What to Look For with Older Class C Properties
Class C properties are popular amongst multifamily investors. These older properties normally have a value add component and can be very profitability with the right repositioning strategy.
Class C properties are considered properties 30 year and older. These properties pre-date many of current code requirements. Building materials that have proven to be problematic are found in these older properties.
This article is a general overview of some of these problematic building materials. These materials include electrical panels and components as well as plumbing system components.
When walking a property there are things you should look for. This is a general overview on things to look for and how to identify them.
Problematic Electrical Panels: There are several panels to be on the lookout for. These include Federal Pacific Electric (FPE), Zinsco/Sylvania brand panels and any system with fuses. Any of these three can pose insurance challenges.
Even if the current owners didn’t have problems obtaining insurance, things have changes since they had the property insured. Many insurance agents will start the insurance policy only to have the underwriters deny the coverage 30 – 60 days after you close.
Federal Pacific (FPE Panel) Zinsco / Sylvania panel
Single Strand Aluminum Wiring
Properties built between 1965 – 1973 may have been wired with single strand aluminum wires. Ask the seller if the property has single strand aluminum, they may know. Single strand has proven to be a fire hazard over the years. Aluminum is a softer metal and can cause thermal expansion. As these wires heat and cool, they can come loose at outlets and wall switches causing high resistance that can lead to a fire.
Your inspector will confirm if the property has single strand aluminum wiring or not. If the property has single strand aluminum wiring there are ways the wire can be retrofitted to prevent total re-wiring of the property. Consulting with a licensed electrician and obtaining cost estimates is recommended. These cost need to be factored into your underwriting.
Solutions for correcting single strand aluminum: CPSC approves of only three methods for a permanent repair.
1) Complete Replacement of Copper Cable
2) COPALUM Method of Repair
3) Acceptable Alternative Repair Method/AlumiConn Connectors
Single strand aluminum, wiring
Electrical Service Ampacity: The main electrical service rating for each unit should be 125-Amps. 100-Amps minimum and even 100-amps services may require upgrading to a higher rating. If the units have 100-amps or less – Recommend checking with your insurance company to see if this will affect your coverage.
Plumbing Systems
There is a variety of plumbing materials used for both supply and drain lines. Properties built prior to 1970 will likely have cast iron drain-lines. Across the United States cast iron drain-lines are costing property owners millions of dollars in repairs and replacement cost. And while some properties haven’t experienced problems to date, many have. Soil PH, corrosive liquids put down drains and tree roots can cause these line to fail. If you are looking at older properties that have cast iron drain lines, it’s important to check with the seller about past drainage problems and/or repairs. Your inspector should flow lots of water during the property inspection.
Please Note: Many properties have the cast iron replaced from the building to the street. Keep in mind that there is still cast iron branch lines in the slab that could cause a problem later on. Having an in-line camera inspection on the drain lines is recommended and should be factored in with your upfront due diligence expenses.
Properties built from 1980 – 1990’s keep an eye out for Polybutylene supply lines (See Photo). These supply lines have proven to be problematic. Studies show that certain detergents can cause the pipes to fail and some of the connections have be known to fail. Most properties we have inspected that had Polybutylene were built in the early 1990’s. Some of these properties had copper stub-outs making it appear the property was plumbed with copper supply lines, only to have it connected with Polybutylene behind the drywall. If you look beneath the sink and see copper, gently push the pipes side to side. Copper supply lines should not bend. If the copper stubs bend when pushing side to side it’s likely Polybutylene. At that point further investigation is needed. Taking the shower valve plate off will provide access to the supply lines and you can confirm if Polybutylene is present. If the property has Polybutylene, this can not only affect getting insurance, it can also prevent an agency loan. Most new insurance policies will require the Polybutylene to be replaced.
In the pictures below – Picture 1 is of Polybutylene supply lines and Picture 2 is of PEX supply lines that are sometimes confused with Polybutylene. PEX piping manufacturers have also been involved in a class action lawsuits. Although PEX does not have the failure history of Polybutylene, it has been problematic with certain components of the piping. You can see in these photos the similarities between PEX and Polybutylene. I would not be surprised if the insurance industry, started raising premiums on properties with PEX .
Photo #1 – Polybutylene Supply Lines Photo #2 – PEX Supply Lines
Properties built in the 1950’s to as late as 1980 can have galvanized supply lines. Budgeting for replacement is recommended for galvanized supply lines as well (See Below Photo).
Galvanized Supply Lines
Side Note: When walking units check shower walls, for water damaged backer-board.
Water heaters: On average water heater last 10 – 12 years. I have seen some that were 20 years old. Figure $800 – $900 for replacement cost. Any water heater 8 years or older should be factored in as needing replacement. The age of the water heater can usually be determined by looking at the serial number. Data codes vary and can start with letter (Bradford water heaters). Typically the first four numbers are the month and year, or vice versa.
HVAC – Heating and cooling system can vary from region to region. A typical split system (Outside AC unit and inside air handler unit) normally last 12 – 14 years. Most manufacture warranties are 5 – 10 years. If an AC system is 10 years old, it’s nearing the end of its life expectancy and budgeting for replacement is recommended. The age of the unit is usually the first four digits of the serial number. This can vary by manufacturer – Example: If the serial number’s first four digits starts with – 1245 – This would be the 45th week of 2012. You can always Google the manufactures data code to confirm.
Prices for these system can vary by size, brand and number of units. Also, ease of replacement (Installation of rooftop units will cost more to install than ground units. For a builder’s grade system figure replacement cost of $2800 – $3800 per 2-ton system. There is approximately 600 square feet of cooling capacity per ton. There are 12,000 BTU’s per ton. To determine how many tons the unit is, look at the model number for a number that can divide by 12. Example – 18 (1.5 Tons), 24 (2 Tons), 36 (3 Tons) Etc.
Side Note: Make sure all air handler units have a condensation over-flow device to shut the system down in the event the drain line clogs. This can save you lots of money on preventable water damage.
Ventilation: If bathrooms Do Not have windows – They should have working exhaust fans that vent to the exterior. Poor air-flow in high humidity rooms like bathrooms create conditions conducive for mold growth.
Structure: With the structure, cracks in block, or stucco cracks larger than 1/8” with vertical displacement may indicate excessive settlement.
– Check condition of windows – Look for cracked glass.
– Check parking lot for evidence of ponding water.
– If in region with termites, look for exterior frame walls that are below grade (Like stucco and/or brick veneer over frame with the stucco and/or brick extending below grade creates conditions conducive for termites. Should see 4 – 6” of the foundation exposed. Also look for water damaged wood. Water damaged wood should be replaced.
– Check concrete balconies, walkways and stairs for spalling, cracking or delaminating concrete. Once the concrete starts cracking moisture intrusion occurs which causes the rebar to rust and concrete to start cracking. Once this condition occurs – it will gradually worsen over time.
– Make sure balcony and walkway railing in secured and spindles are spaced properly (4” or less).
– When walking the property look for trip hazards and other safety hazards. A common hazard we see is open junction boxes at the bottom of parking lot lights.
Roofing: Roofing materials can vary by region and so do the life expectancies. Here in Florida a 30 year shingle typically last about 20 years and sometimes less. Make sure the roofs have 3 – 5 years remaining useful life. Roofs with less than 3 years remaining useful life can create insurance challenges and will be a large cap ex item – Underwrite accordingly.
Flat / low sloped roofs should drain within 24 hours after rainstorm, 48 hours max. Ponding water will decrease the life expectancy of the roofing material. Flat roofs can increase insurance premiums.
Make sure roof to wall intersections and fascia and roof junctions are properly flashed. These areas are susceptible to leaking if not flashed correctly. Walls should not be in contact with shingles.
Large dips and/or humps in trusses or rafters can indicate settlement has occurred.
Make sure there’s only one layer of shingles. In most areas two layers is acceptable, however, not three. Keep in mind additional tear off cost for two layers will be acquired when replacement is need. Two layers of shingles can also cause roof sag due to additional weight of two layers.
In summary:
While older C class properties can be excellent investments and can be great value add properties, they have slightly higher risk and specific materials to look for. Factor in all replacement cost for any of these materials. And remember, just because the current owners did not have a problem getting the property insured, doesn’t mean you won’t. If you have any questions, or if we can help in any way, contact us any time….. We are here to help.
Happy Investing!
Multifamily Inspection Services
Community First Investment Group
Always looking to connect and build relationships with likeminded investors. Our target markets are FL, GA, NC, SC & TN.
matt@cfigwealth.com
Recent Comments