Latest / The Academy Presents podcast / Due Diligence and Asset Management Lessons with Matt Kontoff

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Due Diligence and Asset Management Lessons with Matt Kontoff · The Academy Presents podcast

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  Did you know that 90 % of the world's millionaires
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  invest in real estate? Well, I'm Angel with the
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  You're already taking the first step. Just by
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  joining us here today. But, um, like our coach
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  said, you've got to walk every unit and it was,
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  it was, we thought like he met, we personally
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  have to walk every unit and it's more that every
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  unit has to be walked. So you have teams of people
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  that are helping you do it and we go along. Yeah,
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  exactly. That's what we did in Jacksonville,
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  North Carolina. We actually, um, we were told
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  about one of the units there. that was a hoarder's
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  unit. And we did not go into that one. I think
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  that they were looking out their window or something
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  and trying to figure out what was going on. But
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  in that case, you just assume the worst, assume
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  that it's full gut. Yeah, exactly, full gut.
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  Yeah. Well, and some lawyers will actually add
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  like an addendum in whatever it is. the PSA or
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  whatever that says that if a unit doesn't get
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  walked, you get XYZ amount of credit. Some people
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  catch it, some people don't. But I have heard
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  of people getting a sizable amount of money for
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  units that are never able to be walked for whatever
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  reason. And they get this credit amount. Interesting.
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  So I wish I knew more about it and I knew the
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  amounts because I think it's a really neat thing.
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  If you don't get to, if you can't walk it and
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  over the time that you're under contract, the
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  property management team doesn't get to walk
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  it. So nobody ever gets to walk it. Then you
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  shouldn't be, you shouldn't be penalized for
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  that. And I think that's what this addendum does
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  or this line in the contract does is it says,
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  Hey, you know, if they, they don't get to walk
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  it, if nobody ever has a chance to walk it, then
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  they get like, I don't know if it's a $1 ,500
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  credit or 15 ,000 on credit. I remember thinking
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  it was sizable. Yeah, so however much it could
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  cost to gut the whole unit. Yeah. I don't know
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  if it's enough for a full gut, but it's definitely
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  enough that it would help. So, but those are
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  just some of the things that come up in due diligence,
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  you know, and then just the asset management
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  piece of it too. Yes. Your turnovers and I've
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  heard some really neat ideas here lately too.
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  Now we haven't seen decreases in rent. But I
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  do have friends that they are having to drop
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  rents a little bit. We have to do that in Columbus.
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  Yeah. So we haven't had to do that yet. I don't
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  know if we will. Wichita Falls is kind of weird.
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  We've had 104 ,000 people here since like 1960.
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  We don't go up. We don't go down. We're just
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  super steady. We like it here. because it's super
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  steady like it doesn't do a lot of change and
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  so we haven't seen the same kind of rent drops
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  as other people have but a friend of mine was
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  saying you know sometimes it makes more sense
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  instead of bumping rent on a renewal to split
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  the difference with them or even keep it where
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  it was because the cost of the turnover is going
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  to be so much so if you're trying to bump rents
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  fifty dollars And they can't afford the $50.
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  And so you bump 25 or you don't bump at all.
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  Say you don't bump at all. You're losing $600.
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  Whereas a make ready might be $5 ,000. That's
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  a lot for a make ready. Well, even if it's a
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  thousand, you still saved money by not bumping
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  that person's rent and just doing the renewal
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  at the old rate. Right. And then you still have
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  a certain amount of vacancy time while you're
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  doing the turn. Yep. Yeah, so I've just I've
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  been trying to put that out there and a lot of
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  different recordings that I've been doing because
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  I think that that's a really smart suggestion.
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  And it comes from somebody that I have a lot
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  of respect for. So. So another thing is, and
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  I heard this a long time ago from from an expert
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  that you can go in, you know, with permission,
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  obviously go in and inspect their apartment before
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  they're planning to leave. So, you know, obviously
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  you want to. check in with them 60 to 90 days
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  before the lease is up to see what their plans
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  are. And then when you go in at that time, you
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  can identify what needs to be done and perhaps
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  even do some of the work before they actually
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  leave so that you have a minimal downtime between
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  their exit and the new person, the new resident
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  comes in. You just have to broom sweep maybe.
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  So you have. normal downtime. Yeah, that's super
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  smart too. I've also heard of, so like the bank
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  does, can do, or I guess they do, a yearly inspection.
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  And what you can do is prior to that yearly inspection,
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  you do an inspection. And so it gives you a chance
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  to look through everything. You can do a quick
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  assessment. Now one thing that we have recognized
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  is that in a Class C property, your residents
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  are less likely to tell you they're having issues.
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  So you really have to build some rapport. And
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  so your on -site person, your on -site leasing,
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  your maintenance guys, they're going to have
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  to build a lot of trust so that people are like,
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  okay, hey, this is going on in my apartment.
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  Yeah. And this is another thing I want to talk
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  on. to touch on is the relationship with the
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  on -site manager. I mean, they're the face of
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  the community. They're the first person that
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  residents see when they come to the TORA unit.
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  And, you know, your relationship with them is
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  key, just because you're going to rely on them
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  for connecting with the tenants, being able to
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  catch things before they're a big issue. So.
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  This is why next week I'm going out to Columbus.
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  I'm going to meet our on -site manager and we're
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  going to chat and say hello and I haven't met
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  her in person, but it'll be a good thing. I'm
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  going to bring her a little, I'm giving her a
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  gift as well for all the work she's just doing.
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  Oh, that's super nice. Yeah. So one of the things
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  we do is we make sure that our on -site person
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  has, it's called a camp card. It's something
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  that our local BSA, office does and it has a
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  lot of discounts on it. And so we get it for
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  them because they shop at Ace Hardware and the
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  card has 10%, has 10 % discount at Ace Hardware.
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  So it pays for itself, but there's a lot of other
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  little things that they can use too. So little
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  deals that they get at restaurants, like maybe
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  they get a free drink if they order a six inch
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  sub at Subway or it's things that they can use
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  too. It's a little thing just shows their appreciation.
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  We give it to them, but we ask them, hey, when
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  you go to ACE to buy stuff for the property,
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  please use your card. Go ahead and use the card
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  because that's going to help pay for it. We do
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  that. And then we also will use those for renewals
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  and new leases also because it's just something
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  we like to do. And I mean, we have scouts in
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  our family and it helps our kids. Yeah, you know,
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  but I think those are things that you can do
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  that. build that better relationship and it builds
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  that level of trust because one of the things
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  we recognized was in the first two weeks that
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  we took over another property was that people
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  were coming to the office and they're like, man,
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  thank you so much for taking care of that. You
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  know, I've been waiting six months for this to
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  be taken care of. I've had this leak for six
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  months. I've had this going on for four months.
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  And so we really we went through and I was trying
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  to find all the places that maintenance requests
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  could have been hidden, because when you change
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  property management companies, they take everything
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  with them. You hope they're going to leave records,
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  but I think it's really more of a a nicety than
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  a requirement? Yeah, yes. Yeah, we have, we're
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  using yardy matrix and we have work orders and
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  every week I look at those work orders to see
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  how things are progressing and if they're making
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  progress and you know, what the turnaround time
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  is. And when I do that, they're actually, lately
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  they've been pretty good. So I mentioned that
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  to them even. good on keeping up with the work
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  orders, so that's a good thing. They always like
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  the positive feedback as well as, you know, constructive
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  criticism. Honestly, that's one of the benefits
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  of being so close to our properties because we're
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  15 minutes from one, we're like three and a half
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  miles from the other. So we can just hop in the
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  car and go check. So we'll take the onsite people
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  out for lunch or just take them something that
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  we have, like whether I want to do donuts, but
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  I need to find out what people's favorite donuts
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  are, because I like donuts too. If you've ever
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  met me, you understand. I just like to meet.
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  Krispy Kreme or Dunkin' Donuts? So we have a
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  Dunkin', but it's actually not my favorite. I
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  have a friend who owns a donut shop that's like
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  two blocks from me, and I will be there to get
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  them. I think it's a franchise, because it's
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  daylight donuts. They're really good. I really
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  like them all. So I would like to do more of
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  that, like taking stuff to them because always
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  going out to eat gets kind of expensive. But
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  it's appreciated also just to let them know that,
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  hey, we we appreciate you and we know this job
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  can be hard because I've spent some time on site
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  and. Yeah, no, it's not I don't say it's not
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  fun, it's just. It takes a certain kind of person
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  to be able to handle. Well, yeah, it does. It
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  really does. Yeah, that's why that's the key.
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  Key position is that property manager on site.
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  I mean, they have to they have to be on board
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  with your business plan as well. So if you're
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  doing turns or not even turns, but if you're
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  renovating and updating units. When a lot of
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  times if you're doing if you got LTC. and you're
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  financing some of your rehab and turns and those
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  one -off expenses, your property manager is going
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  to be the person that is doing that report that
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  you're going to be turning in. And so you want
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  to make sure that everything is being completed,
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  that's being completed in a timely manner, that
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  all correspondence is being done in a timely
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  manner and that little things don't happen. So
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  here's a little asset management tip. When you
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  send in a draw, make sure the construction has
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  started or they're going to deny it. I speak
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  from experience. And it was it was goofy. It
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  was like the paperwork for the draw was sent
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  in on like the 14th or something. And because
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  of weather, they couldn't start the job until
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  like the 17th. And so it was denied. And now
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  we have to reapply for the draw. It was just
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  like, dang it. Couldn't we have just paid more
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  attention? But. because I think it was submitted
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  after they had already started, but those dates
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  didn't match up or something. It was weird. But
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  just keep an eye on your dates because getting
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  those draws, that's part of your asset management
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  also. Yes. And you just want to make sure that
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  you are following all the rules so that those
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  don't get delayed because it could be that you
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  front the expense on that. And in our case, we
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  were really hoping for that draw to come through
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  because we needed to pay taxes. And so, yeah,
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  we had to get creative on where to pull the tax
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  money from. We had it covered, but it was a little
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  sketchy there for a little bit. Okay. The part
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  of the reserves? Actually, what had happened
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  was, like I said, we have learned a ton on these
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  properties, right? The property management company
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  had dissolved last summer. When it dissolved,
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  Jason wasn't here. It was during the burning.
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  And I had created another account for the company
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  that had dissolved to put whatever money they
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  still had into this other account. And so there
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  was like a second, I guess, like a second reserve
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  account sitting at Chase. And we were able to
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  use that to help pay the taxes. But if we hadn't
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  had that account. It would have been it would
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  have been a scary situation. So just yeah, make
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  sure you're really following all the rules and
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  the draws and that you're taking care of the
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  things you need to take care of because this
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  is kind of another little aside. Non recourse
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  loans can become recourse if you're not staying
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  on top of what you need to be on top of, you're
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  not sticking to your business plan or you're
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  not updating your lender with changes. If you
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  change property management companies, you have
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  to let your lender know. You have to keep insurance
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  in play. There are so many things that you have
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  to do that if you it's not just missing a payment.
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  Like if you're not meeting their DSCR requirements,
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  if you're not meeting the business plan that
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  you have set out, if you're not updating them,
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  if you're not communicating with them and letting
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  them know what's going on and you get off schedule
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  or you get you get off somewhere, they can say,
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  hey, you're not doing what you're supposed to
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  do. And it can become recourse and You know,
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  I'll never forget Agassino. He's the one that
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  really just drilled it into my head. Every loan
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  is recourse. Ultimately, every loan is recourse.
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  So just keeping that in mind and trying to stay
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  on top of everything that needs to be taken care
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  of for your properties. That's all part of the
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  asset management. And you want to make sure that
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  you've done your even adequate due diligence.
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  to make sure that things don't pop up after you
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  own the property and you're trying to asset manage
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  it. So make sure that due diligence piece has
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  had enough of a, I don't know, like that you
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  put enough thought into it and you really took
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  it on with a lot of intensity and attention to
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  detail because. That's the key is the attention
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  to detail. Yes. Look at those leases and the
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  applications even and contractor. Contractor
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  agreements. I had to do the lease audit. That's
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  what I was in charge of while everybody else
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  got to be outside. It was no fun. I didn't have
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  to do them on the second property. I was just
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  like, no, please don't make me do it. I can't
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  do it. Sometimes you can hire a property management
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  company to do some of that for you. Oh, no, no.
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  He did. Oh, he did. OK. He was doing it, but
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  I had to sit there. I don't know why I had to
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  sit there, but I was just like, and I started
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  calling him Mensa because he was super smart
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  anyway. So that's his nickname for me. The nickname
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  I gave him, but I was just like, I don't know
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  how you do this. This sucks. And he was like,
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  well, it looks like they probably audited it
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  right before you bought because it's pretty cut
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  and dry. like everything is matching up. This
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  is not that, but he would take it. He would pull
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  the paper. And this was when we bought it, all
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  the leases were paper -based. So he would pull
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  the paper. He would look at it and enter it into
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  the computer and then pull the next paper, pull
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  the next file, open it up, look at the paper,
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  enter it into the computer. And it was just like,
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  Oh my Lord. The next property was part paper,
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  part electronic. And that's the one that I was
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  just like, I am. I can't. I can't. I am. I can't.
• 17:12
  I can't. I can't. I can't. I can't. I can't.
• 17:13
  I can't. I can't. I can't. I can't. I can't.
• 17:13
  I can't. I can't. I can't. I can't. I can't.
• 17:14
  I can't. I can't. I can't. I can't. I can't.
• 17:14
  I can't. I can't. I can't. I can't. I can't.
• 17:15
  I can't. I can't. I can't. I can't. I can't.
• 17:16
  I can't. I can't. I can't. I can't. I can't.
• 17:17
  I can't. I can't. I can't. I can't. I can't.
• 17:17
  I can't. I can't. I can't. I can't. I can't.
• 17:21
  I can't. I can't. I can't. I can't. I can't.
• 17:33
  I can't. I can They filled everything out electronically.
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  So part paper, part electronic. And I mean, like
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  the whole thing was electronic. And so like the
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  paper leases were audited and then later the
• 17:49
  electronic leases were audited. But I was just
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  like. Put somebody else in charge of this, this
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  is not where I need to be, because I'm not great
• 17:56
  with details. Big picture, I'm all over it. But
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  the details are they elude me a little bit. So
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  it was a little scary. But, you know, cool. Thank
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  you. Thank you for being here. And my pleasure.
• 18:13
  About some of the fun of due diligence and asset
• 18:15
  management. You know, I hope that everybody out
• 18:19
  there listening is just understanding that things
• 18:22
  don't always go according to plan. Rarely do
• 18:26
  they ever. And you don't always get I think.
• 18:32
  The most important thing that I've seen is that.
• 18:36
  What you're told before you do diligence is most
• 18:40
  likely not an accurate picture. Yeah, oh yeah,
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  definitely. So when you're when you're on site
• 18:48
  and you're doing your due diligence, make sure
• 18:50
  that you help create the accurate picture. Because
• 18:54
  like I said, we were in there, we were going
• 18:57
  unit to unit and nobody realized the fact that
• 19:00
  hey. almost all of these units have LVP. When
• 19:03
  we were told, most of them still had carpet.
• 19:07
  You don't want to have any surprises for your
• 19:09
  investors or your bank or anybody. Just know
• 19:13
  as much as you can going in. It's going to help
• 19:16
  with the negotiation process. It's going to help
• 19:18
  if you're trying to do a retrade. You want to
• 19:21
  make sure that you have a lot of those intimate
• 19:23
  details to be able to have that bargaining power.
• 19:27
  But again, Matt, thank you for being here. for
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  sharing your information, your knowledge, your
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  experiences, because that's how we welcome. I
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  hope this will be helpful. Absolutely. If nothing
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  else, it was fun. So, guys, remember, you can
• 19:44
  get in on the live side. If you do that VIP subscription,
• 19:47
  you'll get the live site upgrade for free. And
• 19:50
  we'd love to have you there. But there's tons
• 19:51
  of information here. And until next time.