One on Two Interview with Mike O’Rourke, Mike Deluca and Rich Merlino

Physical Due Diligence

Speakers:

Mike Deluca

Mike O’Rourke

Moderator:

Rich Merlino – Rich

[Start 0:00:00]

Mike Deluca: As a real estate agent, when I am working with someone who is looking to purchase any property but in this case particularly a multifamily, the first thing I do when I get a phone call, “I want to buy a multifamily,” I won’t show them anything until they come into my office and they sit down and they talk to me. If you don’t come into my office, I will not show you a building. I’m doing that for a very specific reason.

In the context of tonight’s conversation, I want to assess the person and their level of expertise. Is this their first multi and they’ve never bought one before in their life and they don’t have a clue? Or they’re an experienced investor like Michael and we just have never worked together before? In the course of that meeting, I’m going to ask those kind of questions and later on when we get out there to do the due diligence portion, I’m going to use that information.

The second important thing that I’m looking to find out from the individual that I’m meeting for the first time, what are their investment goals? What are they trying to do? Are they going to flip the building? Are they going to buy and hold? Let’s leave those major categories because again when go out and we start looking at the condition of the property, depending on what I show them and what they’re going to buy, it’s hinged on what their investment objective is, in a nutshell.

We get through all that. We go out to the property and we’re showing up. We’re driving up to the property for the first time. What am I looking for and what am I pointing out the clients that I’m working with? Because the approach I take is I’m going to show you and I’m going to talk about the good and the bad. If I drive up to the building and I think the roof is good, I say, “The roof looks good.” I’m not a home inspector.

Rich: Wait, hold on. That was very scientific. What do you say if the roof is good?

Mike Deluca: The roof is good.

Rich: Hey, the roof is good.

Mike Deluca: It look a lot of years of expensive real estate training to get to that point.

Mike O’Rourke: You may see him walking down the street with his binoculars [laughter]. Now he knows the scope. He checked it out pretty good.

Mike Deluca: Yes, one of the things in my trunk is a pair of binoculars. Let’s back up. So, I pull up to the property. I’m going to point out the good and the bad. Let’s start at the top and work our way down. It’s a good methodology as any.

First thing, we look at the roof. What kind of roof is it? Asphalt shingles? Slate? Maybe you can see what shape it’s in, what kind of shape those shingles in. Are they peeling? Are you finding it laying on the ground around the property? You got to understand your cost, and that’s the first step when you start to look at these properties. You kind of keep a mental note as you’re walking around.

What kind of shape is the roof in? What’s it made out of? Maybe you can get a feel for how many layers are on it. Maybe the listing sheet from MLS or the owner would have told us how old the roof is.

I’m looking at the chimney. What kind of shape is the chimney in? Is it leaning over? We’ve all seen those. Are the bricks falling out or does it look like it’s in pretty good shape and it’s got a chimney cap on it?

Other things that might be on the roof that you want to pay attention to that could cost you money, old antennas. I was looking at a two-family yesterday on Vernon Hill. It’s got one of these giant old antennas. I got news for you: it’s going to cost you money to make that thing go away.

Working your way down the roof, look at your soffits, look at your fascias. A lot of those are rotted out in a lot of these big multis and depending on how you fix those, replace those will depend on what it’s going to cost you. The approach I’ve been taking for a while now on my own buildings, I’m going with the plastic wood across the board. It’s more money, I never have to go up there again. Done!

Coming down from the fascia and the soffits, I’m looking at what kind of a siding does a property have. Has it got wood-sidings? Vinyl? The old asbestos? We all know what the old asbestos looks like. What kind of shape is it in?

Rich: You don’t want to find out what it smells like. You don’t want it to turn into dust and start inhaling it.

Mike Deluca: That’s right. You’re looking at the windows. What kind of windows are on the property? You work your way down the doors, exterior doors. To do a good exterior door, steel frame, which is what I’ve been doing, trying to increase security in the properties. This is the kind of advice that I give my buyers that I’m working with. The upgrade on a steel frame on a door for an apartment is about $150, special order but it’s $150. It’s going to be a lot harder for someone to kick in that door with a steel frame than if you just got a regular old frame on the door.

[0:05:03]

            Keep working your way down. You’re looking at the foundation. While the buyers [unintelligible 0:05:08] looking at the property, I’m looking at the foundation. Is it leaning? What kind of shape it’s in? Are the bricks falling out? I’m going to look at it again when I get down in the basement. Remember, I’m still on the outside of the house. Now, I’m doing this relatively quickly, but there is a lot of stuff to look at. Now look—

Rich: I’m sorry. Can we go back to the roof for a second?

Mike Deluca: Yes.

Rich: I am terrible at this. How can you tell by looking at a roof if it is only one layer or if it’s already been doubled up?

Mike Deluca: It can be hard to look at it and figure it out unless you get up there. One of the things you can do is when you’re up in the apartments, start looking out the windows like if there is a porch or something like that. You can get a better feel when you’re up close. It’s hard to do it from far away. You might be able to tell with a pair of binoculars, that’s why one of the reasons I have them, but the best thing is you’re going through the building, look out those windows. Look out those porches.

Rich: That’s a good tip. You mentioned that you have binoculars in your car. I bet one of you has a tape measure.

Mike Deluca: I have a tape measure, an electronic one and an old school one. The old school one works better than the damn electric one, okay?

Rich: [laughter] Which one of you has the flathead screwdriver or the icepick or something that you run around to poke the wood?

Mike Deluca: I have all that. Michael has that stuff.

Rich: Yes. Okay. What other tools like that do you have laying in your vehicle at all times?

Mike Deluca: You should see what I have in my vehicle. Big flashlight, multiple big flashlights actually. I have a whole tool bag because you don’t know what you’re going to need. Basic stuff, power drill. I’ve been known to—

Rich: What do you use a drill for when looking at a properties?

Mike Deluca: Sometimes things need to be disconnected.

Rich: Is it a negotiating tactic, whatever you know?

Mike O’Rourke: Sometimes we got to get in.

Mike Deluca: We’ve shown up on occasion.

Rich: Did you said sometimes we have to get in?

Mike Deluca: Sometimes we have to get in.

Rich: Sometimes guys you got to get into a property you don’t own, okay? Ski masks?

Male Audience 1: [crosstalk 0:07:08]

Mike Deluca: I don’t have one of those, although I do have my polarity checker. Let’s see what else do I have. I suppose it’s a high point.

Rich: Okay, all right. Good tip.

Mike O’Rourke: Good flashlight in case you meet somebody inside that don’t supposed to be there.

Rich: Okay, so you can hit them with it?

Mike Deluca: That’s right. A big heavy metal one.

Rich: Got you, D60 batteries.

Mike Deluca: You’re good?

Rich: I’m good [laughter].

Mike Deluca: So let’s back to the property. Remember we’re still on the outside of the house, plus Rich told me we have an hour. Look around the property. What kind of shape is the driveway in? What kind of shape is the lot in? How does it slope? How is it graded? That could be a clue to what’s going on in the basement when we get down there later. What’s going on with trees and bushes and all that stuff?

The two-family that I just mentioned with a big antenna, it also has a pine tree that’s about this big round, that’s from here to Rich are the front of the house. It’s gigantic. I pulled up and I looked at it. I’m like, “That’s got to go.” I already got a guy give me a quote to take it down. Stuff like that, all the stuff costs me money and when you look at to purchase a property like this, you got to seize the stuff up, so you know what your cost is going to be. You got to understand your cost, go in in the door because to be honest with you, you make a lot of your money when you buy it, not when you sell it particularly if you’re selling it let’s say in a relatively short period of time, let’s say 5 years. I talked about the law. I talked about the bushes.

Rich: Talk about grading in the lot. Why is that as important as you like?

Mike Deluca: Ninety-five percent of water control is directing it away from the house, so if you got gutters and they’re getting directed away from the house, if you grade the land away from the house, think about all the water that’s coming off a big building like that when it’s raining. That’s a lot of water coming off those multis. You got to get it away from your house, so it’s not. We all know water causes damage, whether it’s flooding in the basement, right down to bugs—termites, carpenter ants, they love moisture. They would eat up your building.             It’s pretty much it for the outside. I can’t think of anything else. Can you, outside?

Mike O’Rourke: No.

Mike Deluca: Look at your neighbors. Look around you. What kind of shape are the buildings are in around you? What kind of stuff is in the yard? If you see old barrels that maybe have oily looking something floating in them, you might want to investigate that, see what’s going on with that.

Mike O’Rourke: Before you buy it.

Mike Deluca: Before you buy it [laughter].

Rich: Why do I get the feeling that was an important thing to add on if you had the sense? Do you have experience with that?

Mike O’Rourke: You don’t want to be stuck with anything in that barrel. You want the owner that owns it now to get rid of it for you.

[0:10:02]

Mike Deluca: That’s right.

Mike O’Rourke: And you don’t want to know nothing about it.

Rich: [laughter] Did everybody write that down? You don’t want to know nothing about it.

Mike O’Rourke: That’s right.

Mike Deluca: Okay, so now let’s go down to the basement because as much as everybody wants to get into the apartments and see how gorgeous they are, the reality is the basement is where a lot of money is going to be made or lost. You go down the basement. When you’re going down the stairs, you’re going to start getting the vibe is this basement wet, dry. Does it feel wet? Does it feel damp?

What kind of floor does it have? If it’s got a concrete floor, you’re in better shape than if it’s got a dirt floor. By the way, if you’re going into a building when the power is off, be sure you have that flashlight because sometimes that basement might be full of water. Yes. one time, I’m storming around, doing my thing. This was a couple of winters around. This was a three-decker over Grafton Street. I went down the basement and I’m clicking on my flashlight. Of course, I’m by myself. Smart, right? I’m like, “Oh, oh.” You could just see there was like 2 feet of water in this basement that was just slightly frozen over. It was like oh, oh.

Have your flashlight and watch out for water when you’re going down the basement particularly if it’s a vacant building, foreclosure. Maybe it’s a short sell situation. Let’s face it. Some of these buildings haven’t been maintained. You don’t know what’s going on.

When I get into the basement, I’m shining my flashlight all around. I’m looking at all kinds of stuff. I’m starting out with the walls. What are those concrete, or fieldstone, or brick walls doing? Are they straight? Are they leaning? Do they need to be repointed? All that kind of stuff is stuff you want to be thinking about when you’re down in that basement.

Start at the top and work your way down. Look at the beams. I might be poking around with a screwdriver. Usually I’m not doing that, but if you want to look out for termites, look at the ends. Look where the beams are resting on the sill. A lot of times if the building has termites, those ends are where it’s going to be rotted out, and they started working their way in. I can’t tell you how many three-deckers I’ve seen where literally those ends have been eaten off and the building is hanging on the main beam in the center. It’s crazy.

Rich: When you look at the walls in the basement, what do you look for in terms of cracks, vertical cracks, horizontal cracks?

Mike Deluca: I mean you’re looking for the kind of cracks that are displaced. A crack that’s still in alignment isn’t a big deal. It can be repointed, it can be re-fixed, but if you’re starting to see stuff that’s displaced, out of displacement, then you might have a structural issue and you got to start looking at stuff like that.

Rich: Rotted sill plate, structural issues. Like you said, there’s a lot of money to be lost in that basement.

Mike Deluca: Yes, yes. Remember, I’m doing all this stuff as a real estate agent. Just showing the house. I’m not a home inspector. Depending on the level of expertise of the buyer and depending on the type of deal and the marketplace, I may or may not recommend a home inspection. Usually for a buyer that’s just learning, I’m always recommending a home inspection because even though I’m looking for all these stuff. I’m not a home inspector, and I personally have been burned.

Let’s face it, if you’ve been doing this long enough—everybody in this room has been doing this long enough, got burned doing something that they thought they know and it cost them a few bucks, right? You think. So, foundation.

Now let’s start looking at the main, the lally column. What kind of lally columns are they?

Rich: Screw jacks.

Mike Deluca: They can be the temporary screw jacks. The trees are a good one. I love the trees.

Rich: The trees with the bark still on them. Those are the best.

Mike Deluca: I love the trees with the bark still on them and the powder post beetle holes through sitting on the dirt floor. What do you think the odds are that there are some kind of bugs in those things? You’re looking at all that structural thing. What it’s going to cost you to put in new lally. To do it right, you got to dig a footing, you got to put the lally in. You got to do the whole deal. There’s around $300, $350 a pop, depending on who’s doing the work unless you want to do it yourself.

            You’ve looked at most of the structural stuff. You’ve assessed what do you think is going on down there for water. There’s clues for water. If the bottom of the lally columns are all rusty, that basement is getting wet. If the bottom of the furnace is rusty, it’s getting wet. When you look at the electrical box and there’s rust around [unintelligible 0:14:42] under things, that basement is getting some water in it. The issue now is how much.

Rich: Sometimes you can tell that by looking at the water lines.

Mike Deluca: That’s right. That’s right. Okay, so now let’s look at some of the plumbing for a couple of minutes. I haven’t got the—

Mike O’Rourke: It’s in the [unintelligible 0:14:59].

[0:15:00]

Mike Deluca: It is. Where did they get that data [laughter]? Michael wants me to talk about asbestos, so we’ll talk about asbestos for a couple of minutes. I’ll make a general statement. When you’re looking at the pipes, the snowman furnace, the asbestos outside, and I can get into lead paint, and I can get into mold, too. Technically, you don’t know what it is unless you test, and if you don’t test, you technically don’t know. That’s kind of the rules of the game, but in the next breathe, let’s face it, we all know when we go down in one of these basements and we see a snowman, we see this asbestos on the pipes, the white stuff on the pipes, it probably is asbestos.

            My personal opinion is if it’s in good repair and it’s doing its job, don’t make it go away, leave it alone. It works good. If it’s falling off and it’s flaking, okay now you’re going to have to do something about it and it’s very easy so make it go away and it’s basically so much a foot. That’s the bottom-line. Mold is the same way; lead paint is the same way. If you don’t test for lead paint, you don’t know.

Rich: Mike, what do realtors call mold?

Mike O’Rourke: Mold.

Rich: No, you can’t call it that.

Mike Deluca: It’s like mold-like substance. They don’t have the—

Rich: A black mold-like substance because unless it’s tested, you can’t say it’s mold or something else.

Mike Deluca: You don’t actually know. That’s right, and everybody is looking to use the weasel words, so no one gets sued. Okay, it’s true.

Look at the pipes, particularly those old cast-iron pipes have been there for 80 to 100 years. If you start seeing the little stalactites, those little brown stalactites hanging on the bottom where the water has been sitting for so many years, it’s all cooked. Word of advice: do not cheap out and not replace the whole stack going all the way up. I can’t tell you how many times I’ve seen cracked stacks and they got into the rehab and then it’s leaking after they’ve done a lot of work.

Rich: Now hold on a second, Mike. I’ve never heard of a landlord cutting corners or trying to save money.

Mike Deluca: It’s shocking. It’s shocking.

Rich: I don’t even know why you say something like that, but just for fun just explain why. Elaborate on that a little bit.

Mike Deluca: I mean obviously depends on the extent of the renovation you’re doing, but it’s really not that hard to replace that stack. It’s pretty easy to figure out where they are. It’s pretty easy to open up the walls in just that one section if you got somebody who knows what they’re doing. The last thing you want to do is get well into a renovation and finish the apartment or finish the building. Then because you cheap out on maybe $2,000, $3,000, $5,000 worth of plumbing work, you got a big mess in your hands and it’s crazy what you see when you start opening up the walls. It’s amazing.

Rich: Or you have a cast-iron stack that weighs a few tons resting on PVC Y because that’s the only part that you replaced.

Mike Deluca: Yes, yes.

Mike O’Rourke: If you do plumbing in a bathroom, the tub you drained, the toilet, and then you tie it back into the stack, you’ve done most of the work. It’s a lot easier to fix the stack now because it’s open. You take it right up and vent it through the roof. You can tie it in the kitchen, put in extra cleanouts. You know where they are, and if you have a problem down the road, you can get at it.

Rich: Right, so putting in extra clean-outs, how does that save us money in the future?

Mike O’Rourke: You can do it yourself.

Rich: You can do it yourself. Absolutely. You don’t have to call a plumber. You can snake it out yourself if you can access it.

Mike O’Rourke: Right.

Rich: Now is a good spot to break because we’ve covered a lot of stuff. That was really detailed. Thank you.

Mike Deluca: We have to go.

Rich: I know you do. I know. We’re just going to take a break and start to get people’s questions before they forget them because everybody is so focused on filling out their comment cards that they forget their questions, so raise your hand if you have a question. Doug is milling around with the microphone. Of course, Brian has one. Anybody closer to Doug?

Doug: That’s okay.

Mike Deluca: Remember, we’re only in the basement. We didn’t even finished the basement yet.

Brian: More of a comment on those stalactites. Really good idea to follow them along and look on the floor. You’re looking for little drip patterns or spots. Those are dead giveaways that something is coming down.

Mike Deluca: Or the duct tape that the homeowner used [laughter].

Brian: Yes, engineering and structural.

Mike Deluca: Highly technical repairs that some people do.

Brian: Another very subtle clue.

Mike O’Rourke: [unintelligible 0:19:42] if you’re doing all the plumbing, do the stack.

Doug: I opened my wall and found the stack was sealed with packing tape, not even duct tape.

Mike Deluca: Nice.

Rich: [laughter]

Female Audience 1: I actually have those big antennas, and I was just wondering what the price. Any idea around? I mean—

Mike Deluca: You know it’s going to depend on how big, where, how high. I got a handyman, \ guy that I use. I just send them over there and I just tell them to do it and send me the bill, to be honest because we all have people that we’ve worked with over the years. We have our team of people that we like, and we know the guy is going to do a good job and charge you a fair price, so I’m at the point where I do it. It all depends. It really depends.

[0:20:19]

Mike O’Rourke: Really make sure they’re insured, workman’s comp, liability.

Mike Deluca: Yes, all that stuff.

Mike O’Rourke: If they fall off your roof, you are the new owner.

Female Audience 1: Yes, it’s a big house. Okay.

Rich: How many basements have you gone into and seen one of those white petrified spiders?

Mike Deluca: Quite a few.

Rich: Yes. They’re disgusting.

Mike O’Rourke: There are bigger things that those [unintelligible 0:20:44] spiders.

Mike Deluca: There are.

Male Audience 1: What’s your opinion on slate roofs? If you buy a three-decker with a slate roof on it, do you have to budget a certain amount of money to have it replaced or it is going to last forever?

Mike Deluca: I mean my personal opinion, I’m a purist. I think they look great. I like them, so now you got to start eyeballing that thing and try to figure out what kind of shape is it in. Does it require you binoculars? Do you see a lot of missing slates or slates that maybe they’re hanging by one nail? Has the roof been maintained? How about the, I don’t know what the technical term is, but the trim that’s on top of the roof, stuff like that?

Maybe you’ll bring in a roofing guy like Barnard. I always think of them because they seem to be doing slate roofs. Not everyone can do the slate roofs, give you a quote on what it’s going to take to maintain that roof and what can bring it up to speed. If you can save it and it’s not going to be too much money, I mean I like the way it looks myself and it will last a long time, but you got to maintain them. If it’s too far gone, it is what it is. You’re going to end up stripping down to the deck and redoing it.

Doug: Wait. I got the mike.

Rich: Doug is coming right up.

Doug: For the video.

Mike Deluca: Yes, for the video.

Male Audience 2: I tried using Barnard and their cost is exorbitant, right out through the roof.

Rich: [laughter] What was that? The roofing company’s prices are through the roof?

Mike Deluca: They’re the first name that came to mind, but if you like the look and you want to maintain the roof, there’s other guys out there that will do it.

Male Audience 2: I don’t know. I checked around.

Mike O’Rourke: They’re the best in the industry.

Male Audience 2: Yes, they don’t like to do small jobs.

Mike O’Rourke: They come with a Volvo with the ladder on the roof of their car [laughter].

Doug: Other questions? Here we go.

Male Audience 3: What’s the ballpark price for asbestos removal per foot?

Mike Deluca: I don’t know. Michael, do you know that off the top of your head?

Mike O’Rourke: I don’t have a figure.

Mike Deluca: I don’t know the number off the top of my head. I don’t know the number off the top of my head on that one.

Female Audience 2: About $10 to $12.

Mike Deluca: I was thinking $10 but I wasn’t sure. Yes.

Female Audience 2: Yes, and a snowman about like $1,200 to $1,500, $1,200 to $1,500 for a snowman.

Mike Deluca: Yes, that’s about right.

Female Audience 2: And $10 to $12 per foot. Yes. they also air test and everything else including in there.

Mike O’Rourke: Yes. It is a little cheap if you remove all the piping and the snowman whoever does it haven’t taken it all the way.

Doug: I have no idea about these things, $10,000 to $12,000 per foot?

Mike Deluca: No, $10 to $12 a foot.

Female Audience 2: You have.

Male Audience 3: [unintelligible 0:23:36].

Doug: Ten dollars and someone will take the pipe?

Female Audience 2: No [crosstalk 0:23:43].

Doug: A foot.

Male Audience 3: The asbestos.

Doug: A foot of asbestos.

Rich: Well, no. If it’s a 20-foot long pipe, then it’s going to be $200 to take out that 20 foot.

Doug: It seems like a bargain to me.

Male Audience 3: They don’t do the pipe.

Doug: They don’t do. They just do the cleaning.

Mike Deluca: Just cleaning the pipe. Just removing the asbestos from the pipe.

Doug: Lead sounds scarier than asbestos now. All right.

Rich: That actually brings up another follow-up question. You guys didn’t know the answer off the top of your head, but at some point, you’re putting numbers on all of these things that you’re observing and you’re incorporating that into your next steps. When we come back, can we start with that?

Mike Deluca: You can start wherever you want.

Mike O’Rourke: A normal three-decker, $4,500.

Doug: One more question.

Male Audience 4: Do you prefer CPVC, PEX, or copper? Where do you look for?

Mike Deluca: I mean, when I’m looking at the building, I’m down in the basement assessing it, if I know anything about the history of the property and if most of them nowadays because they’re still old, they’re still going to have the copper. One of the things I’m looking for is what leaks again did the building freeze, did the copper get stolen? You all look for that kind of stuff. Nowadays, if I’m doing a building, you’re running PEX. It goes right up the stack, replace all the supply lines.

[0:25:00]

Mike O’Rourke: I’m not saying PEX don’t freeze, but a copper would freeze a lot faster in the past.

Mike Deluca: PEX is a little more forgiving, but yes.

Rich: And copper turns green when it gets wet, so you can identify where it’s had problems.

Male Audience 5: When it’s wet inside [unintelligible 0:00:00] rotting inside.

Rich: And also when it’s rotting away inside, you can tell that from the outside as well? Good tip.

Male Audience 5: [unintelligible 0:25:24]

Rich: We’re not tasting it. Okay, any questions on just what we’ve covered so far before we move on? No? Okay, so moving on.

Mike Deluca: Okay, so don’t forget about the electrical. I want to cover one final thing down the basement. Electrical is big. What kind of shape are those boxes in? Are they breakers? Are they fuses? Usually these old multis, there’s three or four different vintages of wire that’s strung around right in the basement. Don’t forget about knob and tube. It can very easily be in the walls, even if it’s not in the basement or it’s up in the attic, unless you’re doing a total rehab, you’re not going to make that go away. You’re going to have to make it go away as you make individual rooms and that sort of thing.

            Now picking up on what Rich wants me to talk about, you’ve gone through the whole building. If I’m with someone who’s not experienced like Michael because literally Michael and I would walk through the building. What do you think about this? What do you think about that? It would probably be this much to replace that. Blah, blah, blah.

Mike O’Rourke: I ask him the price.

Mike Deluca: Yes, he always asks me first. We got this little [unintelligible 0:26:35] routine going on here. What do you think, Mike? Then I’ll say something like we’re usually in the same range because you got to look at it from the standpoint, getting back to our investment speaker who spoke first, how much are they trying to sell it for, what’s it going to cost me to bring this building up to speed? What can I charge for rents? What’s your investment objective? What’s the payback?

If you’ve done it for a while, you can do that on the back of an envelope and you can come pretty damn close to what it takes. The reality of the situation is for example, if you take a three family that you’re buying in this city that’s a complete mess and you’re paying $150,000 for it, you’re going to be in that building for $200,000 to $250,000 if you got it down to the studs and you do it right. We haven’t even talked about maybe you got to sprinkle the building, maybe you got to put in a dedicated waterline to support a sprinkler system. Maybe you got—

Rich: How much does that cost if you have to excavate the street and put in a separate water line?

Mike Deluca: It depends. It depends.

Mike O’Rourke: Five to seven thousand.

Rich: That’s cheaper than what I heard. I’m going to call you if I ever have to do it.

Mike O’Rourke: About $12,000 to $15,000 to sprinkle the house.

Rich: Wow!

Mike Deluca: It depends on how long. It depends on the street. It depends on when the street was paved. If you’re talking a main drag like Southbridge Street or one of the other main drags and it was paved in the last five years, assuming the city will let you break into the street at all, it’s a whole different ball of wax in which you’re going to have to do to put in that line, but if you have no choice because the sewer line is gone, the water line is gone, the saving grace is you got to put in a new gas line and the gas company will do that, will go with that.

Mike O’Rourke: A sewer line or a water line, you’ll be able to do into a new street, even if it’s a side street, but you got to get permission, a hardship letter. If you had to sprinkle the building, you have to dig a water line in for the building, you have got to get a hardship letter, then you got to have them dig a [unintelligible 0:28:41] you open the street and after you open the street, then you got to infrared read it after you back fill it in, pave it, leave it, let it sit for a while, then you got to hire a company to come in and infrared and seal it all up for the city. They want—

Male Audience 6: [unintelligible 0:28:58]

Mike O’Rourke: Yes.

Mike Deluca: Yes.

Male Audience 6: Are you talking about [unintelligible 0:29:01]?

Mike O’Rourke: Yes.

Rich: Your question was does this apply to a three-family.

Mike O’Rourke: You can’t dig any road. If there’s a new road in the city, you cannot break into it. The only guy that can break into it is Nash [unintelligible 0:29:15] Eversource, but anybody else, you got to have permits and you got to get permission. A sewer or water line broken, they’ll let you dig it and fix it, but then you got to pay and do the infrared and all that.

Male Audience 6: Is this something new, you’re supposed to get the three-family pay for the system?

Mike O’Rourke: What’s new?

Male Audience 6: [crosstalk 0:29:38]

Mike Deluca: It depends on the percentage of renovation you do. At some point, you go over that percentage and the city is going to make you sprinkle it.

Male Audience 6: [unintelligible 0:29:42]

Mike O’Rourke: But before you start rehabbing the building, you should go see the city and tell them want you’re doing and show them. Don’t think you’re going to be smarter than them and say, “I’m only taking out our bathroom,” because when they come in and inspect, they see you gutted the whole house, they’re going to say where’s your sprinklers. If you don’t ask, they’re not going to tell you.

[0:30:06]

Then when they come in, the fire department, everyone comes in and you want to get your occupancy. Where’s the sprinklers? Now you got to put the sprinklers on the outside of the ceiling and they look awful. But at least if you’re going to gut the building, put them in the wall and it’s less that the tenants can play with.

Rich: And it varies from city to city. I’m not sure, but I think Fitchburg, if you just renovate one apartment in a three-decker, you have to sprinkle the whole building. I think—

Mike O’Rourke: Fitchburg wants it done right even if anything.

Rich: Right, okay. Was it here that I heard the story of the person who finished the basement and then the inspector showed up? Does this sound familiar?

Mike O’Rourke: Yes.

Rich: It does? Okay.

Mike O’Rourke: Yes.

Male Audience 6: That was a lot.

Rich: Yes, so people paid like five digits of money to have their basement finished and then the inspector found out about it. He came in and said, “All of this, gone. You got to pull a permit.”

Mike O’Rourke: It’s cheaper to get the permit because if you go to sell the house, and you get a justice coming in, whoever is going to come in and check your house for the buyer, they might go down and check with city hall and say, “Hey, that house is full of bathrooms. What do you got on the card down here?” And you only have two. They could make you take out those other two. I do a lot of receiverships and I take out bathrooms out of cellars and stuff and close them down.

Rich: How much does a permit cost, Mike?

Male Audience 7: Depends on what you’re doing.

Mike Deluca: It depends on what you’re doing.

Mike O’Rourke: It depends on what you’re doing and it starts at about $85, and then it works up from there.

Mike Deluca: Yes.

Mike O’Rourke: A [unintelligible 0:31:40] right now is $85 for the first—

Rich: For the gas stove.

Mike O’Rourke: For the gas stove.

Mike Deluca: Yes. If you’re doing a major renovation, they’re going to charge you so much per thousand on what you’re doing.

Male Audience 6: Small money. I just wanted to clarify that if you’re buying a three-decker, you don’t mean to make it the Taj Mahal, you don’t need a sprinkler system, right?

Mike O’Rourke: If you don’t open the walls, you don’t need a sprinkler system.

Male Audience 6: Okay.

Mike O’Rourke: If you open the walls, you need a sprinkler system.

Male Audience 6: I just wanted that clear.

Mike O’Rourke: Right, but if you open the wall and you start rewiring the house and you’re breaking the walls apart, they come in for the rough inspection. That’s when you got to know when you need a sprinkler.

Male Audience 6: Well, I lucked out. Thank you.

Mike Deluca: Interestingly enough, it’s not as terrible as you might think.

Rich: It sounds terrible.

Mike Deluca: Well, it’s not. I just did a big three-decker. I’m finishing up the project now. This is one of my own buildings. I gutted it down to the studs, I sprinkled it. You get the sprinkler company out there, they know if there’s enough water pressure to require a separate line or not. In this particular case, I got lucky. I didn’t have a separate line. It was $1,500 to sprinkle the whole building . Now that sounds like a lot of money, I get it, $1,500, but this is like a one-shot deal and for a big three-decker, I personally don’t think that’s terrible money.

Rich: All right, so Doug is coming around with a microphone. I guess we got two questions and then we’re going to get on the speakers—

Mike O’Rourke: The sprinklers, if you sprinkle them, you got to have a low-voltage fire alarm system and you also have to have a telephone into an alarm company that calls the fire department and you have to have a bell and a blinking light outside: one dedicated to the sprinkler, one that’s dedicated to the fire alarm sprinkler.

Male Audience 6: Do they test it [crosstalk 0:33:38].

Mike O’Rourke: Right. The City of Worcester tests the fire alarm, sprinkler system every year.

Audience: [crosstalk 0:33:46]

Mike O’Rourke: Which mike?

Mike Deluca: I don’t know.

Brian: I’m just waiting. When you go through the whole process, get the sprinkler system in there, do you get any type of rebate or discount off of your insurance after you’ve done that?

Mike Deluca: Yes. You say no?

Mike O’Rourke: Your insurance stays the same if you sprinkle it, it causes it more damage with water than there is with fire. I’ve been through a lot of insurance companies checking that out, and they’re all saying the same.

Mike Deluca: I basically agree with Michael. I checked with my insurance company when I was doing a building. I said how much am I going to save if I sprinkle this building? They said $300 a year. Big whoop! A sprinkler system is going to cost me $1,500, so that’s right it’s the water. If that sprinkler system goes off, the building is trashed, and you need a lot of work.

Rich: You won’t break even in 30 years on that.

Mike O’Rourke: If you’re coming from Framingham [unintelligible 0:34:46] you got to go to the other end of Worcester, the water is going to be flowing for a while unless the fire department shuts it down.

Brian: Does the sprinkler system only go off in a room when there’s fire?

Mike O’Rourke: Yes, that’s a lot of water coming out there.

[0:35:01]

Audience: [crosstalk 0:35:02]

Mike Deluca: It’s not going to go all the way down.

Brian: Does it shut off when the fire is out?

Mike O’Rourke: No. It’s going to keep.

Rich: I would like to introduce to the group our first tangent [laughter].

Female Audience 2: I just got appraised from Owens Corning to finish my basement, $80,000.

Mike Deluca: In a multi?

Female Audience 2: Yes.

Mike Deluca: Are you to trying to finish it so you can have somebody live there, get another unit, blah, blah, blah?

Female Audience 2: Nothing fancy there.

Rich: Eighty thousand?

Female Audience 2: Eighty thousand and you’re going to—

Mike Deluca: That’s a lot of coin for a basement.

Female Audience 2: I know, yes.

Rich: You don’t have to rub it in, Mike.

Mike Deluca: It is.

Rich: Okay, that was obviously very interesting to everybody, but this isn’t the sprinkler meeting, so let’s try to move on to your other nuggets.

Mike Deluca: Keep moving?

Rich: Yes, yes, yes.

Mike Deluca: More nuggets. Okay so we’re out of the basement now. Let’s go up into the attic. Let’s see go what’s going on in the attic for a few minutes. Climb up there, walk around, don’t put your foot through the ceiling, try to stay on the beams or the woods whatever is up there, see what’s up there. You’ll be able to eyeball what’s going on with the roof. Look for the water stains. Look around the chimney. Those sort of things, see what’s going on with some of the beams. Does this thing going to need color ties? A lot of times, the home inspectors will flag them for color ties, which aren’t a big deal to put in. What kind of insulation is up there? A lot of times, you can go into these three-deckers, there’s a stinking insulation up in that attic. It’s nothing. You start getting into all the insulation. Remember, if you’re going to insulate, you need to ventilate; otherwise, you’ll end up with the bad M word: mold. Because if you just throw in a bunch of insulation but don’t have good ventilation, you’ll eventually end up with mold.

            Now we’re down in the apartments. The big money is going to be spent in the kitchens and the bathrooms. That’s where the money is. What I usually tell my clients that I’m working with is if you’re going to redo the kitchen and bath, it’s really going to depend. Again getting back to the investment objective, where the property is located, what type of tenant are you reasonably going to be able to attract in this property. That’s the kind of kitchen or bathroom you’re going to put in.

If you’re across the street from U Mass Medical School and you want to attract doctors and nursing students, scientists and things like that, you might make the decision that you’re going to put in a high-end kitchen, nice stuff because you want to attract that kind of client that can afford to pay more rent. If you’re in a part of the city where you’re not just going to get that type of tenant, if for no other reason because you’re not going to drive that far, maybe you go more basic. That’s your kitchens and baths.

What type of flooring are you going to put in? Personally, I’m a big fan of hardwood floors for a lot of reasons. (1) Let’s face it: these buildings are not straight, they’re not level, and sometimes things are moving around a little bit. Wood flooring is more forgiving, from that standpoint. ceramic tile, I think it holds up better for tenants than carpeting tile, things like that.

Mike O’Rourke: People that have kids, a lot of the kids have asthma and they want their carpet taken out of their house, and after they move in and the carpets has been there for a couple of months and it’s getting kind of dirty, now the kid goes for the doctor. He’s got asthma, the doctor says you got to remove the carpet. It’s a lot easier to take that up and do the hardwood floor and no carpet down and then just damp mop it. Hardwood floors, ceramic tiles, that’s the way to go nowadays.

Mike Deluca: Now when you’re talking about renovation, you can’t forget about lead paint, that nasty lead point topic. If you’re doing a major renovation, you can’t renovate when the thing is occupied. You got to get the tenant out of there and sometimes you end up putting them up in a hotel. That’s the whole different topic of lead paint law, so generally if you’re going to do this kind of reservations, you want to do it after your apartment is vacant.

Where was the lead? Let me back up. When you bought the building or when you’re thinking about buying the building, did they have lead certs? Yes? No? I got news for you. Even if they have the lead cert, that lead cert is only good for that snapshot in time when that inspection was done. It’s better than nothing.

Rich: Mike, that’s a really good point and like you said, we’re not going to go off on lead paint, but what are the top two or three things it would take a lead cert out of compliance?

Mike O’Rourke: Worcester Housing Authority, they only honor it for 10 years; after 10 years, you have to get a new one.

[0:40:08]

Rich: Excellent point.

Mike O’Rourke: If the teant is living there now and it’s 12, 20 years old, no big deal. But if you got a new tenant moving in this week, you have to have a new lead paint certificate.

Rich: Okay, which means—

Mike O’Rourke: You have to have it tested.

Rich: Which means like your soffits outside—

Mike O’Rourke: Everything, everything. No chip and paint.

Rich: Any kind of exposed wood looks like it was painted might be suspect.

Mike O’Rourke: Right. They have to test it. The lady I use, she goes around. She has a gun and she checks all the wood.

Rich: Any holes in the siding because it might have paint?

Mike O’Rourke: If there’s holes in the side, you got to fix them. No lead paint can be seen, and the secret to that if you see it, if there’s a chip of paint off the mold or something, you see green and gray underneath that white paint, I can almost guarantee it’s lead paint.

Rich: Yes, and I think Brian is either talking about this Small Property Owners Association again or he’s talking about children under the age of 6.

Brian: [unintelligible 0:41:10] a couple. Is it donation only if you have children.

Mike O’Rourke: If you got children coming to visit like if they are watching your kid and they are a certain amount of hours towards a week, you got to de-lead it, especially if housing knows it.

Brian: Even if was a grandma because the grandkids are coming?

Mike Deluca: Even if it’s grandma. Yes, I got rejected once. I was going to rent to a 55-year-old single adult male and there was peeling paint on the outside of the house and the inspector comes. He’s like, “You got to paint the house.” I’m like, “Give me break. The guy has no kids.” He says, “You got to paint the house.” I said, “I’m not painting the house. You just made the guy homeless.” It’s unfortunate but it happens.

Rich: That was touching.

Audience: [laughter]

Mike Deluca: I know. I like the guy, too. He was a good guy. I was going to rent to him.

Brian: Where was this?

MD: In Worcester.

Rich: Sorry to interrupt about the lead paint. That was really great that you brought that up.

Mike Deluca: How much more time do we have?

Rich: Keep going.

Mike Deluca: Okay, keep going. Okay, so where is the lead? Like Mike said, when they come to inspect to do a true lead paint inspection, you’re going to end up with a report that’s about this thick. They go around the entire interior and exterior of the property. They use a device that kind of looks like a gun, and they test hundreds and hundreds and hundreds of spots. Even if they find lead, it has to be above a certain level before you would have to remediate it if you want it to be totally clean.

In general, on the outside of the properties, a lot of people get burned. They might have vinyl-sided the house over the years, but they get burned around the windows if they didn’t flash them or they didn’t cover them up around the basement windows. Basement windows is one where a lot of people will get caught on. Inside, the lead oftentimes it was either in windows, doors, woodwork.

A lot of the times, the natural woodwork is okay, but it’s not a guarantee. Once in a while, you might get burned on the natural woodwork. Watch out for your closets. You think you’re clean and the inspector comes and you forgot about the basement and the trimming inside the closet, things like that.

Mike O’Rourke: Combination windows on the outside. Even if you put a vinyl window in. some people leave the old combination on the outside, thinking they’re covering the lead. All the combination have to be removed out. You got to put an L-shape beam on the mold outside of the window.

Rich: Mike, can you tell us what a combination window is?

Mike O’Rourke: It’s aluminum. It can a screen upper and lower window.

Rich: It’s a combination of a window and a screen?

Brian: That’s a storm window.

Mike O’Rourke: Storm window.

Rich: Storm window, okay [laughter].

Mike O’Rourke: Single paint.

Rich: Okay, got you. Moving on from lead point.

Mike Deluca: Moving away from lead, I mean in reality, we pretty much covered the whole building now. Of course, you get down to cosmetics, painting. If you were trying to completely remove the lead, you pull off all that old woodwork, a lot of the times, sometimes it’s worth saving, a lot of times, it’s junk. You just get rid of it. Now you’re talking to finish carpenter, depends on how you’re going to finish it off, so it really depends. But it gets back to a point that I was going into a couple of minutes ago, you take a multi that you maybe buy for $150,000 that’s a total, you’re going to dump $200,000 to $250,000 in that building if you totally redo the whole thing.

Now it gets into your investment objective. If you’re buying and holding and you start looking at payback, payback on that type of scenario is probably somewhere 7 and 10 years. If you’re going to hold the building for a long time, it’s not a bad plan. You basically got a brand-new building when all is said and done. If you’re thinking about flipping, now you got to start very, very selective about what you’re buying, what you’re paying, what it’s going to cost you to fix that building up, and what you think you can sell it for when you’re done. That’s all I’ve got unless you got questions.

[0:45:20]

Rich: Okay, I have one question because I’m really kind of focused on the numbers so you calculate something in your head, you calculate something in your head, I want to try to get into your head a little bit. If there like a square foot calculation that you count like a gut remodel and just add anomalies to it  like how do you do that?

Mike Deluca: I mean every building is different, so when I go look at a building and I’m working with a buyer or Mike and I go look at a building, it needs real $15,000 maybe $20,000. It depends on how many layers, what you’re going to have to do, blah, blah, blah. When you fill it all off, maybe you’re going to have some decking that needs to be replaced. Your vinyl side, one of these three-deckers, it’s going to cost you $15,000, $20,000, $25,000 all day long, depends to how big the building is. I mean vinyl is vinyl as those guys like to say, but that’s what it’s going to cost you. You got to know your costs. If you’re doing a lot of these, you’re going to learn these costs, you’re going to know these costs.

If you are the first time out of the block, you’re a young investor, maybe you’re relying on the person that you’re working with to give you some information. The problem in today’s market is there is no inventory out there. Properties are going on in the market and there’s bidding wars. I put a two-family just to give you an order of magnitude, this is crazy.

I put a two-family on Burncoat Street on the market last fall. It was the type of property that could be converted into a three pretty easily and I marketed it that way. I had 16 offers on that property. That’s one property. We’re seeing it every day, seeing it all the time. if you don’t know your costs at the point where you’re making the offer, it’s not the time to be learning that.

Rich: Talk about making the offer. You look at the property, you look at all these things, you just provided a really great list of things to look at. Some of them, we knew about it; some of them we didn’t, so what do you do with these numbers? How do you use that to make your offer?

Mike Deluca: Well, when I’m working with a buyer, at the end of the day, again I keep coming back to what’s their investment objective and my personal opinion from an investment standpoint, if I have to boil down my MBA from [unintelligible 0:45:00] two words, it’s cash flow. If you’re not cash flowing after you’ve invested all this money, whatever the numbers come out of, this is a bad idea. How many people got burnd when the market tanked in ’06, ’07, ’08 because they weren’t looking at the cash flow? They were looking at price appreciation.

Rich: Right, which you can’t control.

Mike Deluca: Which you can’t control. If it’s appreciating, great, but if you’re cash flowing, you can ride anything out.

Rich: What are some of the red flags in the neighborhood that you’re hoping to not find?

Mike O’Rourke: Rundown houses, high prices.

Rich: Does it affect your offer? Does it affect what you’re making an offer at all?

Mike O’Rourke: I’m a bit I don’t care if I might [unintelligible 0:48:35] an adult, or I may just make like a ridiculous like $50,000, take it or leave it and you might be looking for $200,000. I won’t lose any sleep if I don’t get it, but a lot of times, they will come around. They do come around.

Rich: Are there any properties that you wouldn’t take for any price, that if they sold it to you for $15 that you wouldn’t take?

Mike O’Rourke: No, the other—

Rich: Because you and I talked about one a couple of weeks ago.

Mike O’Rourke: A friend of mine, he called me. He said what do use for a realtor, and I hooked up Mike with him. Mike went over and looked at and the guy never called Mike back. I saw him one day—

Rich: Does he know who he is?

Mike O’Rourke: Yes, Mike Deluca. Anyway, the guy I met him. I said, “Why didn’t you call him back?” He said, “I don’t want it. I want to get rid of it, $20,000. Take it or leave it.” I said, “Right, I’ll think about it.” I called Mike up. Mike said, “Buy it. We can get $85,000 to sell it in the morning.”

Rich: No kidding.

Mike O’Rourke: Today, I got a credit card, $20,000 zero percent for the next year. The credit card just bought the house.

Mike Deluca: That’s what happens when you don’t use a good realtor: you lose money.

Mike O’Rourke: And we’re going to put it in the market. We’re going to put it when we buy it, but the thing is, I’ve been away on vacation and Mike said, “This is a good deal, grab it.” I might look at it in the computer, but I take Mike’s word and Mike has been with me a lot of times and I trust what he says. We go into a house. We think is it $150,000? We squabbled over $10,000 the other day and somebody bought it for $145,000 and before that, I offered it $150,000 but then I dropped down to $140,000 because I didn’t get it the first time and now somebody bought it at $145,000, so I lose it.

[0:50:14]

Rich: Got you. you and I talked about a property a couple of years ago that I didn’t want and you didn’t want because it had been on fire and it had to get torn down and the lot was too small to build anything. I don’t know if you remember.

Mike O’Rourke: You got to take the lot size and you got to make sure that if you tear it down, you got to find out from the city if they’re going to let you rebuild.

Mike Deluca: No.

Mike O’Rourke: You have to leave the foundation, maybe even both. You got to talk to the building inspector to see if they’ll let you rehab it and how much you’re going to take down of it.

Rich: But if they won’t and you bought a building for $5,000 and you thought you got the deal of the century and you can’t do anything but turn it into a garden, then that’s something you need to be aware of when you’re looking at a property.

Mike O’Rourke: Right. You got to go see the building inspector and just talk to them. They’re good guys and they’ll tell you what they can do. Bring a plot plan with the house on it and just show them. They know the house had the fire. They’ve been there already and just see what they say.

Rich: Absolutely. That’s is a great tip from somebody who has a lot of experience. Are you guys going to hang around for a couple of minutes for people to ask you questions one-on-one?

Mike Deluca: Sure.

Rich: Awesome. Let’s hear it for the Mike and Mike Show, ladies and gentlemen!

Audience: [applause]

[End 0:51:46]

This is part of the Worcester Rental Real Estate Networking and Training series.

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