Tag: insurance

The Future of Real Estate Transactions – Engineering Inspections

According to Realtor.com, the average amount of time to close on a house is 50 days after listing. By contrast, houses sold by auction are instantaneous. In both cases, several weeks of preparation are required, but the closing process itself is drastically simplified by an Engineering Pre-listing Inspection (EPLI).

What if we could adapt the speed, fairness, and predictability of the Real Estate auction process to the scale and security of the conventional Real Estate market? This article will discuss how an EPLI can significantly increase the liquidity of 140 million of Americans’ most valuable asset while saving billion of dollars in wasted time and unnecessary labor.

 

We all know the drill.  

First, the homeowner decides to sell their property. After a bit of paint and a power wash, the property still has some deficiencies. But everyone wants a quick sale.  After all, a stale listing can lose appeal, and agents need to turn the property as quickly as possible –  not only for their commissions, but also for their reputation. In addition, the owners may need to transition between homes as quickly as possible without incurring double mortgage payments.  There is a lot on the line when timing a property sale.

With fingers crossed, the property goes on the market staged for a quick sale. The first offer comes quickly and is accepted – pending inspection. After a few days the inspector arrives and spots some rotten wood under a window or a few cracks in the foundation. This scares the first buyer away, and sometimes the home must be pulled off the market until repairs can be assessed and corrected.

When the second offer comes in, the  last inspection report belongs to the last buyer, not the owner – so a new inspection report is ordered. This time a different inspector finds a few more cracks and recommends that that a professional engineer is consulted. Any engineering deficiencies must now be acknowledged per real estate disclosure laws.

Days pass as everyone now scrambles to meet the new timeline, negotiate concessions, develop scope of work, get contractor ROMs, etc.  Few things are more expensive than trying to save money.

 

The Cost of eliminating “Seller Bias”.

The reason that the buyer must purchase the inspection report is to eliminate the possibility of seller bias. That means that there may be some nuanced physical deficiency that the seller is not aware of, or does not think is worth mentioning, or may try to intentionally hide in order to defraud the market into paying more than the property is actually worth.  Obviously, it is important to catch the bad guys, but what is the true cost of “seller bias” and is there some way we can assure the physical integrity of a real estate asset in a more efficient manner than buyer driven inspections?

 

How do people buy property at auctions?

Thousands of properties are sold every day at auctions. All the buyers have their financing set up, they have their insurance set up, titles have been searched, permits have been sealed. Everything is prepared beforehand so that everyone has the exact same information as everyone else about the transaction – the good, the bad, and the ugly – because when the gavel falls, the deal is done.

The most critical component of the property auction is an unbiased professional engineering inspection of critical systems. The engineer is concerned with the age, materials, and condition of the entire piping system, not so much wether a particular sink drains quickly as a home inspector would note.   The engineer evaluates the structural integrity, plumbing, mold and rot progression, electrical safety, occupant hazards and expected useful life of building components.  The engineering report may include system definitions, estimated maintenance costs, calculations of useful life, and feasibility of alternate use cases for the property.  The EPLI can also determine limitation of use including easements, critical slopes, roof and floor loading limits, etc. These are what the banks and insurance company care about the most, as should the owner.

The engineer can also credibly tout excellent maintenance, expensive upgrades, and additional safety features, and measurable amenities in a credible and unbiased opinion.  Many such communications are currently constrained by professional laws and ethics, except where validated by a Professional Engineer.

 

The Institution of Professional Engineers:

Only 5% of all engineering graduates in the US are able to attain the Professional Engineering designation. A Professional Engineer must pass board exams and pursue continuing education not unlike the bar exam for lawyers. Professional engineers also need to be nominated by other several other PEs would must validate 4-8 years of qualified working experience. After that, Professional engineers are regulated by the PE act where they are held accountable by law for their integrity, competence, and ethical behaviors. A PE can lose their license for committing negligence, incompetence, fraud, or breach of contract.

Due to the strength of the engineering profession, the rules of the auction can be made very clear. Everyone is in consensus that the Licensed Professional Engineering is worthy of public trust, competence, and unbiased assessment of fact. These attributes rank far beyond a simple home inspection.

 

Items that can be provided in an EPLI document may include:

  • Review of critical systems
  • Cost of ownership
  • Fire, flood, tree hazards
  • Validation of improvements
  • Energy calculation
  • Scope of Work
  • Feasibility studies: solar, additions, conversions
  • Impact of easements
  • Structural evaluation
  • Mold, wind, waterproofing, seismic review
  • Permit review
  • Land use regulations
  • Critical slope

These are by no means the only facts that an engineer can validate, but we can be assured that there is always an engineer who can adapt their expertise to any imaginable condition that may present itself in the Real Estate market.

 

How much will an EPLI it cost?

An EPLI will be more expensive than a home inspection report because engineers command higher compensation and carry greater liabilities than a home inspector.   The professional engineering report is also more useful and can be used in many different situations by legal definition.  It can be used as a basis for contractor selection, insurance coverage, or mortgage financing.

The truth is that many different engineering reports may be generated from the same information collected in a single visit by a qualified engineer. The only difference is in the write up, calculations, and validation by peer review.

 

How much will an EPLI save?

Instead, we should look at the cost of not conducting an EPLI. Nobody knows the true value of a home – today’s pricing is based on what the people down the road paid regardless of how well that home was maintained or improved. Mortgage holders and insurance companies absorb the valuation risk at significant cost to the homeowner. Increasingly, homeowners associations emerge to enforce community standards on private property to which each homeowner is levied at tax. Still, at the end of the day, there is little or no objective information included in the sale of a 3 trillion dollar per year US RE market.

 

The 2008 Financial Crisis;

In 2008, the real estate bubble popped. The result was that the theoretical paper value of all properties far exceeded the theoretical market value of all properties. This turned banking balance sheets upside down as they were forced to mark-to-market.

What few people realized that in the absence of true value for physical property – as assessed by a licensed engineer – there is are only theoretical values to work with in the enormous and complicated financial markets.   If only a small percentage of properties had a valid EPLI, this data could be extrapolated onto all properties to establish a nominal true value for real estate. Banks could then “mark-to-value” rather than mark to market. True value must be disclosed to everyone equally; only from there, we can be confident that market forces can do their magic.

 

Conclusion:

The current real estate delivery system is inefficient. Every regulation adds litigation, which increases time, complexity, risk, and cost to the transaction. The Institution of professional engineering is underutilized for the ability to eliminate bias, distrust, fraud, and other conditions that can diminish the value of a property.  The Institution of professional engineering is also greatly under utilized for validating information that could increase the utility, value, and re-sale of a property.

Taken together the Engineering Pre-Listing Inspection suite is a simple and inexpensive way to increase the speed, security, and efficiency of 140 million American’s most important transaction.

What Every Engineer Needs to Know About Bitcoin

engineering-image-17A bitcoin (lowercase b), as a currency, has several flaws that will continue to limit its ability to replace money as we know it.  There are millions of words published on the subject, so I’ll leave it to the reader to assess arguments on both sides.  However, Bitcoin (upper case B) as a “protocol” for the transfer of value is an extremely important innovation that engineers must not ignore.  

The opportunities for the profession are sweeping and vast, but only if we take action and build this ecosystem ourselves – it is so powerful, that others will gladly do it for us.   I will try to explain this opportunity in this short 1125 word article, but please feel free to contact me with in-depth questions.

The Block Chain Protocol

The Bitcoin protocol is a brilliant innovation that cannot be un-invented – it is here to stay and it will appear in many forms long after it sheds the “bitcoin” moniker.   Formally called the Block Chain protocol,  Bitcoin was designed to solve an age old problem of double spending a currency, specifically, a virtual currency.   A currency created on a computer can be easily copied by a computer and thus negates the real productivity that a currency is supposed to represent.   The same is still true for money – paper currency is becoming increasingly complex so that it cannot be easily copied, etc.

Today, there are vast institutions from banks, corporations, a legal system, prison system, and unfathomable volumes of legislation (all imposing respective brokerage fees) acting on the behalf of sanctifying the dollar.  However, volatility in these very institutions is what threatens the value of the dollar and all currencies upon which the World depends for very basic needs.  How well is this working, really?

So, What’s the big deal?

The stakes are high.  To invent a new secure and resilient means to rapidly transmit value can in one fell swoop eliminate the friction of the massive institutions on our economy, while also decreasing the volatility and economic friction imposed on society.   This is the reason behind the media hype, congressional hearings, declarations of nations, billionaire press conferences, etc.  They are all scared to death of the disruptive potential of this little beast.  Unfortunately, bitcoin has fallen victim to many of the same deficiencies that it proposes to correct.  But these will likely be corrected in the next iterations.   

The Train Leaves The Station

The backbone of the Bitcoin protocol is called the Block Chain.  There are now hundreds if not thousands of Block Chains in existence independent of Bitcoin.  Consider the Block Chain like going down to the train station.  At some predetermined time, a train arrives and the doors open.  Everyone piles into the train and after a predetermined amount of time, the doors close.  The corollary is that the doors cannot be opened for a predetermined amount of time and no changes, copies, or corruption can take place within that time stamp, no matter what.  Only when the train reaches the next location, the doors will open. Once the doors close for a second time, they never open again and a new block is formed.  Also, there is no way to retract this process, except by repeating it forward in a reverse transaction.     

The protocol has a few more features that I’ll leave to the reader to research including a public ledger where all transactions are open for everyone to see; and the train gets infinitely long with each new opening.  The transactions are opened and sealed cryptograpically and incentives are in place that compensates exchanges (the station masters) and well as those who solve a cryptographic puzzle that creates and maintains the integrity of the public ledger (miners).  

Smart Contracts

Everyone knows that money and contracts are intimately related.  In fact, money is a contract.  A contract is defined as a meeting of the minds.  As such, where the Block Chain protocol can efficiently transmit “currency”, so too can it transmit contracts.  In fact, it is so effective for articulating contracts that it’s potential to do so far eclipses its ability to replace the existing fiat currencies.  But again, money and contracts are so closely related that even this becomes a grey area – both can exist within the Block Chain.  This is hugely significant.     

So what’s in it for the Engineering profession? 

There is a special type of contract that engineering societies such as the NSPE should have a laser focus.  These are called Oracle Contracts.  For example, a client would retain a contractor to build a structure or machinery.  They would deposit funds into an escrow account managed by “smart contract” in a block chain.  This means that the computer will flip the switches instead of an accountant, banker, or attorney.  At certain points in contract and “oracle” – a third party vetting mechanism – will verify that the conditions or performance of the agreement have been met, then they would flip a switch that releases the funds to the contractor or back to the client (or through a predetermined decision tree), depending on objective observation.  

It’s All About Efficiency

This is efficient for the contractor because they don’t have to worry about getting paid as long as they meet the conditions of the contract. The client does not need to worry about getting ripped off because they are assured that the conditions of their agreement will be met.  The system is efficient because high integrity is rewarded and there is little incentive to cheat which minimizes lawyers,  accountants, social dysfunction, and all manners of corruption in a public ledger that provides extraordinary analytics available for societal learning in the public domain. 

For the vast majority of projects, products, or policies in the United States and the world, a licensed professional engineer and related scientific bodies are the ONLY qualified Oracles that can be deployed to vet an astonishing variety of Smart Contracts.

Smart Contracts can be written for almost any transaction, but it is inherently an intangible transaction since a “meeting of the minds” is the true nature of the value that they articulate.  The implications of an abundant intangible economy vs. a scarce tangible economy are vast.  Silicon Valley is pumping millions of dollars into virtual currency start-ups like Ripple Labs while companies such as Ethereum  promise to make smart contracts on public ledger block chains as easy to build as dragging and dropping puzzle pieces into a web page.  This is here today – it is not a theory.

Banks, insurance companies, and attorneys will be the first to adopt smart contracts because they stand the most to lose by not doing so.  Meanwhile, engineers in the US and indeed the World are relegated to the contractor sweatshops or smothered under the weight of towering hierarchies. Tragedies such as the Oso landslide and global warming remind us of the absence of engineering oracles advocating for society and our planet.  It is imperative, now, that engineers embrace Block Chain Protocol Technologies and the deployment of Smart Contracts to elevate the profession to the top of the proverbial food chain before someone else does it for us.       

Correcting HOA Maintenance Dysfunction

HOA Horror stories

Here’s How The Problems Start

The board of directors of a homeowner’s association is entrusted by the residents to hire a contractor to perform a complicated reconstruction project. Unfortunately, condominium board members are not very good at writing contracts or issuing requests for proposal or collecting bids. When a contractor is selected, the scope of work is often poorly established. The expectations between the community and the contractor begin to diverge. Soon, a law firm is engaged my some residents to sue the contractor for damages. After a long battle, a settlement is awarded, but it is not enough to fix the problem after expenses are paid.

A Chain Reaction

Fortunately, the contractor in the suit was insured, but this does not cover the personal, professional, and opportunity hardship of defending against the suit. The insurance company also increases the premium for coverage for condo projects. Most good contractors say, “it’s just not worth the trouble.” As the pool of available contractors dries up and the price for reconstruction increases, many condos are forced into deferring maintenance in a distorted market.

Cascading Failures

After a while, a condominium springs a few leaks in their piping system. Each leak results in a relatively small water damage claim. When the insurance company notices several claims in the same building, they begin to fear that a mainline is about to rupture next, and threaten the condominium with cancellation of their policy unless the community replaces the entire system immediately. Now the insurance industry is in a double jeopardy: they force the contractor out of the market and they force the condo out of the market to basically avoid suing themselves.

The Dysfunction Deepens

Banks will not make construction loans to condominiums that are not insured. Likewise, they will not make mortgage loans to buildings that are not insured. The property values plummet and the owners are sent under water. Soon they begin to default on the mortgages that the banks already hold. More maintenance is deferred as owners move out and renters move in. Buildings fall apart and become unsafe. Banks pull out of the market to avoid defaulting on themselves. The wider community suffers.

Correcting HOA Maintenance Dysfunction

Community Engineering Services, PLLC is currently deploying The Value Game to the condominium reconstruction market with remarkable success. The Value Game is a new class of business methods that alters the incentive structure of a distorted market so that everyone acting in their own best interest is in fact acting in the best interest of the community.

Here Is How The Value Game Is Formed

The first thing is to identify the “shared asset” in whose best interest it is for everyone to preserve. In this case, the shared asset is the physical condominium building where preservation is the context about which a community interacts.

If we look at each of the players individually, we see some consistent patterns.

  • It is obviously in the best interest of the residents to have a safe and well-maintained home.
  • It is in the best interest of the contractors to have a successful and profitable interaction with the building.
  • It is in the best interest for the Insurance industry to reduce the risks that they underwrite.
  • It is in the interest of the financial industry to loan money into a viable, organized, and disciplined community.
  • It is in the best interest of the real estate industry to represent strong values and complete insurability of assets.
  • Finally, the broader neighborhood benefits from the presence of a viable condominium community.

Project Management is Incentives Management

It is actually in everyone’s best interest that the others are successful. Once incentives can be re-aligned, the project can be managed in a manner that reinforces the community instead of tearing it apart.

Social Capital has value:

Taken together, project risk is vastly reduced and social capital is vastly increased with a simple realignment of incentives and the proper communication channels appropriately open to all. Community Engineering Services, PLLC can orchestrate a tight project by managing the schedule, the design, contracts, risk, and quality; and therefore the cost.

 

 

Addressing Water System Failures Before They Happen

water failure

In the heyday of the real estate bubble, developers flipped tens of thousands of apartment structures into condominiums – with little regard for the condition of the potable water system. Many of these galvanized steel or early copper systems are rapidly approaching the end of their service life.  Unseen, a small leak can cause thousands of dollars of damage and a ruptured main riser can amount to millions of dollars in claims and severe hardship for the community of homeowners.

Many Factors are involved

While it may be tempting to react to failure statistics, not all water systems are equal. Water chemistry varies substantially across the country, as do workmanship and materials quality – these variables may have a greater influence on mode and consequences of the failure than the age of the system itself.  The least appropriate action may be for the insurer to put the community in an emergency situation.  Poor or rushed Homeowners Associations (HOA) decisions can end up costing everyone far more than a properly replaced system that is well planned.

Insurers must first help the community to resolve to replace their potable water system.  Then, they must encourage the community to have a comprehensive piping condition assessment overseen by a qualified engineering representative. It is essential to determine the stability of the existing system without the threat of policy cancellation. Small leaks may be tolerable as long as the possibility of a large rupture is fairly remote – they are not necessarily related conditions.  Once these probabilities are known, then good decisions regarding a replacement system can be made.

Unfortunately, The HOA board is often left with a daunting task of selecting the right technology that both heals the pain and fits the budget. All pipe renewal solutions have different risks and vulnerabilities and many HOAs can fall for a slick contractor’s peddling inferior products. Potable water is a matter than requires rational analysis.

Piping Materials:

The three main classifications of piping renewal materials on the market include epoxy liner, copper re-pipe, or a variety of plastic products.  All have vulnerabilities and limitations so it is important for the insurer to take a deep hard look at the risks while the HOA can focus on the costs.

Epoxy Pipe Liner

Epoxy pipe liner is a continuous paint-like coating that is blown through an existing pipe system that has been cleaned by an abrasive sandblasting. Epoxy has the advantage of being relatively fast and minimally invasive. The problem with epoxy is there is no certain way to know the pipe is clean on the inside and no certain way to know if the cleaning process compromises the strength of the pipe.  Finally, if we were to test the epoxy, and adhesion is shown to be poor – then what?  There is no way to remove the epoxy and breaking the continuity of the coating breaks the protection. Our research has found that an epoxy failure can very likely happen at the exact place where the pipe is already at its weakest. This does little to mitigate the peril of the multi-million dollar rupture claim.  While we are confident that epoxy may be applied correctly, we are not confident the epoxy would be risk/cost competitive over a far superior re-pipe.

New Copper Re-pipe:

Copper is a very familiar to most people from its use in the penny.  The tarnish that forms on copper actually protects it from corrosion. Under the right conditions, a 50-year service life is a reasonable expectation if that tarnish coat is not disrupted. Copper plumbing has been extensively studied and many professional codes and standards apply to its use. Consequently, many copper failures can be traced directly back as failures to apply these standards; improper design, poor workmanship, aggressive water chemistry, or inferior materials, etc. All are known perils, which may be avoided or mitigated with the assistance of a good technical advisor representing the best interest of the owners.

Cross Linked Polyethylene (PEX)

PEX is a white or colored plastic that is fairly stiff but also quite flexible.  A slightly weaker form is commonly used in plastic milk jugs. PEX has been used in the US for 20-25 years, and has demonstrated an excellent track record in millions of installations.  PEX is easy to install, relatively low cost, and enjoys broad market acceptance.   PEX has two main problems – both of which are avoidable.  Lawsuits have been filed over failures due to ‘dezincification’ of low cost brass fittings.  It is extremely important to avoid some sources of fittings with high zinc composition in alloy.  Lawsuits have also been filed over the leaching of chemical compounds from types A and C PEX – the use of Type B PEX largely eliminates this problem.   Again, a good owner’s representative can help navigate this landscape. Many other plastic piping materials exist, but not without similar controversies.

New Polypropylene Pipe

A newcomer to the pipe materials selection is polypropylene – polypropylene is a common recyclable material with important uses in medical and food grade applications. Polypropylene is a very simple molecule of carbon and hydrogen – nothing bad goes in so nothing bad can leach out.  While new to the US, we have traced its use in Europe to at least 30 years back with a very low failure incident rate. Polypropylene has excellent thermal and acoustic properties and is widely considered the most environmentally friendly piping material available.  Some disadvantages include special fusing irons and specially trained installers are required.

Addressing Water System Failures Before They Happen

Water system renewal can be a confusing process – and certainly not a hands-off affair for the insurer.  A qualified owner’s representative to help navigate the landscape of technologies and contractors who sell them.  When the project is complete, the representative can help petition the underwriter, the financial industry, and the real estate market for adjustments that reflect the value of your renewed new system.   The technical representative can help eliminate engineering and construction risks without interfering with the normal dynamics of a wise and proactive homeowners association.