today. He just feels like there’s not that honesty there, and trust starts to come in.
I think we’ve probably all been in situations of when you lose trust in something you start looking for things. I think sometimes you start seeing things that aren’t there, or they’re blown out of proportion. So I think if there’s a little bit more honesty there between those parties … and I think people, especially developers now, are very busy people outside of this particular build that they’re on. They come past in that fleeting moment, and something’s not where they think it can be and they think the worst.
And I think we all … people see social media and phone and internet, and updates of builders going bust and this and that. So people start to get wary and worried, and then put pressure on each other. Whereas, I think maybe if you’re going to do some of these big developments keep that line of communication open, and have a monthly meeting or a fortnightly meeting. And keep that good communication open of where things are. Maybe not come down on it with a tonne of bricks on being a couple days behind on something. But make it known that, why is that, and get the correct reason.
Mike Mortlock: Hmmmm. I guess that’s sagely advice. But human beings being human beings, you’re still going to have plenty of work with those broken communication lines.
Marty Sadlier: And that’s what people have to understand, is that a builder is a human being that has the life pressures outside of your house that he’s building. Like anyone else, he has kids at schools and this. And same as the developer, they have the same sort of pressures. And money is sometimes … even though you’ve got approval, it can sometimes be slow. Someone thinks they’re not getting paid because the person doesn’t want to pay them, but it just could be in the background there’s a bit of an error with some paperwork. I think you sometimes got to be clear on that.
Mike Mortlock: Your average residential investor or small-scale developer, they might have some exposure to quantity surveyors for renovations. Whether it be just costing those up or new builds. And I know that quantity surveyors are called upon in New South Wales to assess the value of improvements. What’s your role there, and how might people come across a quantity surveyor like yourself?
Marty Sadlier: In New South Wales, a lot of the … it’s sort of mandatory that a quantity surveyor needs to sign off on the construction costs through the Section 94 developer contribution. That’s when a developer is looking at doing a development. There are going to be future residents or people that are going to be moving into that, where it be a house or units. Now there needs to be money put aside to pay for infrastructure work, such as roads and foot paths, and making sure there’s parks and community services in and around these developments. So, you have to pay a developer contribution, which is the Section 94. What was happening early on is a developer didn’t want to have to pay that large fee, [crosstalk 00:32:08] so they would say, “Well, that development’s only going to cost 500 hundred thousand dollars.” Even though it might have been a two million dollar build, because the fee was less.
Mike Mortlock: Yeah.
Marty Sadlier: So, councils were missing out on these monies that they could be using for updating roads and curbs, and putting parks in and this infrastructure. So they made it a mandatory thing that quantity surveyors would need to sign off on the construction costs of this development. It just made it more of a fairer playing field.
Mike Mortlock: Yep.
Marty Sadlier: So we go in and assess what the construction costs will be. We fill in a council form. Every council typically has the same sort of format. It’s very similar. Some have some slight tweaks, and we’ll fill in that form as well as giving a detailed cost plan. What the costs are going to be, and then they can work out the council contributions off that.
Mike Mortlock: Yep.
Marty Sadlier: Now that’s before you’ve even got development approval. So we’re going back to where we’re talking before about at the very start of a job, when you’ve got a developer and an architect that are still sketching stuff on plans. That’s when a quantity surveyor’s being used. That’s not the same across the country. It’s not the same in all the states. It’s mandatory in New South Wales. There’s a few councils in Victoria that are starting to get behind that, and see the merit in that. I figure it’s just a point in time that Victoria follows suit on that, and Queensland.
Mike Mortlock: Yeah. And property investors that own strata titled properties may have had exposure to someone like yourself, but perhaps not even known it because it was engaged through the strata manager or the owner’s corporation. But you do a lot of work with sinking fund estimates. Can you tell us more about your role in those?
Marty Sadlier: Yes. The role the quantity surveyor’s playing there is that there’ll be a sinking fund with that unit entitlement, and that’s to replace materials and items once they’ve reached their life span. It might be a balustrade. So the balustrade is deemed common property on this particular development, and it’s a glass balustrade. It’s going to have a life span. The life span of that balustrade in the current environment that it is, because it’s near the marine environment or not. Let’s say it’s 25 years for the replacement of that balustrade.
What you don’t want as an owner of that unit block is that one day that 25 year mark comes around, and it’s a hundred thousand dollars to replace all the balustrades in the development. And you’ve got a chuck a hand in your pocket for your share of that. So the idea is that money is getting put away each year for that event when it comes up. So we’ll go in and do a sinking fund forecast, where we go and quantify and cost all those common items.
It would be things like carpet and tiles and paint in common lobbies and hallways, or your balcony works if they’re common with the balustrades. The roof if it’s a common roof, and the guttering and downpipes. And we’ll put a price on each of those items and quantify how many lineal metres or square metres of each of those are. And then give an indication of what we believe that lifespan to be. So if it was a downpipe, we might say that it’s got a 30 year lifespan and it would need to be replaced in 30 years. And when it does it’s going to be a certain number, 30 dollars a lineal metre, to replace.
Mike Mortlock: Yep.
Marty Sadlier: So then what people can go, okay that’s going to cost 30 thousand dollars, all those downpipes in 30 years. Let’s start putting money away for it now. So I guess in its simplest form, if it was 30 years and it’s going to cost 30 grand, they’ve got to put a thousand dollars away a year. And of that thousand dollars there are five units. They’ve all got their own different unit entitlement, and they’ll break up that share of that money per year.
Mike Mortlock: Yep.
Marty Sadlier: It’s not necessarily as simple as that math formula we just spoke about, because there are also cost escalations. So, what the gutter might cost, or the downpipe might cost a thousand dollars now but in five years’ time it might be twelve hundred dollars. So we have to add some escalations to that as well. But primarily what we’re doing is we’re saying these are the items that are going to need replacement. These are the years it’s going to need to be replaced, we’re forecasting it’s going to need to be replaced. This is the money it’s going to cost. This is what you should be putting away now, so when that event happens you’ve got the money sitting there.
Mike Mortlock: Yep. I guess that’s a form of insurance for the building, in a way. You’re planning that things will break over time, and you have that money set aside.
Marty Sadlier: Yeah.
Mike Mortlock: Another service I know you do is replacement cost estimates. That’s when … let’s say your house has burned down, or you’ve had flood damage or what have you. Obviously we’re not chipping into our pockets each week just to calculate a percentage so we can rebuild after a certain time. We outsource that to insurance companies. So how is that you help investors with getting those insurances right?
Marty Sadlier: Yeah, so residential investors it’s a bit harder. They tend to be a little bit more cost sensitive. They’re already paying their property managers. They’re already putting some money away for hot water services and all those sort of things, and they don’t want to spend too much money on it. So we tend to do a lot of insurance replacement estimates on commercial developments. But the reasoning and the importance of it is just the same. We’re looking at a residential house. We’re saying to people, “You need … to replace your house, to rebuild your house is going to cost you x.” But that shouldn’t be what you go and insure your property for, because there’s a lot more to just what the costs to rebuild your house is when it comes to insurance.
So what we do … we do up a replacement cost report, and we’ll identify what the replacement cost of that house is. But then we also cost in some other items and say well if it’s going to burn down or it’s going to be flood damaged no one has clicked their fingers and your house has just totally disappeared, and you’re starting fresh on your build, like you were potentially when you first built. You’re going to have to have some costs to remediate the site, to demolish the existing and start again. So we put some money in for that.
And then you’re going to have the cost of site work. So the retaining walls and the gardens, and all these extra things that you’ve been bolting on over the years you’re going to need to replace. It’s not just the house. And then you’re going to have the cost escalations that go along with that. So if we’re saying that you’re going to replace your house today, and it’s going to cost x amount, it’s going to take a few months for the assessment to be done by the insurance company. And another few months to get your house drawn up with an architect and get it through development and planning approvals. And another month or so for a couple of builders to go through the tender process, and give you a price. And maybe a few weeks or a month for a quantity surveyor to be costing it up, and double check that. So suddenly we’re at nine or ten months before we’ve even started to rebuild yet.
So when we’re talking about what the replacement cost will be, we should be looking at well we’re not even going to start building for another year. We’ve got to be sure we’re putting some cost escalation on what it’s going to cost them to rebuild next year. And then there are some other design things that you need to allow for. And then even that, just be wary that if your house burns down you’ll need to go and live somewhere. You just got to be a bit more mindful that not just let’s click our fingers and rebuild this house that we’ve currently got.
Mike Mortlock: Now I know that most people would probably opt to come up with a figure that’s given to them by the insurance company or using their online calculators. Are those figures factored in, and if so, is it accurate enough to use those calculators?
Marty Sadlier: No. The calculators are very broad and they’re meant to be a supportive tool. They’re meant to give you a bit of an overview. You’d really need to get it costed because, the thing is that a cost calculator isn’t going to take into account that you have a sloping site and you need to have a 40-lineal metre by four metre high retaining wall at the back. And it’s not going to be able to just say that what size pool you’ve got. Or that you’ve got a half basketball court down the bottom.
So when you’re looking at the cost of homes, you might have very high-end finishes in your particular home. It may be a weatherboard home looking from the front, and you’ve been able to select on a cost calculator weatherboard 3-bedroom home. But you may have quite extensive fittings inside, and light fittings or technology with C-buses and that kind of thing, which aren’t going to relate to a 4-bedroom weatherboard home single story in a cost calculator.
So I guess if it’s a quite a simple home, there still could be differences. It’s not going again to whether it’s piered or on a slab, or whatever it might be. We always say, spend the couple of dollars. It’s a big investment that you’ve got. You’re quite prepared to buy a home that’s 500 thousand dollars or more, but not spend a couple hundred dollars on getting a cost plan done for insurance.
Mike Mortlock: Yep. And I guess the negative side is that if something happened, you might find yourself exposed and having to cover a shortfall. On the other side of things, you might have to pay a higher premium. But that’s I guess because you were underinsured in the first place, right?
Marty Sadlier: Yeah. And then you hear the horror stories of the figure you had was 80 percent of what the actual cost was, so therefore what the insurance payout’s going to be is 80 percent of that value. And suddenly you’re shorter again on your replacement costs, and those sort of things. So it’s just important to spend the time at the start, as much as it is … go and get a building and pest inspection done. The same should be said for if you’re going to have a property, and you’re going to live in it or you’re going to rent it. Make sure you’ve got the coverage there for it.
Mike Mortlock: Yep. And what is it that you enjoy most about being a quantity surveyor, Marty, if there is anything at all?
Marty Sadlier: I think it … I take it back to when I was building, I think what gets my juices going is the tangible thing. I like to see something physically. I like to build something and see the end result. With quantity surveying I might not be seeing a hammer anymore, but I’m seeing a set of plans come across my desk at sketch level. And we’ve costed that up and that has meant that everyone was happy, and they’re now going to progress to a builder. And then, we do a more detailed cost plan. We then compare three builders’ pricing, and low and behold a builder is selected and signed up. The developer then goes away to the financier and says, “I’m going to need to get some money to build this.” And the financier says, “Well let’s get the QS to do his checks.”
And next thing you know, we’re now working with the builder to make sure he’s got his insurances in place, and the construction certificate or the building permit’s been granted. Suddenly we’re now at a point where someone’s going to actually knock the tree out of a road, or dig a hole on site. So we get out to site and work’s beginning. We then start going out there once a month or more frequently, and assessing what’s being done. The builder’s getting paid, and there might be a bit of a hiccup and we’re able to help out either party to get that sorted. And suddenly there’s a house built. And suddenly there’s occupation, and the bank’s been paid out. And they’re great, and they’re happy.
And we now do a depreciation schedule, because the developer is now rented it. We’ve seen this come from a set of plans that were pretty simple, where they didn’t even know what the roof was going to be built of. We were making assumptions at the start, to going in and doing the inspection with tenant’s furniture in there. Someone’s living.
Mike Mortlock: Yep.
Marty Sadlier: The beauty about that for me, is I get to see something go from start to finish, whereas there are a lot of jobs out there that you never see the product. You never get to feel the product, or never get to see it evolve or grow or change. And little things that pop up that you need solving along the way, just those little challenges that every job’s different than. I think that’s what I enjoy about it.
Mike Mortlock: Yeah, and I’ve enjoyed looking at some of the photos of your progress claims and doing some of the inspections on your behalf to see a block of dirt turn into something rather fantastic. So yeah, it’s interesting. A lot of people don’t get to see that. You just sort of find the end product and buy it. But yeah, you’ve got that behind-the-scenes inside look at how it all comes together.
Marty Sadlier: Yeah, and someone will see a wall and say, “That’s a nice wall.” I’ll see that wall and go, “Yeah, but I can remember six months ago that to do that there was a major issue. And it was this and that.” And the wall means so much more. And that’s hard to explain to people.
Mike Mortlock: Yeah. So Marty, if people have got some questions for you, or wanted to have a chat about anything estimating related, how do they get in touch with you?
Marty Sadlier: Without getting too sales-pitchy, just jump on the website. More details are on there. So if you get on the MCG QS website, all the details are there. Emails and phone numbers. And for the cost of an email, the cost of a phone call, it’s a pretty cheap chat. And I’m always up for one.
Mike Mortlock: And your phone calls are free too, right?
Marty Sadlier: Yeah, yeah. They can just … we’re not charging for that. And I spend most of my days on the phone to people who are just wanting to pick the brain and have a chat about stuff. We’ll end up winning the job or working with them on other developments, or that development, and it all started from, “Hey, if I was doing a house what should I be looking at, or what have you?” It’s just getting around people that are like-minded or have a little bit more knowledge in certain areas, and helping you out.
Mike Mortlock: Awesome. Now Marty, just before you go. There’s one piece of advice you could impart to property investors, what would that be?
Marty Sadlier: I love these questions, because being born in the 70’s and a product of 80’s ads, whenever I get asked this question I always go back to the Pizza Hut ads with Dougie delivering the pizzas. Be good to your mother.
But, I think from a quantity surveying point of view is just know your numbers. I think it’s the same as if you’re going to go and buy a car. You walk in and you get a price on a car. More than likely you jump on the computer and you double check that against somewhere else, or other car selling websites, or other dealerships. And you shop around, and you play against each other.
The same has to be said about property. That if you’re going to do a bathroom renovation, you don’t just ring up someone and the first price you get is what you go with. Know your numbers. Know what the breakup is. If someone’s not prepared to give you the breakup of it, for me they’re probably not the person to use. If I want to build a house, I don’t want a builder to say it’s going to be two hundred thousand dollars. I want to know where, because if it increases for whatever reason with a variation later on, how do you know what that variation is because it was never itemised. Then I have to provide a full bill of qualities. But just know your numbers. Know what you’re investing in.
Mike Mortlock: Awesome advice. Be good to your mother, and know your numbers. Love your work, Marty.
Marty Sadlier: Yeah.
Mike Mortlock: Thanks for coming on Geared for Growth.
Marty Sadlier: Yeah, thanks for having me.
Mike Mortlock: Cheers.