Latest / The Academy Presents podcast / Learning Real Estate Due Diligence with Matt Kontoff

Transcript

Learning Real Estate Due Diligence with Matt Kontoff · The Academy Presents podcast

0:01
Did you know that 90 % of the world's millionaires
0:05
invest in real estate? Well, I'm Angel with the
0:09
Academy Presents Real Estate Investing Rocks,
0:11
and I'm here to help you if you want to go for
0:15
your piece of that pie. Are you new? Are you
0:19
new to this and you just don't know where to
0:20
start? It's okay. Are you someone that has invested,
0:25
but you feel stuck, you feel like you've lost
0:27
momentum, you don't know where to really head
0:30
from here? Are you a seasoned real estate investor
0:33
who is doing great but maybe you just want to
0:35
hone a few skills here and there? This is the
0:38
place for you. The Academy Presents Real Estate
0:41
Investing Rocks podcast will connect you with
0:44
industry experts so that you can save time, avoid
0:48
costly mistakes, and begin living the life you've
0:52
dreamed of all through real estate investing.
0:56
You're already taking the first step. just by
1:00
joining us here today. So that was a huge surprise
1:04
as well. And we decided to try to renegotiate
1:10
the selling price, but the seller was like, yeah,
1:13
no, not coming down any further. So we had to
1:17
walk from that deal. And it would have been a
1:20
very sketchy, thin deal for our investors. And
1:25
we probably would have had a hard time. And so
1:32
we thought it was only like 15 and so we thought
1:43
it was only like 15 updated units. You know everything
1:48
needed to be updated and. It kind of I think
1:55
it kind of makes you think a little bit differently
1:57
too about not necessarily about the broker but
2:01
about the seller broker relationship. Because
2:05
was the seller that detached the property to
2:09
not know what had been done. Because this is
2:13
the kicker on this one too is our regional had
2:16
managed this property from like 2018 to 2020.
2:21
So up until the current the current seller bought
2:24
it. And so she knew. And so when she finally
2:29
saw our business page, she was like, there's
2:33
way more than this done. And we're like, what?
2:36
And so I'm wondering. So that worked out to your
2:40
advantage. That was a pleasant surprise to find.
2:43
Usually it's the other way around. Yeah, no,
2:45
that's what I was saying. It was in our favor.
2:48
Yeah, usually. So the main purpose of doing your
2:51
due diligence is to find reasons to not do the
2:54
deal. And as soon as you find enough reasons,
2:56
you can say, okay, this is, you could stop doing
2:59
your due diligence and renegotiate or walk away.
3:04
But most of the time, you'll find one or two
3:07
things that move the needle a little bit. And
3:10
sometimes you can just absorb those and it will
3:13
still work out okay. Yeah. Well, for us, like
3:17
we've discovered, and this is one of the benefits
3:20
of having residential too. So we had a two -house
3:23
portfolio. It was actually five or six houses
3:26
in the beginning, and they kept selling them
3:27
out from under us. And we were like, let's get
3:28
this thing closed. We want some houses here.
3:31
Because we wound up getting these houses for
3:32
like $55 a piece. That's about what it averaged
3:35
out to. So we get two houses for $110. And the
3:41
way Jason and I talked about it was, I know.
3:43
I know, right? And they cash flow. They cash
3:47
flow. So we were like, you know what? They're
3:50
class C. There were three bedroom, two baths,
3:54
but like a carport. I think both of them are
3:56
two, but three bedroom, two baths, the carport.
3:59
And so we're, we're going through them and we
4:02
were like, Hey, you know what, if nothing else,
4:04
we're going to spend $110 ,000 and we're going
4:07
to learn about class C properties. So it was
4:11
almost like a coaching program, except we had
4:14
no coaching. We were going to be self -taught.
4:16
And so we learned about, like, we basically learned
4:19
the make ready process on a class C. We learned,
4:23
like, as we're walking through it, we're just
4:25
like, how many coats of paint are on these walls?
4:29
Holy night. And you, like, they're parent beam.
4:34
So we were like, I grew up in a parent beam house,
4:36
so that didn't freak me out. But it was like,
4:38
there's some stuff that needs to be looked at
4:41
here. We may have a foundation. So we learned
4:45
about foundation. We learned about like just
4:47
like the fact that you got to do something about
4:49
the walls. You can't just keep painting and painting
4:51
and painting them. And we looked at the doors
4:54
and that was where I realized there was some
4:56
foundational, there was some stuff going on because
4:59
the doors weren't square. And so we learned,
5:02
we really just learned a lot and it was a great
5:04
learning experience. Now we had an inherited
5:05
tenant in one of them. So one of them we've never
5:07
actually even been in and we've owned them for
5:09
almost two years now. It was good anyway. I think
5:16
we've like been in like a walk, like just see
5:19
what it's like on the inside. But we've never
5:21
we've never really done any big work inside of
5:23
it. The other one was empty. And so we got to
5:27
do things like. We put in a butcher board counter,
5:31
which I don't know, I've never been in a multifamily
5:35
that has butcher board counters, but they're
5:37
pretty cool and they're not expensive. you're
5:42
rolling your eyes. Do you not like them? We have
5:45
one in our ski house. I'm not a big fan, but
5:48
you know, it's a cutting board. It's great. You
5:50
know, it's very handy, but it's the kind of the
5:53
kitchen counter so small itself. It really takes
5:57
away from, you know, consistent counter space.
6:00
I don't know. Yeah, but I just I thought it was
6:02
pretty cool, but it was more that we just really
6:05
got to learn about sea property. So we had a
6:07
big freeze and we couldn't find heaters. The
6:12
electricity was on in the property. This was
6:13
during snowmageddon. So that year that we lost
6:16
power and everything else. So we're trying to
6:19
open up all the drains, turn off the water to
6:21
the house. And the city, the way the city works
6:23
is they're the ones that have to come and shut
6:25
water off at the front, like at the main. And
6:28
so like we're out there trying to do it. The
6:32
place where you can go in to put the key and
6:33
to turn the water off was full of water. It was
6:35
like 17 degrees outside Jason has on the long
6:38
sleeve shirt and his coat and he has to put his
6:40
hand down into the water. To find the place where
6:43
he can put the key and to turn it off and it
6:45
was freezing cold and now he's wet and just like
6:49
oh my gosh and we couldn't figure out how to
6:51
drain the water heater. Because we just couldn't.
6:54
So we're like, well, I hope it isn't free. And
6:57
one of the things that we learned is that sometimes
6:59
in older plumbing, even if there's nothing in
7:03
it, once things get working again, not everything
7:07
works the same way it used to. So it was weird.
7:11
So like one of the shower heads just didn't work
7:13
anymore. So they had to go through and redo some
7:15
of the plumbing, but we got to learn that. So
7:19
as freezes hit now in our multifamily, we're
7:22
like, hey, make sure that they can't unit. is
7:25
dripping, make sure that vacant unit is not going
7:27
to get 40, 30, 20 degrees inside of it. We need
7:30
to go make sure that it's going to stay warm.
7:33
And so I think we're more on top of that because
7:35
we had experience in the residential with classy
7:39
properties because one of them was like a probably
7:42
a Sears and Roebuck kit house from what the 50s.
7:47
So one of them is I really think it's a Sears
7:50
and Roebuck kit house. Maybe they both are. I
7:56
had a similar issue with a freeze in my boulder
7:59
property. We had a deep, deep freeze and one
8:04
of the pipes froze. It didn't burst, but it just
8:08
froze solid. And I had a call plumber and he
8:11
came in with his tools and thawed out the pipe
8:13
and water started flowing again. And I filed
8:16
an insurance claim. And they initially said,
8:19
well, your pipes didn't burst, so we can't pay
8:23
your claim. And I argued, I said, no, but they
8:25
weren't working. So their place was supposed
8:28
to flow water. So you have to file honor the
8:32
claim. And they did. I convinced them to honor
8:35
the claim. So I think that was a huge win for
8:38
me. I wish I would have heard about that story
8:40
when I was trying to get. So this is our own
8:42
home, but a residential issue. Our ceiling collapsed.
8:47
with the attic or it was starting to collapse.
8:50
Insurance said they wouldn't pay for it unless
8:53
it collapsed. And I was like, if we let the ceiling
8:56
collapse, the wall connected to it is the kitchen.
9:00
It's going to pull that whole wall down. And
9:04
so we want to just pay an out of pocket to have
9:07
to have the ceiling in the garage fixed. But
9:10
we learned we learned also that, like, because
9:13
of the way the garage was, the Joyce. I think
9:16
it was the Joyce warrant strong enough because
9:18
we have a one, a one big garage door. And so
9:22
that spring pulls on it. And so it would have
9:26
been better to have two bays as opposed to one
9:28
big bay because of the way the ceiling was built.
9:32
So they reinforced it while they were there,
9:34
but it also made me start looking at like when
9:37
I'm looking at a unit or when I'm looking at
9:40
apartments or I'm looking at other residential
9:41
stuff, I'm trying to think in my head. it was
9:47
like, it's older, but it was like, it's older,
9:50
but it was like, it's older, but it stood up
9:54
to the tornado. It was a huge tornado that came
9:59
through here in 79 and wiped out half the town.
10:03
Yeah, so the stuff that was left standing with
10:11
to me says a lot about the structures that were
10:14
remaining. So our houses, those two class C's
10:17
that we got at $55 ,000 apiece, I believe they
10:21
were both built before the tornado. And so pretty
10:24
strong. OK. Maybe you have to have tornado insurance.
10:30
Do they have tornado insurance? I have no idea.
10:33
There's no tornadoes in Massachusetts. I have
10:35
no idea. We buy insurance. OK. I have no clue
10:40
what it is. It was hurricane insurance. The property
10:45
I invested in in Tampa had extra insurance for
10:48
hurricanes. I mean, we might. I know if you're
10:54
in the 100 year floodplain, you have to have
10:57
flood insurance. But in my mind, we're more prone
11:02
to drought than to flood. There have been two
11:07
flood situations here Since we've moved here,
11:10
which was really funny because we have like a
11:12
hundred year flood almost twice in a 15 year
11:16
period. But we also had a five year drought.
11:20
So I mean, it's I guess it's just like the variations
11:24
in volatility and temperature. We just have crazy
11:26
stuff that kind of happens every now and then.
11:27
But even with that, the insurance isn't insane.
11:31
OK, that's good. But I will say that one of the
11:34
things that I have noticed is that. you really
11:38
have to set aside money for plumbing. And I don't
11:42
think that's unique to us. No, I don't think
11:46
so either. I think, you know, plumbing stuff
11:47
happens. You get leaks, you get clogs or things
11:52
break. Yeah, we have had and this may be unique
11:56
to us, but we've had two separate slab leaks
11:58
on one of our properties that one of them required
12:02
that we put the building in a hotel. And the
12:08
other one, it was easier to get to. So nobody
12:14
had to be relocated, but people couldn't use
12:19
their kitchen sinks for like a week. They had
12:21
to use like their bathroom sink, because the
12:23
kitchen sinks were on the wall where the slab
12:25
leak was. So the slab leak thing may be kind
12:28
of unique to us, just because of the volatility
12:31
of temperature. we get the crazy freezes and
12:34
then we had one summer we had like the we set
12:36
the record in Texas for the most days of over
12:40
100 degree temperatures in a row. We had like
12:44
100 days over 100 or something. You guys don't
12:47
have basements do you? So we do not. At least
12:52
not in Wichita Falls proper. Some people do.
12:55
It's just that the water table is pretty high.
12:58
OK, even though we get droughts and so. people
13:02
that one year where it's really wet, the water
13:05
just bubbles up and. Well, and the people that
13:08
have them, they smell disgusting. They smell
13:10
like mildew and mold. And so what we what we
13:13
did have here about five years ago was because
13:17
people were getting the credits for putting safe
13:19
rooms in and putting storm shelters into their
13:22
homes. So a lot of people might have been about
13:25
10 years ago now. A lot of people put those into
13:28
their homes. So there are these structures, I
13:31
don't know if they're nationwide, but they're
13:33
like these structures that you can put in a room
13:36
or in a closet that will withstand like, what
13:39
is it, E5 or whatever the designation is for
13:42
tornadoes, the big strong ones. And so people
13:46
have those in their houses or they have like
13:48
these, I swear they're like dog crates and they'll
13:52
put them in their garage and it's supposed to
13:55
withstand if the house comes down on it. I mean,
14:01
I'm not going to get in a cage that I can't even
14:03
stand up in, in the hopes that the fire people
14:06
and all the rescue teams find me after my house
14:08
collapses on me. Because I can't do spaces like
14:13
that with my four kids, my husband and my dog.
14:17
No. A safe room maybe, but we don't even have
14:20
that. Like our neighbor has that cellar thing
14:24
that stinks. like crazy. And then we have across
14:26
the street neighbor that has an in -ground shelter
14:31
behind their house. Yeah, we have a basement
14:33
here. I think most houses in New England have
14:36
basements. And the first year or so, in the spring,
14:41
after we bought the house, we had a high, the
14:45
water table just comes right up to the basement.
14:47
So this basement's cement. It's like a sponge.
14:50
It just floats up. And so I'm like, that's never
14:55
happening again. I spent money and I put it in
14:57
a perimeter drain. So there's around the perimeter
15:01
of the basement is this sort of channel, which
15:04
channels water into a bucket and a pump pumps
15:07
it out into the yard. So we've had a dry basement
15:11
ever since. Coming back to have all your stuff
15:16
damaged by water and just seeping up from the
15:19
floor. It's annoying. Well, here's a weird due
15:24
diligence one. So at our property at Thousand
15:28
Mary, in the plans, it says there's a basement.
15:32
We can't find the basement. Weird one, right?
15:39
That is weird. Maybe they filled it. Supposedly
15:45
there's a basement somewhere. We're all like,
15:47
I don't know where this basement is. I don't
15:49
know if it got covered up. or if it was filled
15:51
in or who knows because so those apartments are
15:55
about 15 minutes from our house they're in like
15:57
this little suburb of Wichita Falls called Iowa
16:00
Park and in Iowa Park people have basements or
16:03
they at least have like what do you call them
16:06
three -quarter basements where it's like some
16:08
of it's around and some of it's below so it'll
16:11
be like a two -story house but the bottom floor
16:14
is like two -thirds in the ground one -third
16:16
above the ground It's weird. The windows, so
16:22
the windows are those little bitty windows and
16:24
they're like ground level. And then the rest
16:26
of it sunk in. But the height of that level is
16:29
normal height? It's like a normal like eight
16:31
foot ceiling. Oh, okay. Like six foot of that
16:34
floor is underground. And the top two foot is
16:37
above ground. It's weird. That's the basement.
16:40
Yeah. So, but it's, I don't think it's as low
16:44
as other people's basements in other places.
16:46
I don't know. Our basement has little windows
16:48
like, you know, a little window so you can look
16:49
at it. Just unfinished area. That's where the
16:53
boiler is and the washer and dryer. Yeah, because
16:56
I have friends in West Texas that they created
17:00
basements, I guess they created a basement under
17:03
their garage and it has no windows. It's fully
17:06
submerged underground. There is the ability to
17:13
have basements in Iowa Park. So there still could
17:17
be somewhere we just don't know. But that's a
17:19
due diligence. Like, what? It's a weird one.
17:24
And I'm sure we'll come across more weird stuff
17:26
as we continue this journey. But it's, it's been
17:31
kind of fun. Like I didn't know that you could
17:36
hire the property management company to come
17:38
and help you do due diligence. They love that.
17:42
Yeah, because they made money.