By: Curtis Gabhart, CCIM
Here is a quick recap of some things I look for when doing a quick inspection of an apartment building or even a single family home and common issues I come across.
I like to do a quick review to the outside condition of the property in order to gain insight as to whether it warrants further consideration for purchase or investment.
Now, before getting into the details, let me summarize the most important factors regarding the physical condition of a property.
Some of the important visible considerations are:
- Reviewing the foundation and cement
- Checking the siding
- Reviewing the sprinkler systems
- Analyzing the quality of the landscaping
- Looking at the windows
- Looking at the roof
- Inspecting at the front door
- Looking at the gas meters
- Looking at the train gutters
- Reviewing the quality of the paint
- Looking at the overall neighborhood
When buying a property, whether it’s an apartment building or single-family house that you may plan on flipping, some of the concepts are going to be very similar, if not identical. With many investment properties, you will find an inside inspection is subject to an accepted offer. This means you will need to make some assumptions about the property before you submit your offer. This can prove difficult, especially when you’re not able to view the inside.
I’ll look from the ground up – I’ll start by looking at the ground and taking an overall look at the condition of the property to see what level of care has been maintained. As a general rule, if it’s a piece of shit on the outside, it’s probably a piece of shit on the inside. There have been a few exceptions where I’ve been pleasantly surprised when I got inside a property, but that’s exactly what they are – exceptions. I’d use this analogy as a general rule of thumb – if you see a car that looks junky on the outside, it probably just as junky on the inside.
Foundation – I’ll look at the foundation, all the cement on the ground near the foundation, and all landscaping near the foundation. I’m looking for things like sprinklers spraying on the building. I’ll then check if there is stucco peeling off the building, which can sometimes indicate moisture intrusion into the building. I’ll also check if the ground is sloping towards or away from the building; it should be sloping away from the building. If it’s sloping towards the building, it may indicate that a possibility of having a foundation or other problem that relates to water. If there’s cement, I’ll look for big cracks in the cement, which sometimes can indicate unstable soil or cracks in the foundation.
This could indicate further foundation issues
Landscaping – what is it going to cost me to improve the landscaping, what do I need to do to it, are there sprinkler systems, and are they automatic or non-automatic?
Building – what kind of siding is there? Is it stucco, brick, vinyl, wood? I pay close attention to the condition that it is in. If it’s wood, I will check for visible water or termite damage.
Eaves – Does the wood going into the eaves have damage? If there’s a lot of damage in the eaves, it very well could go into the attic rafters, which could be a lot more expensive. If it’s on the siding, what kind of siding is it? If it’s an old building, a lot of times replacing siding can get very expensive for two reasons:
the eaves is the part of the roof that meets or overhangs the walls of the building
- First is the fact that you may not be able to find that particular kind of siding anymore without having it specially milled.
- Second is anytime you pull something off an old building, you’re very likely to find unforeseen surprises. Because you can’t be certain of the magnitude of these surprises, it is safe to assume everything is going to cost you a little more than you think. Whatever you think the price is, assume it probably cost more than you originally estimated.
Windows- Are they new or old? If it’s an old building, are they wood sash or aluminum windows? Is that something that’s going to need to be replaced? Typically, the double-wood-hung windows that you see in houses or old apartment buildings are not in very good condition. With aluminum windows, I essentially just look at them and decide if I’m going to replace them or not. What you need to be aware of is in many areas where you replace these windows, there may be architecture review committees that require you to replace them with historical windows. This could prove to be very costly, especially if they are wood sash.
wood sash window
Building Corners – Does everything appear straight? If there’s siding, are the lines of the siding vertical or are they all straight? On the corners of the building, what does the wood look like? Is there stucco coming off?
Roof – Does the roof have something called a drip edge? This is a little metal edge that goes into the lip of the shingle roof. Are there rain gutters? If there are no rain gutters, water may not have been running away from the building. Because of this, I will spend more time thoroughly inspecting the foundation.
I look at the shingles of the roof; if there are many noticeable curved edges, it is likely on its last leg. Then, if I think I may need to replace the roof, I will look at how many layers of roofing there are. Typically, you don’t want to go past two or three layers of roofing. What that means is that if you replace a roof that has two or three layers, you need to put in your budget funds to tear off that existing roof before replacing it. You also will need reserves for unexpected issues when you pull of the old roof because you may need to repair the plywood underneath. Depending on how much work you do around the roof, you may have to re-sheet it.
re-sheeting a roof
Fence – Do I need to replace or paint it? Is the fence wood? Is it leaning, does it look like it’s on my property line, does it look I could add private yards for apartment units? Many times, you will find large open areas in the back of apartments that are shared. What we can do is put up a fence around the units and now each unit has their own backyard – a very inexpensive fix that not only can help you get higher rent but can reduce costs because you may not have as much landscaping to maintain
Paint (for older buildings) – If it’s pre-1978 and you have peeling paint, you’re probably going to want to get a lead-based paint test conducted. That’s going to tell you whether you’re going to need to do any kind of abatement or work on the property. If work is needed, you may need to use lead-based paint best practices, which can prove very costly. I usually recommend getting a test. Paint used in older buildings in San Diego is less likely to have lead in it compared to the east coast, where the weather is harsh and requires more durable paint. Most of the properties I have tested did not contain lead, but it is still important to get it tested.
If it is tested and comes back negative you do not need to follow lead based paint best practices. If you have a pre-1978 property and decide not get it tested, you still must work on it like it contains lead based paint – which is a good reason to get it tested in the first place.
peeling lead-based paint
Click here for information on lead-based paint best practices
Front Doors – Aesthetically, are they looking good? Are there any gaps? If I look at top of door, I will look for a little pie-shaped gap at the top. If this is present, it indicates there may be some settling in the property.
Meters – Is it gas or electric? Are there gas meters for all units? If the property runs on gas and there is one water heater, there should be gas meters for each unit and also for the building.If it’s a multi-unit building, I count how many individual meters there are. There should be as many individual meters as there are units, plus one additional one, which would be for the common area. If you’re missing a meter, you may have something called a bootleg property, which means one of the units may have been put in unpermitted (just something to look at). These are important things to note because in San Diego the tax assessor will charge for all the units, and state on the public website that it is X units, but that does not necessarily mean they are legal units.
Electrical – As far as electric meters go, I’m looking at what kind of panel it is. If it’s old, it could be something called knob and tube, which could indicate that I’m going to have to put a lot of money into upgrading the electrical. This will likely increase the interior costs as well. I then look at the circuit panel – is it updated? Then, I’m looking at how many amps each unit has. Ideally, you want 100 amps, but for many apartments, you’ll have between 30-50. Newer apartments should have 100.
Knob & Tube Wiring
I’m also looking at the type of panel; Murray Lampert typically have problems, so I want to check what kind of panel there is. Are there circuits in the units? Is there any room to add additional circuits if you want to add appliances or anything else inside the property? Is the inside of the panel painted? If so, it could indicate that the previous people who worked on the property weren’t doing things the proper way. This would lead me to believe other things were not done the proper way.
This is quite the mess!
I’m looking for bunches of electrical or cable lines running all over the place. We’ve bought properties where it looks like spaghetti running all over the building, and we’ve ended up having to rip it all off and start from scratch simply because it’s easier to do instead of trying to sort it all out.
Staircases – When I walk on the stairs, I make sure to walk very heavy. I’m looking to see if it seems squishy. Is termite damage visible, are the railings stable? In compliance with code, railing spacing should be about three and a half inches. For me, if I can make a fist or place my hand through the pickets of the railing, it is most likely not up to code and I’ll have to replace it depending on my insurance company and how bad it is. I look at the stairs to see if the tread rise and depth are consistent. It should be around 7” of rise and 11” of depth. If they are not to code they may need to be replaced.
Inconsistent stair depth
After An Inspection – Once the inspector gets into the property and finds things that I may not have found, do I decide not to buy the property? No, not at all. It just helps me to figure out what it’s going to cost to fix or if I even want to fix it, and what exactly I’m getting myself into. That’s what is critical about the inspection. You can make a well-informed decision on the property rather than going in blindly and being surprised later.
It is naïve to think you can figure out how to hit a certain number or certain profit, or how to stay within a tight budget, without being informed of all the problems. This is valuable while I’m negotiating in the beginning. If I’m coming in lower than the initial offer, I can right away talk to them about some of these problems, which, most likely, the owners already know about but haven’t disclosed yet or many times they had no idea there were these problems which make it easier to negotiate.
Keep in mind, none of this is 100%. These are just good rules of thumb when looking at a property. They have served me well to establish if an investment property warrants further investigating and analysis, and if so, what kind of offer to submit. This obviously isn’t everything. I depend on inspection in most cases. I will be posting an interior walk through an article in the weeks that follow. I’m interested to hear your story and what else you may look at when walking a property. Please share your take in the comments below.
**Disclaimer** – make sure you are walking the property with the consent of the current owner. Please keep in mind we are in the San Diego market and practices in your area may be different. I highly reccommend you get a building inspector to look at the property unless you are highly confident in your ability.
Curtis Gabhart, CCIM President Gabhart Investments, Inc.
Edited By Blake Imperl, our newest intern at Gabhart Investments. Check out his Linkedin page by clicking here.
Gabhart Investments, INC. (GII) is a privately held real-estate investment firm based in San Diego, California. We operate in a rapid paced project driven environment. The employees at Gabhart Investments, INC. (GII) are close-knit, highly qualified professionals, possessing the necessary competence to meet our clients’ goals. GII promotes ethical balance for continuous training, leadership, and teamwork. Since 2000, GII has acquired and converted multi-family properties into condominiums throughout San Diego County. The new real-estate market has presented us with many opportunities to take advantage of. Along with our equity partners, Gabhart began to grow its portfolio in, arguably, the strongest housing market in the country. Thus, we consistently generate superb risk-adjusted rates of return for our investors. In 2005, Gabhart’s private investment portfolio had transactions in excess of 40 million dollars. We intend to accelerate our business model by maintaining our focus within the purchasing and rehabilitation of bank owned real-estate property. Our additional services include consulting, brokerage, venture funding, development, construction management as well as property and asset management.
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Foundations of Commercial Real Estate: Players & Properties
If you think about it, there really are only two facets to dealing in property; the people, and the properties. Everything falls into or between these. So let’s begin your entrance to the world of commercial real estate (CRE) and take a deeper look at both of categories.
Many people who are commercial developers have a background in brokerage.. While there are many similarities, the largest key difference between the two is that emotions play a much smaller role in commercial real estate as compared to residential real estate. Buyers, Sellers, Tenants & Landlords are much more motivated by profit than by individual preferences. Of course commercial real estate transactions are often much more complex and take longer to complete as well.
Now, let’s consider the major players involved in the Commercial Real Estate Industry:
The Major Players
Real Estate Brokers
As anywhere else, the job of the broker here is to find and facilitate a transaction between a buyer and a seller. Most who play this role in CRE call themselves brokers, however this is not necessarily 100% accurate as some people hold a broker’s license, while others hold a salesperson license. Brokers working for buyers, more often than not, need to find properties suitable for purchase outside existing MLS listings. Whereas brokers working to sell a property need to target a highly niche segment of buyers and investors. As commercial real estate transactions are quite complex, brokers may or may not be involved in the entire spectrum of the transaction. Additionally, they may or may not refer other professionals during the course of the transaction.
The key thing for residential realtors to realize is, that their previous buyers may prefer to deal with or through them, rather than a commercial real estate broker who they don’t know. Thus, it is highly recommended for residential realtors to joint venture with or refer to a commercial broker who has the experience….. that their clients can be served without losing business or relationship value. (Let us know if you are looking for tips on evaluating the right commercial real estate brokerage to associate with and how to negotiate with them, we will have an article on that soon.
Plus, it is crucial to note that the Code of Ethics layed out by San Diego’s Association of Realtors ® recommends against brokers practicing beyond their expertise. For more details, refer to their publication here.
As with any real estate transaction, finance needs to be secured. While most buyers have their own source of financing, the broker needs to have relationships with various types of lenders; construction, acquisition, equity and permanent. These relationships are useful during preliminary valuations and can also be crucial in enabling financing of the final transaction.
Just like most commercial real estate players, it’s important to have a lender who specializes in the product type you are dealing.
Architects, Engineers & Planners
During development and redevelopment (and sometimes even leasing) buyers may need the assistance of any of these professionals, so it is important that a broker has developed such relationships beforehand to enable a smooth transaction.
As the profit motive is significantly larger in commercial real estate deals, buyers and sellers will often want financial and tax advice. This is usually done by consulting with their own accountants and financial advisors, which is fine and recommended, however, when appropriate it can be helpful for the broker to be involved in these transactions so the broker can better advise on the real estate portion of the transaction based on the items the principal financial advisor recommend.
There is no doubt that legal advice will be needed in any commercial real estate transaction and as a broker, unless you hold a license in law, you are not permitted to provide that advice or draft legal drafts and deeds. It is, again, therefore important that the commercial real estate broker has established relations with competent lawyers who can facilitate transactions rather than killing them. Are you looking for such attorneys to work with? Let us know and we would have happy to provide references.
Sellers want appraisers’ valuations in order to establish a selling price. Buyers pay for appraisers as mandated by lenders before they extend the loan in order to purchase the property. Appraisers need to be not only specialized in commercial real estate, but also in the type of commercial real estate as the property under consideration.
Depending on the type of transaction, various other professionals may need to be involved. This will change from time to time and here are a few scenarios elucidating the requirement of additional outsider help:
- Business Brokerage
This brings us to the closure of this part of the article. Do you know any of these professionals who you would like to recommend? Are you looking for any such professional for your transactions in San Diego Commercial Real Estate? Or do you just have some questions? Drop a comment and share; we would love to hear from you.
San Diego Commercial Property Types
As mentioned already, Commercial Real Estate transactions are much more complex than Residential real estate ones. As a result, brokers often need to be specialized within specific types of properties of Commercial Real Estate. However, if the geography is a small market, it is possible for the broker to service most segments within commercial real estate. But in more larger markets, including San Diego Commercial Real Estate, it is very difficult to know the market of every product type. make sure the broker you are working with has specific experience in the type of property that you are interested in.
While there are many types of properties with the San Diego Commercial Real Estate Industry, the major ones are ;
Multi-Family 5+ Units (more on this later)
Some of the smaller segments include Hospitality, Storage and Multifamily, which is last in this list, but the largest within this category of sub segments. Interesting to note that Gabhart Real Estate Advisors has experience within most of these segments in San Diego!
Now let’s consider each major type of property within the Commercial Real Estate segment:
Each type of user has their own requirements. As a broker it’s important to understand the factors that tenants would consider important for their business. What is important for a Law Firm is not likely to be important for an IT startup, and so forth. While there are many sub categories (Converted homes, Low-rise, Mid-rise, High-rise, Specialty etc.) within this category, most of San Diego’s Office Properties fall under the following:
Footfall, window and internal display & layout are the more important variables in this type of property. In San Diego Office Showrooms often fall within prime localities in order to attract the most customers.
As the name suggests, a space suitable for storage of goods (depending on the type of goods) as well as administrative and sales teams. Location, price and usability are often the most considered points in such transactions. Certain suburbs of San Diego are well known for Office warehouses.
Security, Storage capabilities, Bonded, Climate control are some factors to consider. Most of San Diego’s Warehouses are located in suburban areas around the 13 cities.
Here, often legal matters matter the most. Free trade zones, licensing for light and heavy manufacturing are of prime importance. Availability of labor nearby is another key consideration. Free Trade Zones # 153 in the San Diego / Tijuana area is very popular for various manufacturing concerns for precisely these reasons.
Is another type of industrial product (do a small amount of research to make sure I am correct and do a small blurb.
Apart from the factors mentioned in various types of office spaces above, there are various more which apply to some or all such properties. They are:
· Labor pool availability
· Proximity to customers
· Transportation access
· Space configuration
· Ceiling Height
· Floor Load
· Docking area
· Sprinkler systems
· Zoning laws
· Govt. Incentives (local, State & National)
· Buy vs. Lease
Additional resources recommended by National Association of Realtors ® is available at the website of Society of Industrial and Office Realtors ® www.sior.com and the CCIM Institute www.ccim.comalso add IREM
Again, this is a wider segment than most may imagine and carries various sub categories of properties within the retail real estate segment. They are:
These are used by destination orientated retailers such as Banks, Retail Chains or even Grocery shops.
When retail is being financed, the tenants business strength is reviewed for considering the tenants lease as a security for a loan. Financially stronger tenants in San Diego (and other places) are often granted better terms. However, these terms may change during the course of tenancy based on the business outcomes of the tenant.
Big Box properties in San Diego are limited to large National or International companies. These are companies that require 25,000 + sq. ft. of space, sometime even more than 50,000 sq. ft.
Small Strip Center
There is no dearth of San Diego’s Small Strip Centers. These are buildings which contain numerous mom and pop shops i.e. retail outlets which are typically owned and operated by the same person.
Neighborhood Shopping Center
Every San Diego neighborhood has one as each such center services within 1-3 mile radius. There is always several anchor tenants, which vary from cleaners, nail shops, grocery stores et al. Recent trends observed by the National Association of Realtors ® notes that drug stores used to be a part of such shopping centers, however increasingly they have become stand alone shops near the parking lot, and as such, are known as an “outparcel”.
Community Shopping Center
These buildings service a larger community than neighborhood shopping centers. They typically service up to a 10 mile radius and house a major retailer such as Walmart, or Movie Theaters etc. Fashion Valley & Westfield Horton Plaza are a few that fit this category.
Regional Shopping Center
As implied, these buildings service a wider region and are often known as malls even though they need not be an enclosed space. Tenants include a variety of Regional & National tenants including boutique stores. The size of such stores range between 400,000 sq. ft. and 2 million sq ft. Beyond that, and they are known as super regional. However, it is not just the size of the mall that determines if a mall is a super regional shopping center, but also the tenant mix and sales per square foot to ensure that the building is actually popular amongst customers.
These centers vary in size and objective. They can house certain types of décor such as antique or be geared towards a certain segment such as parents by selling just baby related items. Belmont Park is an example of a San Diego Specialty Center, focusing on wearable and accessories for beach goers. Surfs up dude!
This is where monuments are made. Realtors ® focusing on Land deals are often (or should be) Accredited Land Consultants, which is a designation imparted by the Realtors Land Institute. This is a highly specialized niche within commercial real estate as planners, architects, engineers, developers and brokers are all often involved. Some of the key considerations in San Diego’s Land transactions are:
· Suitable Soil
· Nearby Amenities
Let us know what you think and what else you would like in included in future posts.