by Barry Lebow
In my last article, I explained much of the criteria for inspecting an apartment building. This last article was primarily devoted to the exterior of a building. The current article explores many of the aspects of what we look for within an interior and when other professionals are retained.
Few of us would buy a used car without taking it to our own mechanic for inspection; it is now the norm for house inspectors to do a full inspection when you are buying a house. Today, prudent commercial investors are putting in offers based upon diligence undertaken by their selected professionals.
When my clients are buying a commercial building, I find myself working with a crew of people representing various trades and professions. Add up all of the fees from a cluster of professionals, including disbursements, before you buy a building, and you can easily spend $4,000 or $5,000 on professional fees and that is only for attendance - full reports will easily double this figure.
An environmental engineer is a must today. Were there buried oil tanks (common occurrence), were chemicals ever stored on the site previous to the construction of the current building? What is that material wrapping the pipes - asbestos? The list goes on but many of the buildings I have appraised have had hidden contaminants, some of which can be rather obscure and hard to find. Most Phase 1 inspections include viewing of older aerial photos to ascertain what was previously in place as well as archive research into who were the former users.
Structural engineers check the building from the balconies, windows, exterior walls, etc. Nothing is as unsightly as spalling brick and then the ugly aluminum or steel cladding to cover the deteriorating brick face.
Mechanical engineers check the age and condition of the electrical systems, boilers, elevators, etc. Recently a deal I was involved with had to be renegotiated as the boilers were found to be nearing the end of their life cycle. They were represented as being in good working order and they looked okay but the engineer found defects that indicated that only replacement of the four boilers was practical. The seller did know, they were just trying to conceal the fact. The deal was renegotiated with a reduced price to allow for the boiler problem. Every mechanical item in a building must be checked and a
capital expenditure list must be created for items that either need immediate replacement or are coming to the end of their life cycle.
An accountant must go over the statements, and a rent roll is mandatory. At least three past years of statements should be produced. Recently, after diligence, a represented 7% turned out to be 5.5% after the accountant carefully reviewed the statements. That deal did not go forward. As appraisers we find that many sellers show this year's projected income and last year's expenses.
A reputable roofer can save you enormous costs. I recently asked a roofer to explain to me in detail what he saw during his inspection and I learned a great deal. Buying a building only to have to put a new roof on immediately, can be costly, unless your purchase price is reduced for this cost.
I got burned years ago in Burlington with a commercial property I bought. Within six months the roof needed full replacement and I had to find a quick $25,000 that was not in my budget. I had bought it under a power of sale and my bargain turned out not to be a bargain in the end.
As an appraiser, when I am inspecting an apartment building, the suites I insist on seeing first are those on the upper floor. I want to check for water penetration as this is a major cost, resulting in replacing the roof to losing tenants and having to retrofit their water damaged units.
As an appraiser I also check the type of cars on site. I am looking for affluence or lack thereof. I also like to walk around by myself without an owner or their manager at my side. Nothing is better than asking someone who is coming into a building if they live there and what it would be like to move in. I have found many hidden problems just by speaking to tenants. Drugs, gang activity, etc. are not usually visible during my morning inspection; those types of problems usually come out at night.
I am finding that upon a purchase today, my prudent clients are now scheduling various professionals and trades to come to a building and although it appears almost to be a parade when we go through as a group, each of us looks at features and items based on our specialties. By comparing notes later, my appraisal reports include a lot of observations from professionals who possess skills and testing equipment that are outside of my expertise.
My best advice for you when looking at a commercial investment property, is to put in your offer immediately, tie it up and then have it conditional upon your trades inspecting. Use the reports, if major problems are found, to renegotiate or just walk away.
Diligence today is mandatory as the costs to hire the professionals is small in comparison to the problems that can be hidden and come up later.
Pay a small price now or pay a much higher price later. Your choice, but never be pushed to acting on the spot. A good real estate investment is made at the buy. Buy wisely, use professionals acting in your best interests and get references.