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Rehabbing Apartment Properties, Part 2

March 26, 2014

Another important item to consider when contemplating the rehab of a multi-family property is when and how to schedule a property inspector visit. The visit should be scheduled before signing the purchase contract, if possible. At a minimum, you can have it written into the purchase contract that you have 30 days to have the property inspected. Some sellers will pay for an inspection pro bono, but in most cases you will have to foot the bill for this. A licensed commercial property inspector will write a report detailing all the work that needs to be done, plus the estimated cost to cure. If you are buying this property from a bank for what appears to be a great price and you don’t have time to have a property condition report done, at a minimum be sure to walk the property with the contractor who will be doing the repairs. Any red flags that arise should be set down in writing, and it is a good idea for the builder to document the discussion in a letter to be signed and dated with the cost to cure. Once you have something in writing on the property inspector or contractor's letterhead, you can take this back to the seller and try to negotiate a better price if the repair work is substantially more than anticipated.

Of course, one thing you will not want to overlook in your discussion of a potential rehab project is the American Disabilities Act (ADA). This federal act mandates that public accommodations (including most rental housing) need to be made accessible to people with disabilities. The ADA can make or break any rehab project and any potential gray areas could lead to major financial pitfalls. Local inspectors may be somewhat knowledgeable about ADA requirements, but being that it is a matter of federal law you’re dealing with, you will want to make absolutely sure all your t’s are crossed. A safe bet is to visit the ADA website at ada.gov, where you’ll find a list of requirements, or call the toll-free information line at 800–514–0301.

In the future, it may become easier to remediate properties due to a strong move toward standardizing and consolidating building codes over large geographical areas. For example, there are now three code-writing organizations that make up the International Code Council: the International Conference of Building Code Officials, the Building Officials and Code Administrators, and the Southern Building Code Congress International. Until recently, each organization had its own model code, but they now plan to do away with the three regional codes in lieu of a combined International Building Code (IBC). If more localities choose to adopt the IBC in favor of homegrown building codes, this could mean a significant streamlining of the entire rehab process.

Just as important as building codes and the ADA are potential environmental hazards. Asbestos, lead paint and underground storage tanks are hazards commonly found in old properties. If this is the case in the property you are considering purchasing, you will have to hire an abatement contractor for the removal of asbestos or lead paint, so you should figure that cost into your final decision. While the presence of asbestos or other environmental hazards will warrant more scrutiny in determining whether the property is a good candidate for rehab, it should by no means be a deal breaker for an otherwise promising asset.

Lastly, minimizing surprises is key to any successful rehab. The best way to do this is to conduct a spotless, unit-by-unit investigation prior to the acquisition of the property. Usually a very costly process, some subcontractors will do this for little to no compensation if it means getting in on the ground floor of a reputable builder’s rehab project.

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Item Date: 
Wednesday, March 26, 2014