Sunday, June 2, 2019

The $500,000 Machine

Suppose you owned a machine that was worth a half-million dollars.  How would you take care of it?

Suppose you owned an expensive piece of machinery.  It could be a fancy car or a yacht or maybe one of those bus motorhomes.  Or maybe it is a piece of machinery like my cabinet-maker friend has, that can cut through ten sheets of wood at a time, using laser precision, all computer controlled down to the thousands of an inch.  Stuff like that represents a huge investment, and you'd take care of such equipment, because you spent a lot of money on it - and you want to maintain its value.

Well, maybe you already own such a machine - maybe one worth $250,000 or maybe a million dollars.   What am I talking about? 

Your house.

Yes, as I noted before, a home is not "the American dream" but a machine for living in.  And it is a complex machine, having a number of disparate parts and mechanisms, all of which are in a constant state of wearing out, sometimes failing in a catastrophic manner.  Pipes can break and flood your house.   Wiring can short and burn the place to the ground.   Yes, insurance helps, but make sure you have the right kind - you may not think you need flood insurance in the desert, but they get floods there, and if your house is flooded by a plumbing leak, your homeowner's may not cover it.

Also, insurance doesn't cover slow-moving hazards.   You find out you have termites and the garage has to be rebuilt - that isn't covered by many policies.   Keeping termites at bay is deemed maintenance, not a natural disaster.   Yea, we spent a pile on termite treatment - and annual updates as well.   But not having it - in the South - can be disastrous.  Similarly, your insurance company may send out an inspector, and if you have a tree hanging over your house, ready to fall, they may cancel your policy or at the very least insist you take the tree down first.   So you can't just forget about your obligations to this very expensive machine and let it fall down around you.  You have to keep it up.

Of course, the price spread between a "well- maintained" house and a "maintained" house, and a "run down" house in your neighborhood may be only 20-30% or so.   For example, houses in our neighborhood sell for about $450,000 or so.   A real run-down example may sell in the 300's, or in one recent special case, $250,000.   A stellar home might top a half-million, but it is very rare.   But there is a hundred grand spread between houses that are "serviceable" and those that are in top shape.  And maybe another hundred between "serviceable" and "ready to be gutted".

There is also the aspect of selling.  Houses in good shape sell quickly - often in a week or less. Houses needing work or updating can stay on the market for months, even years, as one low-ball offer after another is rejected.  It is only then that the owner decides to plow money into a house, installing new appliances, carpet, and paint - all things they themselves could not enjoy while living there - just to sell it.   The new owner rips all that out to install new things to their own tastes.  Yes, I have seen it happen - brand-new appliances with the EPA stickers still on them, sitting at the curb.  A good buy for wily people such as myself.

I noted before that in the appliance business, the design life (the lifetime that Engineers design for) is about 15 years.  With cars, about the same.  By the way, every product ever made, has a design life.   As in anything else (life of people, for example) there is a bell-curve (no relation) distribution.  Some things fail early on, while others last seemingly forever.  But the vast majority fail right smack dab in the middle of this curve, and for appliances and cars and whatnot, that is about 15 years.    So, plan on these replacements and repairs so you are not taken by surprise.   It kills me when I read some "oh woe is me!" story in the press about a single Mom in credit card debt because of an "unexpected appliance repair" or car repair or whatnot, when in fact, they should have expected such things to occur, particularly since the appliance in question was 20 years old, and the car of similar vintage.

What is worse is that often the people profiled in the story try to "fix" end-of-life appliances, and end up throwing more money at a used washing machine or car than it is worth.   One service call from an appliance technician is equal to nearly 1/4 or 1/2 the cost of replacing an appliance.   Even with Trump's washing machine tariffs, you can still buy a washer for under $500 (the same washer being only $299 a few years ago!).    Most service techs charge $75 to $100 just to drive to your house.  Parts and labor are extra.

Back in the day, I used to buy used GE (or associated brand) washers and dryers for $200 the pair (or less) and run them for a few years.  Once they started leaking or malfunctioning, off to the curb they went, and I looked in the Pennysaver (the Craigslist of that era) for a new pair.  In the metropolitan DC area, there was always someone almost throwing away good appliances on a daily basis.   Where we live now, in rural Georgia, people don't get rid of appliances until they are utterly wrung out.

But the point is, even if you bottom-feed for used appliances, spending money repairing them is often a foolish waste of money, unless you are handy and can fix such things yourself.   Most people can't.  And if you have to hire someone to do the repairs, often the cost of repair exceeds the cost of the appliance.

Our air conditioner is leaking.   Now, I've been able to nurse air conditioners along for years, in my previous life.   But even then, eventually they need to be replaced.   You can only patch and bandage for so long.  I repaired the microwave, and it cost me nothing, other than my time.  But experience tells me that this repair will last maybe two or three years, tops, before the whole thing needs to be replaced.   Everything has an end game.  It would not have been worthwhile spending $100 on a service call and another $100 for a new handle and faceplate - on a microwave worth $500 at most (and some sell for as little as $99).

And that is the problem right there.  Towards the end of an appliance's life (and that includes cars) repairs are needed.  At first, it seems like a no-brainer to spend a few hundred or a few thousand on repairs.   After all, that appliance or car cost a lot, new, right?   But the resale value on that item might be close to nothing.    Is it worth spending $1200 or more putting new tires on a car worth $4500 on a good day?   Pretty soon, even minor repairs exceed resale value, and that's about when it is time to cash it in.

To fix the leak in the air conditioner, I would have to buy a new coil.  A new coil, even on eBay, would run about $1200.  With labor, which involves disassembling a major portion of the air handler, evacuating the system, removing the old coil, installing the new one, pumping down the system, charging it and leak-checking it, it would easily cost over $2000 - possibly more.

A whole new A/C system, including air handler, A-coil, resistive heat coil, compressor and condenser and new refrigerant lines, installed, can be had for $5600 or less.   Which is a better bargain?  To some, it seems that the $2000 "patch" is a cheaper.  But since the system is about 15 years old, it is only a matter of time before something else breaks - such as the condenser coil, which has been sitting outside in the salt air, buried half the year in acidic pine needles.   What could possibly go wrong with that?

Sadly, people on the lower end of the financial spectrum take the patch approach, because they have no money in savings and their credit card is maxed out.  The A/C company offers to finance, of course, but folks whose credit is shot often don't qualify.   So they throw money away, patching an older system, and within a few months or years, have to pay more to patch yet again.   They end up spending more trying to fix end-of-life equipment than it would cost to simply replace.

Then there is the overall transaction cost to consider.   You own this $500,000 machine called a house.   Someday, you might like to sell it.   Actually, some day you will.  How does it appear to the prospective buyer when you say, "The A/C system was completely replaced five years ago with all-new equipment!" versus "Well, the system is 20 years old, but it has a new coil!"?   The former adds value to the home and makes it easier to sell.  The latter tells of band-aid approaches to maintenance and also speaks volumes about how the other systems in the house are faring.

In terms of cash-flow, the "patch" approach may seem less expensive, but in terms of overall cost, the overhaul is a better deal.  Patching together old appliances and systems adds nothing to the value of the home - and arguably decreases its value.   Replacing the HVAC system doesn't add much to the value of the home - maybe 50 cents on the dollar.   But on the other hand, that 50 cents represents the approximate spread between the patch price and the replace price.  In other words, in terms of overall cost, replacing the system ends up being about the same price as patching, with the bonus being improved reliability.

And by the way, as a prospective buyer, you should look at these things as well, which is why a home inspection is a good idea for novice buyers.   A house may look stunning to you, but it may turn out to need a lot of new stuff in a few short years.   Old appliances, old HVAC, old plumbing, old electric, old roof, and so on and so forth, spell trouble.   Our old Pacific-Electric panel was deemed a fire hazard, even though it "worked" fine.   We were fortunate in that the insurance company never inspected the house and demanded its replacement (as has happened to some neighbors of ours).   If we had to sell the house today (or a decade from now) a home inspection would spike that panel.  So, it made sense to replace it, even though it was "working" - why wait until the fire trucks come or your homeowner's insurance is cancelled to act?

When you see cracks in the driveway (our next project) or sidewalk, you have ask yourself, what else did the homeowner neglect?   It is like looking at a used car and seeing coffee stains on the upholstery and an ashtray overflowing with cigarette butts.  You don't have to even ask to know what the oil change history is like.   A house that looks poorly maintained probably is.

But again, it is this $500,000 machine - a machine so expensive that you should keep it polished and waxed and in good shape at all times.   You never want to be in a situation where maybe you have to sell, and the house has a litany of repairs that are needed - repairs that you put off.  when that happens, you are over a barrel, with a house that is hard to sell, that won't command a very high price in the marketplace as a result.

A reader takes me to task over this, claiming they spent $3000 repairing an old air conditioner, and it worked for years after that.   And again, due to the bell-curve distribution of failure rates, this is possible.  Not probable, but possible.   You can gamble that such a repair will be all that is needed to keep some piece of equipment running - and win.  And in the old days, when A/C units had copper coils - with copper fins, no less - and air handler motors had oil cups so they could be lubricated (as opposed to "sealed for life" bearings we have today) such equipment could be nursed along for quite a long time.   Yes, they don't make them like they used to - in some regards.

But of course, adjusting for inflation, they were a lot more expensive back then.  And today, appliances are designed for increased efficiency and lowest possible installed cost.   Copper coils and copper fins have given way to aluminum coils with "spiny fins" that look like Christmas tinsel.  Cheap to make and actually more efficient, due to the increased surface area.  But more inclined to corrode, particularly in salt-water environments, and nearly impossible to clean, except with foaming cleansing agents (a pressure-washer can blow the fins clean off!).  So the idea you can "patch" together a modern appliance like you can with one from the 1960's or 1970's is flawed.   Old refrigerators from the 1950's are still running, today.   Modern appliances are not made to be repaired much, as the cost of repairs is so high (because Americans all demand high wages) and the cost of new appliances (made in Mexico, no doubt) is low.

Of course, this stupid tariff war could change all that.    I am not sure it will be "progress" to pay two or three times the amount for appliances.   All I can say is, I am glad I snagged a new washer and dryer before the tariffs went into effect, and glad I snagged a new A/C unit before the Mexican tariffs went into effect as well.   Because if we go down this road, the $5600 A/C unit will be $10,000 before long.....

UPDATE:  About two hours after I wrote this, the air conditioner stopped working entirely.  I jumper the contactor and I was able to force it to run, but I think it is running out of charge as the circuit board on the condenser unit is flashing a green light and I believe the low pressure sensor has tripped. In other words, it's running out of refrigerant. I'm hoping you'll come tomorrow or Tuesday and replace the whole system.