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That was it. Like usual a minor problem that stopped me in my tracks. Thanks a bunch.
Now on to make a collision mesh.

Yesterday I tried to figure out lods. I made a cargo container with two lod models. I made my own and exported the model.
I tested the model in-game and in the model viewer. The original model disappears, but none of the lod models pop in. Moving the camera in Max displays the lods.
Original:

LOD1:

I opened the lod.smds in Max and both were fine.
The qc has the following:
$lod 23
{
replacemodel "cargo_container" "cargo_container_LOD_1.smd"
}
$lod 45
{
replacemodel "cargo_container" "cargo_container_LOD_2.smd"
}

I'm about to go to sleep. I'm gonna try to figure it out tomorrow. I don't know what went wrong. Any tips or suggestions would be greatly appreciated. Thanks
I also made 4 different diffuse textures. Did a quick search for multiple skins on the forums and found the answer. Successfully exported the skins :D  Neat way of doing it with the sub-object material.

Screenshots from model viewer. No problems exporting and compiling this time :D
This time I learned about phong shaders. Played around with the settings, this is what I have at the moment.
   "$phong" "1"
   "$phongexponent" "15"
   "$phongboost" "1"
   "$phongfresnelranges" "[1 75 0]"
   "$rimlight" "1"
   "$rimlightexponent" "2"
   "$rimlightboost" "0.2"
I was disappointed when I opened the model inside a test room and it looked completely different. It seems lights are important, but I'm a hammer noob ><

Nice!
Now I know what that blank is.

I've played a bunch of source mods. Mods got me into 3d modeling and now I'm looking to contribute and this tool makes that possible :). I'm looking forward to using some of the other options I didn't use for this like the LOD creation options.

QuoteUsually to compile normal maps you should turn off "nice" filtering, also a good thing to do for decals if you get "halos" around them as you move away.

Thanks for the info K@rt. Is this "nice" filtering setting available in WW, I couldn't find filtering settings. I also got VTFEdit, it helped me figure out the compression issue. Once I opened the VTFs the bad compression became apparent. After trying various compressions in VTFEdit I found nocompress to be similar if not equal to BGRA8888 in size and quality.

This was my first time doing anything with source or any other engine. After spending a bunch of time reading tutorials I found Wallworm and I immediately thanked the universe. I might have quit without it lol

It took me a while to get the spec to work. The texture page helped me out, but I wasn't able to get the specular to work as an alpha on the diffuse.
The in-game console kept saying the following when I typed "mat_specular 0/1":
"material keypad/keypad_diffuse512 has a normal map and $basealphaenvmapmask.  Must use $normalmapalphaenvmapmask to get specular." It also took me a while to find out that I needed "$envmap" "env_cubemap" for the specular to display.
I wanted to avoid putting it on the normal because DXT5 didn't work well with normal maps so I didn't compress the normal. I figured that it would be more efficient to add the specular on the diffuse with DXT5 compression.
I then added a self illumination map on the diffuse alpha so it all worked out.
I first tried a separate self illumination map, but that didn't work for me. "$selfillumtexture" "keypad\keypad_illumination" didn't seem to do anything. Adding it to the diffuse worked fine.
According to this page https://developer.valvesoftware.com/wiki/$selfillum $selfillumtexture doesn't work in source 2007. I used source 2009 Ep2 and it didn't work.

I learned a few things and was successful in importing my first prop. Thank you Wallworm for the awesome tools. Next time will be super easy.