Today’s Investment story comes from Sean Morrissey, who entered the Real Estate forum as an investor in 2003, and now leads one of the premier residential property management firms in the Fox Valley area. Sean is a “buy and hold” real estate investor that has a rental home portfolio throughout the Chicagoland area and focuses on value-add opportunities. Sean lives in Aurora with his wife, two children, two cats, and dog.
This investor story is different from our prior ones in that it focuses less on the initial purchase and rehab, but more on an event that occurred months after the investment was stabilized. Sean found the 16-unit apartment building via a postcard campaign he ran in the city of Aurora in 2017. He initially thought he would be able to broker the deal with several sets of investors; however, this would have made him a minority partner. To avoid giving up too much equity, he found a way to take the deal down himself.
After rehabbing much of the property and filling many of the units with qualified tenants, Sean’s value-add opportunity was thrown for a spin. Late one Saturday night around Christmas time, Sean received a call from the police -- his building had a fire and they needed him to get there as soon as possible. When he arrived, Sean noticed that there were two fire trucks, an ambulance, and 5 police cars. The number of possible outcomes which could have come from the damage were endless, making the situation all the more stressful. Sean came to learn that the fire started in the kitchen - likely from a stove burner or the stove’s exhaust fan.
One of the first things that Sean noticed was that the firemen didn’t have to knock down the door or heavily damage the property. The fire actually burned out due to a lack of oxygen. Luckily, the damage was mostly limited to one specific unit. The entire unit itself was completely black from smoke damage. Sean also noticed that the air conditioning units were melted from the heat of the smoke, and that the kitchen had been completely destroyed.
At this point, Sean was in very uncharted territory. As an investor who hadn’t previously dealt with a fire, Sean wasn’t entirely sure what his next steps should be. Sean initially panicked because the renters didn’t have renter’s insurance, but was pleasantly surprised when American Red Cross came out and said that they could house the tenants for three days.
Sean’s insurance company, Acuity, did a great job of processing the claim. After the tenant used the three day stay provided by American Red Cross, he went to Mexico for a few months. Acuity actually swallowed the entire claim, despite the fact that the renters didn’t have renter’s insurance. Interestingly, Sean was able to provide the claim adjuster the lease agreement, after which they gave him 5 months of lost rent. This “loss of rent” coverage allowed Sean to refinance the property despite the vacancy. Sean noted that the lease had a clause indicating that if an insurance claim is involved with the property, it would automatically terminate the lease; as such, he no longer rented to this tenant after the property was repaired.
As he was looking to repair the property, Sean ran into some immediate issues. First, he had to find out how to start the unit’s rehab prior to payment from the insurance company. Acuity immediately paid him the first two months of lost rent, and he started a GoFundMe for $600 worth of the tenant’s prorated rent payment.
During the fire, the fire department knocked open the ceiling kitchen’s ceiling in which there were no fire walls in the attic (the house was built in the 1970s). Acuity agreed to give Sean all new rafters and insulation in the attic. Sean pulled permits from the city of Aurora as soon as possible, but ran into some permitting issues. First, they required him to use ⅝ inch thick drywall, but his contractor used slightly thinner drywall. The city did not let use alternative solutions to remedy the thinner drywall, so he had to resort to replacing the drywall as it stood before the city provided him a new Certificate of Occupancy. Currently, he is using an old Certificate of Occupancy to keep the unit occupied.To compound the issues, the contractor’s foot went through a different unit’s ceiling on two different occasions, causing more repairs to be done.
Replacing the drywall required placing the tenant into a new home for 10 days while the contractor performed the repairs. Thankfully, the insurance company was at fault for the delays (this occurred 11 months after the fire), so they are going to pay the tenant rent for the entire month of December 2020.
Sean eventually refinanced the $840,000 property with a commercial loan using US Bank. He spent a total of $175,000 renovating a few units at a time, financed by a combination of zero interest credit cards, a business line of credit, and his own cash. When all was said and done, the building appraised for $1.52 million. Using this appraisal, Sean refinanced the mortgage into a Fannie Mae Small Balance Loan at 75% loan-to-value. One downside to note with this loan was that he had to maintain a 1.25 debt coverage ratio for 12 months (with quarterly checks from Fannie Mae).
Since the incident with the fire, Sean has been better at screening contractors, and is now more thorough in his tenant introduction speech as it relates to renter’s insurance. His most recent purchase was a property in Joliet, as he is looking to continue expanding his real estate investments.
Despite the fact that commercial insurance carriers do not appear to care too much whether tenants have renter’s insurance, it is still advisable to require or encourage tenants to obtain such insurance. This allows them to cover their possessions and the cost to relocate while the property is being repaired in the event that the owner’s commercial insurance provider does not cover the renter.
Ask the renter to add the landlord or property manager as an “additional interest” on the renter’s insurance policy so that the landlord is notified if the renter cancels the policy.
If the tenant does not obtain renter’s insurance, but it is required in the lease, it provides the landlord leverage in the event that the landlord wants to evict the tenant at some point.
Keep in mind the idea of using a GoFundMe for various issues that might occur in your real estate investing, or even in your personal life.
Validate that contractors are licensed and bonded.It is extremely important to do things to code to avoid safety hazards and to prevent the city from withholding a certificate of occupancy.
Review your insurance policies to ensure that you have proper coverage and that it is aligned with your goals. It is too late to go back once an incident occurs.
How to best contact Sean