Purchasing Multi-Families Due Diligence with Mike O’Rourke and Mike Deluca
Mike Deluca: I’m going to be very brief. I mean basically when I was talking to Rich, the whole topic of this conversation was pretty much how not to screw up when you’re buying a property too badly and cost yourself a lot of money in the process. Usually what I like to do when I’m working with someone, who wants to buy an investment property and I don't know you, is I ask you to come into my office and we’re going to have a meeting. We’re going to talk about a lot of different things.
The way I’ll work with that new buyer is very different than the way I would work with an experienced, sophisticated buyer that I know and have worked with a long time like Michael. He and I are already in sync on what he’s looking for, what he wants to buy. We work together all the time. I look for properties for Michael every day, and when I see something, I call him.
Rich Merlino: What are like the top two or three things it’s critical to consider when going property shopping?
Mike Deluca: Well, if I’ve had that meeting with you and I know the type of properties you’re looking for, the type of properties I’m going to show you are things I know you want to buy.
Rich Merlino: How do you know what I want to buy?
Mike Deluca: Because I’ve already met with you.
Rich Merlino: But tell me.
Mike Deluca: Okay, I’ll give you an example. I’ve sat down and I’ve met with you, and I have asked you a lot of questions about what your investment profile is, what type of return on investment do you want to have, what kind of cashflow you want to have, what are your investment goals. Why are you buying this multifamily? Do you want 2 units, 3 units, 4 units, 10 units, 20 units? Are you going to live there? Is it just an investment for you?
How are you going to manage that particular property? For example, are you going to self-manage it? Are you going to hire a management company? If you’re going to self-manage it, there are lot of considerations. For example, if you’re going to self-manage and you live in Boston, I have news for you: that’s probably not going to work out really well for you, coming from Boston here to Worcester every time you want to try to get that apartment rented, so I’m asking you a lot of questions about how you want to manage your businesses, how long you’re going to hold on to those properties, a lot of different things from that standpoint of what your investment profile is.
What type of property do you want to buy? Like Michael, sometimes the worse it is, the better it is. Other buyers, they want a 3-family or a 4-family that’s in decent shape because maybe their financing is going to drive that. What type of financing are they going to get? Are they a cash buyer? Are they doing an FHA loan, for example?
There’s a lot of different considerations that I take into account when I’m having that initial meeting with that buyer. By the way -
Rich Merlino: You might call up Mike with a property. He might say, “It’s not damaged enough.” He’s like, “Listen. Could you do me a favor and light that on fire for a couple of hours first and then it’s more up my alley?”
Mike Deluca: Michael would not say that ever [laughter]. But in Michael’s case, for example, he’s a very sophisticated investor. He’s been doing it a long time. He knows exactly what he’s looking for. He knows exactly where he wants properties. He knows what he’s going to do with them when he buys them. Other people are starting from square 1. They don't have a clue. Then a lot of people are in between. Maybe they bought their first building, or their second, or third building.
Rich Merlino: Those questions you mentioned, those are important considerations for people who are just starting out but everybody in this room isn’t just starting out but even intermediate buyers. Somebody who’s already been in the business for a while, they should review those things.
Mike Deluca: I personally believe that even if you own a couple of buildings, have done it for a while, you really want to work with a real estate agent who does this full time for a living and does it all the time because a real estate agent can really bring value to the table and not just a real estate agent, a realtor. There is a difference, which I won’t get into tonight because I don't have time. But -
Rich Merlino: What if I don’t want to pay a commission, Mike?
Mike Deluca: Well, the bottom line is a good realtor will put more money in your pocket even after paying commission, and remember if you’re on the buy side of the deal, the seller is paying the commission, not you.
Rich Merlino: I like that.
Mike Deluca: There is no reason as a buyer why you wouldn’t want to have a buyer’s agent working for you taking you out into the marketplace, knowledgeable about the marketplace, knows what stuff is selling for, knows how to negotiate. I do this every day, you don’t. It’s no different than not hiring a plumber and watch what happens to a lot of us sometimes when we don’t hire the plumber.
Audience: [unintelligible 0:05:16].
Mike Deluca: Exactly, or going into court without a lawyer. I’m in the camp of when I go to housing court because I own apartment buildings myself, I manage them myself here in Worcester, when I go to housing court, I’m in the camp of, I always bring a lawyer with me. I think I know a lot, but once in a while, you get bit, so it’s always good to have your attorney there. You can ask me another question, so go ahead [laughter].
Rich Merlino: No, I want to get Mike O’Rourke involved here, so when you’re talking about some of those initial questions, what would some of those answers be fit for you, Mike? Just to give everybody an example of what one style of shopping is.
Mike O’Rourke: Well, when I call Mike or Mike sends me an email and says there is such and such a property, most of them I know already. I know the areas where they are. If I don’t, I take a ride by. I call them, let them know if I’m interested or not. The price means a lot to me. I don’t want to spend a lot of money to buy a property. I try to buy as low as I can and sometimes I go into a house with Mike and I say, “It’s worth $140,000.”
Mike says, “Maybe you would have go up to $145,000 or $150,000 before you get it.”
We’d negotiate it ourselves and that’s what we’d figure out and then I bid on it at that price. One of the other things when I buy it, I buy it as is, so I don't need a fire inspection or nothing. I buy it. We go home, inspections or something, cash buyer. That means a lot. If you buy cash, cash buyer, you get a better price and sometimes you can buy faster through a bank or foreclosure, whatever. You can get it in 30 days. Those are some of the things.
I’ve been out of the country and checking my emails and Mike sent me a house. Mike went to look at it, and Mike sent me back. We talked on the phone and Mike put in a bid for me, and I didn’t even see it. Mike knows my price range, and like I said we negotiate. Sometimes myself and Mike before, we put in a purchase to sales on the price.
Then like, “You know, Mike, I looked at a house there one time for $159,000.”
Mike said, “Go to $160,000.” I went to $160,000, I got the building. I asked the other realtor why did you take my bid because it was the highest?”
He says, “There’s 1 or 2 higher, but you offered $160,000 and you had cash.” It was a closed deal. Thirty days, he was done with the building and now I’m happy and I got it. Then Mike put it back on the market, and I made a few more bucks.
Rich Merlino: Nice.
Mike Deluca: When you’re a cash buyer, it’s a totally different deal than when you’ve got to get a mortgage. If you’re a sophisticated investor, basically the bottom-line is, all you care about is am I getting a clear title, particularly if the property is vacant. If the property is occupied, you’ve got all the concerns associated with tenants that you’ve got to take into account, things to watch out for like who are the tenants? Do they have leases? Are they tenants at will? When you walk through the property, you can usually seize up the tenants. Let’s face it, if their apartment is a pig sty and they’re giving you a hard time trying to get into the apartment, I got news for you: you’re not going to want them as a tenant.
Rich Merlino: This is actually going to be part of an ongoing series of things that relate to this. One of our topics is actually going to be – I’m glad you brought that up. It’s going to be what to do with the tenants in advance of buying the building, how to find out what you need to find out, and how to use that information.
Does anybody have any questions from these guys so far? I know we’re just scratching the surface of it.
Mike Deluca: Yeah. We’re really just scratching the surface. I can talk about this for hours and hours.
Rich Merlino: All right, I’ll make my way to the back.
Mike Deluca: Do your thing.
Rich Merlino: You want to keep going and going.
Mike Deluca: Yeah. You’re going back. There’s a fellow back there that had a question.
Mike O’Rourke: One thing when I go into a building, I look to see if there’s young kids and stuff. Then the question is, is there a lead paint certificates? I go into a building, there’s young kids in the apartment or something. I check and see when I walk through. Are there young kids in the apartment? If there’s young kids, I ask to see if there’s lead paint certs if I have tenants living in the building. Then if not, then that works on the price, too, because I don’t want to buy something that’s not lead-free if there’s young kids in it.
Mike Deluca: One of the things we haven’t even talked about is for someone who doesn’t know buildings, the whole topic of home inspection. Most people need to get a home inspector. A lot of money is won or lost based of the home inspection, based on what’s going on in the basement of that building or on the roof of that building. That’s a whole different world onto itself, so when you go and look at a building, like when I look at a building, for example, I’m telling my buyer the good and the bad, based on what I can see and based on my experience. In the case like Mike, we don’t usually do a home inspection but I work with lots of other buyers that will do home inspections. We got a question back there.
Male Audience 1: Yeah, hi. I go online at these auction sites.
Mike Deluca: Yeah.
Male Audience 1: It always says put your bid in. When you’re looking at the information on the property, it really has like something about the title, but it doesn’t have anything that really applies to the title. They want you to buy it as is without really knowing whether the title is clear and you said you got to have something with a clear title. Is there such a law here in Massachusetts that requires a seller to have a clear title?
Mike Deluca: Not that I’m aware of.
Male Audience 1: So-
Mike Deluca: But you as the buyer, you want to buy a property with clear title; otherwise, you get in a whole different world and the gal sitting behind you is the one can answer all those questions.
Male Audience 1: All right, thank you.
Rich Merlino: You had mentioned home inspections. I’m heading up front. George has a question. By knowing what to look for in a property, not that you’re going to be as thorough as a home inspector but with the experience and the things that you guys are going to teach us the next time you come back about how to walk through a property, some of the things that you look for, you can use those as negotiation points a lot faster than another buyer who has to wait 3 or 4 or 5 days to bring a home inspector out. Isn’t that true?
Mike O’Rourke: Yes.
Mike Deluca: That’s true. one of the things that you got to keep in mind when you’re negotiating, everything in a negotiation, everything in an offer has value – the price, the size of your deposit, when can you close, are you a cash buyer? Are you getting a mortgage? Are you going to have to kick tenants out? Are you taking the property as is and all you care about is clear title?
A lot of those and a lot of other factors, those things have a lot to do with for example whether your offer will get accepted or rejected, whether you end up in a bidding war. Prices of multi-families in the City of Worcester have been going up for a number of years. There’s not that much inventory out there of multis, and a lot of them that are out there, some of them are in pretty tough shape, but it all depends.
Male Audience 2: Of the many auctions that I’ve attended, I found the auctioneer will give you a breakdown – whether the title is clear, what’s sold for water, what’s sold for taxes. Sometimes he will tell you if the building is in need of repair, so --
Mike Deluca: On the topic of auctions, most of the time when there’s an auction for a property whether it’s a single family, or multi, or anything, the bank buys it back. Once in a while they’ll actually sell it to somebody at the auction, but most of the time all they’re doing is to get rid of the owner, get rid of any mortgages that are in second position, maybe some other liens and things like that, so they can take control of the property. Then what they’re going to do is they’re going to hire a real estate agent and put the house back on the market.
Mike O’Rourke: What Mike was talking out back, he’s talking about when you see these signs up, auction, and you buy it on the computer, you have no control if the title is good or bad. You have no one telling you. You are putting your money up and you’re buying it. You got to do your homework to see if the title is good.
Male Audience 2: There you go.
Mike O’Rourke: If you don’t do your homework, you’re out of luck.
Audience: Fail [unintelligible 0:13:38]
Mike O’Rourke: Yeah.
Mike Deluca: If you’re really interested in that property, oftentimes what you can do is, to be honest with you, you can hire a title attorney, spend a little bit of money if you really want to go after that property and figure out what’s going on with the title upfront.
Rich Merlino: Does anybody else find it ironic that we’ve done nothing but talk about titles for the last 5 minutes when that was the second -
Mike Deluca: It’s intimately involved with the -
Rich Merlino: It’s very important.
Mike O’Rourke: It’s the most important thing.
Mike Deluca: Purchase of the price. If you don't have a clear title, you have big problems on your hands, and it’s probably going to cost you some money.
Male Audience 3: I have a feedback on that title problem. When you put up your offer and you run that auction, you don't have a lot of money on the table and over time, you’ll figure out whether the title is good before you actually take the final title. Your attorney will go after it and make sure that you’re getting a good title. In the worst-case scenario, you might only have $4,000, $5,000, $10,000 on the line and I’ve never seen a bank want to take that money from you and give you like some seriously defective title.
Mike O’Rourke: This is an auction property you’re talking about?
Male Audience 3: Yeah, auction.com.
Mike O’Rourke: You’re not even talking to them. You put it on the computer.
Male Audience 3: I’m talking about auction.com.
Mike O’Rourke: Right.
Male Audience 3: Hubzu, any number of these other auction companies, none of them. I had a Fannie Mae situation where one of the things that comes up in title is whether the property is actually on the lot that they’re selling you.
Male Audience 3: You laugh but that’s an important thing to know and whether there’s any encroachments and things. There was a part of it that wasn’t on the property and Fannie Mae didn’t require me to buy it. They gave me my money back.
Mike Deluca: They found out there was an issue, so they just gave you your money back.
Male Audience 3: Yeah, so -
Mike Deluca: Those online auction sites oftentimes they’re like circuses. It’s crazy.
Mike O’Rourke: But just be smart enough to check on it, too.
Male Audience 3: But don’t be fearful of them. Some of the best deals are on those sites.
Mike O’Rourke: But if you wait to buy it and then you find out a problem, which you did, and you try to take it to land court, and then you got to track down who’s the bank and who owned it before and you can go a year, a couple of years playing around, you can’t sell it. You bought a building and the bank won’t give you any money, so even if you use your own money, you can’t refinance it or anything. They don’t even want to talk to you until you get a deed.
Male Audience 4: Don’t close a bad title.
Mike O’Rourke: Right.
Mike Deluca: Right.
Male Audience 4: When the bid was [unintelligible 0:16:01]
Rich Merlino: Does that answer your question?
Mike O’Rourke: But it’s going to tie your $10,000 or $15,000 up for 2 years.
Rich Merlino: We are going to continue the title discussion when we have the title attorney. I’m very glad that everybody is interested in this topic all of a sudden, but we’re going to wrap up this.
Male Audience 5: Williams & Williams, that auction site, keep in mind that’s not really an auction site. They’re just collecting bids. You got to watch what the fine print says there. It’s binding upon the bidder, not upon the seller.
Rich Merlino: Wow!
Mike Deluca: A lot of times what happens if they don’t get the price that they want, they just throw it back up and they just start it all over again.
Mike O’Rourke: I like to see it and touch it and then I’ll buy it.
Rich Merlino: That’s a good tip. Wow! We’ve had
Mike O’Rourke: This is not LOB now, you just mail away and get [0:16:46]. You’re spending a big investment.
Rich Merlino: [laughter] One second. All right, I think we have time for one more question. I’m going to make my way over here. All right, this is a good one, right, Bill?
Bill: Yes. There was recently an auction on a property and I wanted to find out what transpired. I went to the registry of deeds. I couldn’t find anything on it. How long do you have to wait to get the information and what is the best way to get it?
Mike Deluca: I mean all the information on the registry of deeds is public knowledge. Anyone in this room can go on a computer, anyone in this room with a smartphone could go right now and look up any property and what’s been recorded on it. If you couldn’t find anything on it, it’s because that deal never closed. It never became public record because until it becomes public record, you’re not going to know about it, so for whatever reason that deal didn’t come together and who knows what they did. They probably put it back on the market.
Mike O’Rourke: Most time, 30 days is kind of the –
Mike Deluca: Yeah.
Mike O’Rourke: Amount of time before it goes. If it’s not going to go, give it 30 days and then check it again.
Mike Deluca: If it’s a cash deal, you should be able to close it pretty quick because all you’re doing with cash deal, clean title, your attorney should be able to get it done pretty quick.
Male Audience 6: This is a great start. I’d love to see you guys come back with possibly a checklist from like roof to foundation of some of the issues that have jumped out in the past that from your experience we could leverage and learn from.
Mike O’Rourke: Give Rich a list. Anybody send Rich a list and he can follow it to us and we’ll go through it. One thing is I’m a contractor. I’m a licensed contractor. I pull my own permits, my permits for my roof. I don’t do them. I have people do them but I pull on my own permits. If you’re putting a roof on your house, I’m there to watch you. If you’re fixing my foundation, I’m there to watch you. It’s my money, so I’m looking out for myself. I have nobody else to answer to. That’s one thing.
Rich Merlino: That’s why. You’re a contractor. You’ve bought hundreds of properties, that’s why we want to plagiarize what you do and turn it into our own checklist [laughter].
Mike O’Rourke: Be as nice as you can to the inspectors because let me tell you, if you get them on the bad side, anybody has more than one property even my own. Pick and gloat and get 100 violations, no problem! But you got to be nice to them and they will be nice to you, and they’ll work with you. That’s the main thing. Say you’re in housing court, if you’re nice to the mediators and the judge, she’s nice to you.
Rich Merlino: What a great note to end that on: be nice to everybody.
Mike Deluca: Yeah.
Rich Merlino: Let’s hear it for Mike and Mike [applause]. This is to be continued.