Getting your offer accepted after making best and final is an exciting time. Now the real work begins. As a multifamily investor myself, I know how exciting this can be for you and your team. At this stage, you have attorney fees, inspection fees, travel expenses, time, energy and sometimes emotions involved in the deal….Sometimes to many emotions.
Our team recently inspected a 220 unit apartment complex near the panhandle. The syndication team’s main concern with this property was the stucco. This property was stucco over frame with numerous errors in the application. There was bulging and delaminating stucco on every building, stucco below grade, lack of flashing, no relief joints and no weep screed along with a host of other discrepancies. We performed a Level 2 type stucco inspection to best address their concerns. Moisture and resistance testing was conducted on the substrate behind the actual stucco. Areas suspected of water intrusion were tested for moisture levels and water damage. These areas included below decks that lacked ledger flashing, roof to wall intersection, below windows, along parapet walls and any area with a high probability of water intrusion. Moisture reading above 30% were found in numerous locations and on practically each building. Anything above 18% moisture content is considered elevated. The substrate was softer than normal on each area that was probe tested, but this softness did not feel like water damaged wood sheathing typically feels like. We were actually puzzled by the softness and consistency of the substrate. Luckily while inspecting the roofs and parapet walls we found some locations where the stucco had pulled away from the parapet cap. This allowed us to see what was being used as exterior sheathing and to our surprise, it was fiberboard. If you’re not familiar with fiberboard, it is similar to particle board and does not do well when wet and in high humidity.
Fiberboard is not a good product for sub-tropical climates like here in Florida. Especially when the stucco is poorly maintained. There were numerous large voids and cracks in the stucco that allowed water intrusion behind the stucco. And since some of the walls on these buildings did not have weep screed and were not open along the bottom of the wall, water stayed within the wall cavity. This condition increases the humidity levels within the wall cavity. If you have seen fiberboard, you will understand how high humidity can cause the fiber board to fail and soften. In this case the fiberboard had softened so much over the years there were many areas where the fiberboard pulled off the fasteners and framing.
To confirm our suspicion on this product, I reached out to the Bob Koning, who is the President of the Stucco Institute. Bob said Florida, is the wrong climate to use fiberboard for exterior wall sheathing. I sent Bob some videos and pictures of the stucco. The Stucco Institute provides training and best practices on stucco applications and Bob is an expert in anything that has to do with stucco. Bob said that this was the worst stucco job he had ever seen. He said the stucco needed to be removed, fiberboard replaced with plywood or OSB and a new stucco finish applied and painted. He estimated the cost to be approximately $15 psf. On a 220 unit complex this job would be well over 2MM dollars.
At this point the syndication team decided to reduce their offer price and the seller decided not to accept their offer. Now keep in mind this syndication team had been working on this deal for well over a month and had a lot of energy and time invested. They had a lot of money already invested for attorney fees, inspection fee, travel fees and other cost associated with doing proper due diligence.
Now, this team of savvy investors had a choice to make, keep their original offer price and hope it worked out for them and their investors, or walk. Like true professionals they chose to walk from the deal. Could they have just kept patching the stucco and made it work? Possibly, the stucco has been damaged for years and had many errors in installation ever since the property was built. My concern was that trying to “make it work” would have hurt them on their exit. And that potential new buyers would have wanted concessions on the stucco – that at this point would have had 5 more years to fail. Also, even if they systematically replaced the stucco – one building at a time, this would have a huge impact on their budget and overall returns.
In this competitive environment it’s more critical than ever to stick with your underwriting and do proper due diligence. If it doesn’t feel right and the numbers do not work…Walk away. Even if that means losing thousands of dollars in time and money already invested. Savvy investors know when to walk away. Sometimes, the best deals are the ones that never happen and this savvy group of investors understood that.
To Your Success
Multifamily Inspection Services
Serving all of Florida
To Your Success