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

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