Solo Builder Indemnification Fund

[riorider]

And let's not only focus on estate issues. More than one luthier has gone "missing" for a period of time (several years in one case) and some just have gotten so far behind in their finances that they'd have to build for free for a year to catch up.

And that's just the customer risk side.

As I said earlier, maybe there's a way that this helps the luther's risk as well. I don't know - I presume most of you luthiers handle your own risk (customer stiffing you in some way).

I did a quick survey of the first 10 or so AGF sponsor luthiers' webpages - their ordering policies.

Most have a $500 or so non-refundable deposit; a few had 25% to 35% required.

Most had an additional payment when the build starts; some more than others.

All (I believe) had a full payment before final shipment.

None said anything about what if the luthier could not complete the build for any reason. Many had a 3 day review / return policy on the completed guitar; none spoke to a partially completed build.

I know of two situations where the final payment was sent, and yet the guitar was not delivered nor completed, and communications went dark for some period(s) of time. Different luthiers, well known at the time.

I know in the last handful of years of three luthiers who died while still in their "productive years", meaning no one would have expected their deaths.

Those are the examples of cases that would seem to need some kind of escrow or other method to warrant to the customer that their funds could be returned if the luthier was unable to complete the build.

Luthiers may choose to handle this in different ways. Some put the monies into their own escrow accounts. Not all are financially able to do that (how many of us in the general population have 6 months salary set aside in liquid savings?).

Possibly one way to handle this would be to have it stated in the warranty and policies page on your website. It could be as easy as "I have an arrangement with two other luthiers, and if I am incapacitated for any reason they have agreed to finish my committed work. Your payments are safe with me."

I admit this is a "sticky" topic, and I do not wish to impact negatively the luthiers I know as friends. But the issue arises and potentially impacts the luthier business as a whole when one "problem" occurs. Most of us don't post when we do have a problem. So this was hopefully one way to bring up the discussion without having to post a "where's Fred" or "beware of sending any money to Alice" kind of thing.

Personally, my apologies to any luthiers who I've inadvertently maligned by bringing this up. My intentions were much the opposite.

Best,

Phil

[HHP]

Perhaps each builder should post a standardized risk factor in their agreements. Something like......

Age of builder + Backlog in years - average life expectancy - lifestyle factor = assumed customer risk.

[Haans]

Originally Posted by Howard Klepper

Most custom builders have 50% of the total price in hand between starting and completing the guitar. If the buyer should die, or lose his or her job, or become disabled and no longer able to complete the transaction, or lose his money in one of the securities markets, the builder is stuck with a custom guitar.

The builder cannot just turn around and sell it. This is a slow, difficult market with inconsistent demand. And it is a custom product, even if it doesn't have some personalized inlay or other feature unique to the buyer. Finding a buyer make take years, even at a discounted price, with a lot of time spend dealing with marketing the guitar (advertising? taking it to shows instead of another guitar?). Discounting is problematic; if people see a new guitar being sold at half price, they may think this is what the builder could really be selling new guitars for. The fine print about someone else having paid for half of it will be missed by many who just see the price. Meanwhile the out-of-work original buyer or the family of that buyer will be asking for it to be sold at full retail, so they can get some money back, and indeed the builder is in most cases legally obligated to mitigate their loss by selling for as much as possible and making a refund. A demand for all but the $500 non-refundable deposit may come from the lawyer for the buyer's family, especially if the builder (like most) gave a guaranty of satisfaction--the lawyer will argue that this is just the same as if the buyer didn't like it; the builder only gets to keep $500. The builder has to deal with this potential can of worms.

Given what a mess it is for a builder when a buyer cannot complete the transaction, I want to propose that people who order custom guitars form an association and purchase insurance that in case of death, disability, bankruptcy, bad investments, job loss, or just changing their mind (the last may be hard to price actuarially) will pay the guitar maker the full balance of the price (with shipping). Then the family will have a guitar by which to remember the deceased, or the newly impoverished buyer will have his dream guitar after all.

I'm sure custom guitar buyers will understand that builders take a big risk when working for them, and will want to insure that builders don't have to worry about it. Life is risky enough already.

Eloquently put Howard. Ya'll may have noticed, I'm not eloquent.
Most builders have insurance, but can't afford what you "buyers" propose...so, go buy your own. Better yet, build your own instruments.

[Bruce Sexauer]

Originally Posted by riorider

All (I believe) had a full payment before final shipment.


Phil

See my previous post.

[Tim McKnight]

Let me start off saying that this discussion makes my stomach rumble just reading it. It seems like there are always a few sour apples or bad experiences in every profession so we have to be careful that we don’t allow them to taint the entire basket. As I read these posts the underlying context seems as though there is a problem with the way all luthiers conduct their business. I am not sure that we want this discussion to go there.

Still, I also feel a sense of compassion for those players who have lost sums of money or encountered a bad experience with an individual builder and hence the OP need to air this topic in an open discussion, seeking some form of resolution of protection for the buyer. It’s a worthwhile topic to discuss and learn from. A guild may be a viable vehicle but it will require a salary to manage and operate and who is going to absorb that cost?

I have a general understanding of corporate capital expenditures used to purchasing assets on a time based scheduled payment plan. Large corporations can leverage their purchasing power and spread their payments over time but you can bet they also have a legal team on retainer and enough financial power to defend themselves in a court room should the outcome not meet the exact and specific expectations clearly documented on the accompanying purchase order. Unfortunately most individual buyers don’t have a team of lawyers (neither do builders the last time I checked) on their payroll so it’s quite likely [BOTH] may incur some amount of risk when dealing with a small one or two person shop.

Since it’s likely that none of us (builders) conduct our business the exact same way, looking forward it may be worthwhile to do some homework before handing over your deposit or structured payments. This would give you a more thorough understanding of what risk your money will be placed in. Is it a gamble you are willing to take? My dad always said “if you can’t afford to lose your money then you shouldn’t be gambling in the first place”. If a buyer is concerned about losing their deposit or progressive payments, then perhaps that buyer should look at other builders who have terms that are more to their liking. If they simply HAVE TO HAVE a guitar from that builder then they will have to accept their terms and conditions, period.

The last time I checked none of us have the assurance of tomorrow. Not only is the buyer taking a risk… so is the builder… We don’t know if the buyer will be around either when it’s time to deliver the guitar. We had one instance of someone placing a deposit, the guitar was built and ready to be delivered and we never heard from them again. We can only assume they passed away. Attempts were made to contact the family without any success. Sure we can sell the guitar down the road and recoup our labor costs but it’s even more work for us when it’s a custom job, with unique inlay like ALICE is inlayed down the fingerboard! That really limits the number of potential buyers out there!

A few years ago, we learned a great deal from watching the events unfold after the untimely death of a fellow builder. People may agree or disagree with how they conducted their business but that was up to them and not for me to judge. We have been blessed with an abundance of orders and are currently maintaining a 3 year waiting list. We recently closed our waiting list and have stopped accepting any more deposits. Mary and I are both healthy and happy but have decided we are not accepting any more orders until at least 2014 so we can hopefully catch up a bit. Working 90 hour weeks has a way of taking its toll on you after a while…

We may have a unique way of conducting our business at McKnight Guitars but it’s one that has worked successfully for us and our customers. It’s our personal viewpoint that even though we accept and hold a security deposit, that deposit money isn’t viewed as our money until after the customer has received the guitar and is 110% satisfied with it. Then and only then will we transfer the deposit money from one bank holding account into our savings account. In the event of our death our heirs have been instructed to return any deposits that we have held in a separate bank account to its rightful owners.

[Larry Pattis]

Thank you, Howard, and to all the builders taking the time to think and to comment here, whether or not you feel you are/were eloquent (or otherwise)!

[riorider]

Originally Posted by Bruce Sexauer

See my previous post.

Got it, Bruce. You are unusual in that policy; perhaps unique. In that policy, you are taking risk, and part of my discussion (perhaps not anyone else's here) is how to mitigate the risk on both sides. Some kind of escrow would do that - if the guitar got delivered and the customer scampered, the money would still be paid to you.

If you (all - luthiers) have adequate orders, and have not been impacted by the Kevin-Trevor-Brock (mentioning only those which I remember to have been discussed on various AGF threads) stories, then this is a useless and probably insulting discussion.

If you think that those stories - or your potential customers' perceptions of the luthier business in general due to those stories - have or could impact you, this was intended to be a discussion for ideas on what could be done to address that kind of issue. There are risks on both sides; mentioning only the risk from the customer point of view is half the discussion as is mentioning only the risk from the luthier point of view.

Again, apologies if I've scattered the scat too widely. I for one am one who would think more carefully about commissioning from someone I don't know because of my own experiences as well as those I've read about. So, if I'm a "typical" luthier customer, your business could be impacted. If you take steps to address the problem maybe you'll sell more instruments. If you don't need to sell more, great. No issue.

Phil

[Rod True]

Tim, thank you very much for you inclusion in this discussion. I think you've said everything that I would want to say.

Custom ordering anything is risky......but the reward is usually well worth the risk.

This topic has really caused me to think weather or not I want to get into the custom order relm (I'm still leaning that way) but more so, it's really caused me to re-think my policy page on the upcoming website. Details about retainers, deposits, should I become disabled or die and maybe a contact incase of emergency (like you can't get hold of me over a 1 week period or something) might be a good idea too.

Everyone wants to trust people is my ultimate belief (I know I sure do) and for the most part, I think the majority of people are trustworthy, but sometimes life has a way of happening to us all and even the best intensioned folks have a hard time rationalizing things when the floods pounding down on them...

None of this is easy, to say the least. On either side of the coin.

[gitnoob]

Seems like guitar builders should be pretty similar to construction contractors. Those guys need to be licensed and bonded in my state. A $12,000 surety bond costs under $300.

[cpabolting]

Originally Posted by Larry Pattis

I'm not sure what you think is being proven with this very short list.

Here's what I see:

1) Three builders that have a firm $2.5K (or more) deposit. Not "quite a few", but three. Stating "quite a few" and then producing this very-short list shows me that one cannot back-up this statement with fact.

Of course, "quite a few" can be interpreted many ways, I suppose. I personally would want to see a list of a few dozen builders that all have a set fee of the $2.5K deposit for this kind of statement to be taken seriously.

2) Another three with floating deposits, none of which are near $2.5K as a base guitar. Assuming specialty woods or options that raise the deposit amount, it's still a list of six living builders.

Not significant, and I could list far more builders that are in the $500-$1,000 range for deposits. Don't bother asking me to do it, however.

3) Kevin Gallagher's situation is unique, as far as I have seen, and it's clear that one cannot fully discuss the issues surrounding his financial problems on the AGF. His deposit-requirement (60%) was indeed extreme, but not relevant in any way. People lost large sums of money, but no one living is asking for that kind of money.

If someone asked me for that kind of money as a deposit, I wouldn't have an internet discussion about it, I would ask for a contract. If a contract wasn't produced, I would run the other direction, quickly.


That said, I have a will, my wife has a will, and both documents address not only our own individual deaths, but what is to happen if we die (or are incapacitated) simultaneously.

I don't take this matter lightly, but I also don't see a rampant issue in the building-community.

I see a discussion-forum topic that is simply a morsel of raw meat.

Of course discount the list the I put up. I fully expected you would. The fact is that with the floating deposits on a practical level, there are six builders by your own admission that require substantial deposits, and those deposits are are seriously at risk.

The fact is simple. It has happened off and on over the years and will continue to happen. And there should be some reasonable plan in place to have that covered in the case it happens to someone else. If it has happened to one person, that is one person too many.

You can say all you want in your will, but that does not mean it happens that way. People have LLC's and corporations, and those entities are protected at the end of the day. You can talk about your contract all you want. I have one with Kevin Gallagher and at the end of the day... that and 99 cents can get me a Big Mac. I was not one of the huge financial losers because I was able to recover my Brazilian rosewood but I was financially harmed to quite a few thousand dollars and there were many hurt worse than me.

And reading onto Howard's comments, which I can appreciate his perspective, I think as others have pointed out that having a guitar and some cash beats having no money and no guitar, by a large margin in fact. I think if someone wants something that highly customized, that is justification for a larger deposit. I think one very logical solution is to pay the deposit via credit charge and have the guitar buyer pay the credit card fee. That way he does have some protection in the case something goes wrong, which thank God for me with the Calton Case debacle, I was able to get credited back for an order of three cases I placed that never came into being despite promises.

[CraigRyder]

Originally Posted by gitnoob

Seems like guitar builders should be pretty similar to construction contractors. Those guys need to be licensed and bonded in my state. A $12,000 surety bond costs under $300.

We need a bureaucracy involved. That way we can be certain to get a guitar with no strings attached.

I think CPA is trying to draft policy based on an untypical experience. Frankly, I don't think the proposed solution would have helped him anyway.

[cpabolting]

Originally Posted by Tim McKnight

We may have a unique way of conducting our business at McKnight Guitars but it’s one that has worked successfully for us and our customers. It’s our personal viewpoint that even though we accept and hold a security deposit, that deposit money isn’t viewed as our money until after the customer has received the guitar and is 110% satisfied with it. Then and only then will we transfer the deposit money from one bank holding account into our savings account. In the event of our death our heirs have been instructed to return any deposits that we have held in a separate bank account to its rightful owners.

Tim McKnight (collectively Tim and Mary) by the way...the way he explained it and presented it... is very reflective of who he is as a human being, businessman, and just all around good people. I have no doubt he handles it with the utmost integrity.

I don't think there is anything wrong with having a reasonable mechanism of protecting customer deposits.

[cpabolting]

Originally Posted by CraigRyder

We need a bureaucracy involved. That way we can be certain to get a guitar with no strings attached.

I think CPA is trying to draft policy based on an untypical experience. Frankly, I don't think the proposed solution would have helped him anyway.

I am sure it has happened to 10 people.... that is not atypical. I am not drafting any policy, just suggesting that a customer's deposits should be protected. Do you not think one should have their deposit protected?

[cpabolting]

Originally Posted by Larry Pattis

Has anyone asked to see a list of these untimely issues?

I'm always curious when someone makes a statement like this...it's not quite like quoting a percentage, but we've all seen the comment that XX% (insert any number here) of statistics are made-up on the spot.

I can't quantify what a "spate" is, nor can I attribute any direct number to "quite a few" (CPA/Keith's posts)...but I would sure love to see the examples given, rather than vague allusions...and Keith's examples actually only highlight that what he stated was incorrect, from where I sit.

I knew Gallagher died having spent a bunch of deposit-money. I know of another widely-discussed (here on the AGF) luthier who disappeared for a year or two, who has recently re-surfaced (and is apparently making-good on his builds for the customers).

I can't think of anything recent (within, say, 5 years or more) besides these two somewhat-public examples that have had these issues...so please help me out here.

What factual/statistically-relevant information am I missing?

I think if it happened to much of anyone, that should be all the example you need to see that a customer's deposit should be reasonably protected. As long as orders keep coming (i.e. Bernie Madoff), it keeps all the balls in the air. The second there is a hitch in the order cycle (inflow of cash), it all comes crashing down.

[cpabolting]

Originally Posted by Bruce Sexauer

If you are going to run me up a flagpole, I feel I have to clarify.

I call my customer commitment a retainer, not a deposit. While it does apply to eventual cost of the guitar it represent a commitment and is therefore non-refundable should the commitment be broken by the buyer. Of course I can change my mind if circumstances suggest it. The retainer is less than 10% of my base price. In return I commit a time AND a price structure, as well as a willingness to apply my time to the project.

If the customer wants specific wood that I own, not always the case, this removes it from the market. Since I have purchased it at considerable cost for the purpose of attracting customers, it is reasonable to pass this cost on to the buyer as it's value to me is gone. This cost IS refundable.

By the time I start to build all details of the guitar must be established, and therefore the price of the whole is known. I require 50% of this price in my hands before I will actually cut wood. All retainer/upgrade payments apply to this 50%, which I call a deposit. The remaining 50% is due on (not before) delivery.

All of this information is on my website. Bottom line; I do not qualify as requiring $2500 or 60% for a place in my queue, not that it matters. It is $1000 or 9.52%, and it is not because the money makes a difference in the long run, it is because I need commitment for my business to be viable.

Please be more careful, Keith, misrepresenting others can do damage, and we are talking about real people here.

Per your web site:
To secure a place in my queue, and to be confident that I will remember everything you tell me, I will accept a $1000 retainer from you, which will be applied against the cost of the instrument we will then collaborate on the design of. The retainer locks in the current price structure. The retainer is non-refundable as it is a statement of your commitment.
--------------------------------------------------------------------------------

In the event that you choose a special set of wood, or another irreplaceable piece of my special offerings, you will remit 50% of its price in advance to secure it for your instrument. This is refundable should you choose another route in the creative process, but the refund will not be guaranteed to happen until someone else has agreed to purchase the material in question.


So unless I am misunderstanding, a $4000 upgrade via Brazilian set I pick out would require a $2000 payment plus the $1000 deposit. Nobody is running anyone up a flagpole, I just calculated it according to your web site. And when you are ready to cut wood, you require to have 50% of the total cost. It is "unprotected" at that point in time absent anything you do to legally escrow it. It is a risk that's all and at some point in time, as it will be for all of us, you will pass away and probably have some unfinished guitars. And so it will happen to someone.