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Print Pagefrom Oct 2007 issue of Houston Real Estate Experts - FREE subscription
Is There Time for a Quickie? - Part 1
by Kevin Smith
Let me give it to you right here, right now. You need to know what you are getting for your money. Real estate investment is supposed to accumulate wealth, not distribute it, so take a good look at that house before you sign a contract. Caveat emptor, let the buyer be aware. We are responsible for our own investments, and it's up to us to make them work.
We do that best when we make good decisions, and we make the best decisions when we are well informed about what we are getting into. There are lots of decisions to be made when you are taking a property, and one of the most important decisions you will make is what to offer based on the condition of the property.
You have to know what it will sell for when it is fixed up. Then you have to figure out what it is going to cost to bring it to that condition. In order for you to do this, you must first evaluate the asset by inspecting it. In this two-part article, we'll look at how you figure out if this house is a good deal or not, based on the condition of the house.
Inspecting the house usually involves a licensed real estate inspector armed with the methodology of the Texas Real Estate Commission. He or she goes over the house with a fine-toothed comb and lists out every little thing that "is in need of repair or immediate attention." Like accounting, that level of detail takes time, and it costs you money. Besides, if you are looking at more than one piece of property, you are going to have to proceed at a pretty brisk pace to get everything looked at and evaluated for the purposes of making a purchase offer.
As investors, you will be looking at a lot of houses. Time is of the essence; the deals don't grow cold on the streets today. Harder to find the right rehab property, but you can do it if you can be agile and move quickly. If the property is occupied, if there are tenants, if the property is a foreclosure, or if you are trying to see ten houses in one day - you just have to be able to make the evaluations at a pretty brisk pace.
If the numbers don't work, if the deal will not make you any money, that property is not a good candidate for your investment model. If you miss a large item on the rehab budget, it could turn your investment upside down, and that would be the end of your girlish laughter. It could mean that you have to put more money into the project than the budget will allow, and where is it going to come from? It comes out of your refrigerator, my friends.
We can't let that happen, can we? We need a solid methodology that will give us what we need when we ask for the information. We need a technique that will be successful, something that we can do over and over again and reach the same desired result.
Want to know what the really big guys do when they go for it? Want to know what the successful real estate investors do when they look at a house they want to buy? Want to know how to do an inspection in thirty minutes or less? Come, gentle reader, I'll show you the way.
It's a quickie inspection, and it works like this. You look at the general condition of the house first. You walk from room to room looking to see if it needs paint, needs something fixed or replaced, see what is missing. You will later build a scope of work and a budget that will list all these items requiring attention, but for now we just want to get the big picture. Think of it as qualifying the property much like a salesman qualifies his prospects. Is this property the right one for me to put my money and my time into? It helps you keep your focused on the task of looking for the properties that will fit into your investment model.
Look at the general condition first. I walk all the way around the house, and I walk through every room in the house. Walls ceilings, general condition of the plumbing fixtures, appliances, lights, damage, anything that you will have to spend money on to bring the property to a good and marketable condition.
Once you have seen the property, you will know if this is a project that you can undertake and win with, or whether to disqualify it right now. Now turn your attention to the big dollar items that will make a formidable impact on the budget. Look closely at the three most expensive repairs that you will make in a rehab situation. They are the foundation, the roof, and the HVAC system.
Check the foundation first, because they usually take more dollars to fix than anything else on the house. If there are bricks, look for cracks. Look for a separation between the trim on the windows and the siding, especially if it is bigger on one end than the other. As you walk through the house, does it feel like the floor is rising or falling? Are you carrying the four-foot level you need to check the foundation for level? Look for cracks around the doors and windows, radiating from the corners. Look for doors that close or open themselves and doors that drag or stick when you open or close them.
When you look at cracks in the perimeter beam (the part of the slab that we can see between the grass and the siding on the walls of the house) remember that most cracks are considered to be cosmetic and not structural if they are less than 1/8" wide. Look for separation, which means that the slab has actually broken, and the two pieces have come apart from one another and left a space between them. The other serious failure is called differential settlement, where one piece of the broken slab is higher or lower that the adjoining broken piece.
If you have any question about the foundation, pull the level out and check it. Remember that if the deflection (rise or fall) is more than 1/4" in 4 feet, then it needs foundation repair. If you are not sure, get a foundation repair company or a licensed real estate inspector to have a look at it for you.
Problems with block and beam (block and beam means that the house is up on some type of blocks with a space beneath the house) houses are normally easier and less expensive to correct than concrete slab foundations. With block and beam foundations you have to remember to check the floors in the wet areas. Check around the commodes and the tubs and in front of the sinks for weak or missing flooring. The more extensive it is, the more it will cost to fix. You can get contractors in later to give you prices, but you don't want to waste their time or yours on a deal that isn't a deal.
As a licensed inspector who has done over 8,500 inspections on investment property, the problem that I have seen the most of is bad planning. Bad planning looks like incomplete scope of work and also inadequate budget projections. Even if you have never done it before you can learn to do it like the other successful people. It will teach you how to make the right decisions by copying what has been successful for so many people, and it will get you started a lot faster.
That's all for this month. Next month we'll continue with how you do a quickie inspection and talk about roofing. You can call me at 713-858-1330 if you have questions, there's never a charge for talking on the phone. I'm Kevin Smith, and I'll see you out on the property.
Kevin Smith, Professional Inspector
Kevin Smith of Forward Assist is a well-respected professional inspector with hundreds of investment properties inspected every year. Kevin has conducted "Mr. Fixit" workshops and served on the Board of Directors at the RICH club. He shares his treasure chest of secrets with anyone who asks. You can reach Kevin at (713) 858-1330.