Inspected Thoughts

I noticed a little tidbit about a new requirement for property managers and landlords in Texas: you need to be able to provide to perspective tenants a set of criteria that you use to choose who will be your future tenant. I was trying to find the exact Property Code that deals with this issue, but I could not find it. I did discover that the rental application form used by Realtors created by TAR has a line referring to this form.

Real estate investors that I work with are not using property managers or Realtors to help them deal with these properties, so I thought I would go over this idea with you to make you aware of your responsibilities. The criteria form needs to be typed with clear definitions of what you will consider to be an acceptable client, or what might cause you to decide to not to rent to a potential tenant. Your selection process may include factors like a tenant’s criminal history, credit history, current income and rental history. Spell out clearly what your concerns are. For example, you may not want sex offenders at all, but what if a drug conviction is acceptable if the tenant can show that he successfully completed rehab? You have to consider the details which may cause you to have an exception.

On your application form, you should have a statement informing the possible tenant of their right to see this list. The statement is simple: state that this form is available upon request, and generalize what may be in the criteria (like the factors for the selection process mentioned above).

If you are unsure of your criteria list or the statement on the application, it may be worth it to consult a real estate attorney. The best prevention for loosing a law suit is to do everything properly when dealing with tenants and applicants. In that case, a lawyer can be worth it.

As most home inspectors should be aware by now, the new SOP and report form go into effect in February 2009. There have been changes made that we need to be aware of, and that we need to include in our reports. I took a preliminary version of those SOPs to create a simple checklist for our inspections. The requirements are listed on the form, and then spaces are left for notes. In some cases, I put down Yes/No answers which can be circled.

I based it on the SOPs so we would have a quick reference guide to ensure that we are meeting these requirements as we are getting used to them. I also included space at the beginning for some basic information about the job to have on hand. I included reminders to write the serial numbers down for appliances. This is not a requirement, but it is a good practice. You can then say that this is the specific piece of equipment that was examined, in case a unit was changed out, and there is an issue with the new unit. If you come up with any ideas on how to improve this, let me know, so I can update this file. I created this one fairly quickly, so I probably will be making changes to it soon.

For Real Estate Investors: please use an inspector, he says in a whining tone;) Alright, now that is over with, I am sure that you would like some type of checklist form. This may suffice, but you have to educate yourself on what would be considered a deficiency,how tests are performed, or what the terms mean. The SOPs are just a guide of the minimum requirements of what we home inspectors check. Otherwise, I think this may be a good starting off point for your checklist. You have to remember, home inspectors are not concerned with bad paint jobs, or dirty carpets. You may want to add notes about these concerns.

Here it is in pdf format:

I received the call from California. An investor was looking for real estate in Houston, and she needed a home inspector in Houston. Most real estate investors pick a comfort area, where they know the homes and their values, but I have performed home inspections for a few investors this year, who came from other parts of the country. Houston is not a bad place to invest when you consider that our home values are still rising, we have foreclosures or other distressed properties, and we do have renters looking for homes. However, I think that there is an issue with individuals looking for properties far from home.

Consider the difficulties when looking at investment properties in another state. Finding the home, and making the initial look around to see if it has potential. Arranging for the house to be inspected, appraised, surveyed, or whatever else needs to be done. Negotiating with the seller or the seller’s agent. After the purchase, you face finding renters or buyers. Do you know a contractor to make any repairs? You need to check that everything is being handled well.

Some of those issues are easily taken care of with a good real estate agent (especially one with investor experience). Blogs are a great way to examine a realtor, when you cannot meet them, but this is not always possible. You may need to spend some time talking to different agents to get a feel for them. In Houston, I would recommend Erion Shehaj (his is the Investor Nation Blog in the blog roll), so maybe asking a few home inspectors in the area you are looking at may be helpful. Once you have the Realtor, you may find the tasks mentioned above can be dealt with by them. See if they will help with the selling or renting of the house; they may then be willing to look over the contractor.

That is the biggest problem which you will face. Earlier this year, I found a general contractor was reporting back to his investor in another state that he had done certain work. My clients (the buyers) kept asking that I go check. I ended up going to that house ten times over the course of a month, and the work was never completed. Finding a good contractor may not be hard, but they may not be reliable if they feel that they can get away with it. If the Realtor sees the possibility of more income from the transaction, they may be willing to check up on the contractor. Otherwise you may find that you can retain a home inspector to look over a contractor’s work.

When looking at houses in your own neighborhood, you can check and handle much on your own. Just remember that you will need a confidant to make long distance real estate investments work.

After having written a post about using REITs as a tool for real estate investors to discover which kinds of properties to invest in. I had a person ask me which REITs had lower leverage (based on the comment to that post). Since you can purchase a REIT that specializes in one type of property, is there a sector that is generally lower in leverage than others. Maybe, but I find that you can discover firms that are run properly, whether they are buying office buildings, hospitals, or hotels. To help you pick a REIT, I thought that I would go over some guidelines that I use.

Firstly, I am not a financial advisor nor some stock guru (I am a home inspector); I am only explaining my method, so you can build upon it to find your own REITs. I will not explain the terminology in this post, because there are better sites for those definitions. I think that Mr. Bogle’s advice of investing in index funds is best for a little investors, but I also think that REITs can be a great introduction into real estate investing for those who do not want to deal with owning an actual piece of property. Here we go.

Where can you go to find a stock? Since I have a brokerage account, I use the research tools available to me on that site; however, there are many free stock screening tools to be found on the internet. (Type in that phrase into your favorite search engine to find a list). In the past, I have used the one provided by Kiplinger’s which I really liked. Today, I checked what would come up in a search, and I found one from Zack’s Investing site that was really good. Take some time to learn how to set up your search, and maybe try a few different ones to see what they come up with on a list.

What should I be looking for in a REIT? To find my parameters, I looked at a set of metrics which made sense to me, and wrote down those numbers for twenty different companies, which I then averaged out. Here is the metrics list:

P/E (price to earnings) ratio: average = 24.03 I made my range 20 to 28 I felt that this range showed that there was not too much unqualified belief in the stock’s performance, nor a feeling of bad performance by other investors.

Debt over Equity: average = 2.18 to play it safe, I decided to look for firms that had a number lower than 2.18 (most REITs take on debt to buy real estate, but you do not want them to be overburdened by it).

Yield %: average = 3.72 I decide to look for yields greater than 3.5% (what can I say, I like dividends, but all REITs have to pay out there profits)

ROE (return on equity): average = 11.69 I decided on a range from 8 to 15

ROA (return on assets): average = 4.09 I decided on a range from 2 to 6

P/B (price to book) ratio: I chose a range of 1,21% to 6%, because I associate that figure with more value stocks.

I also focused on smaller firms (under $10billion), because I thought that they had room to grow, and I chose only one firm to represent a sector of REITS, beacause I was not looking to buy a great many stocks. I looked at the fluctuations in price over time (anything that was swinging wildly up and down was out); I also looked at the stock price history (there had to be a good steady climb over ten years). A note on the ROE and ROA: I felt that if management was going too far below the average, they were not doing a good job. If they were too far above average, they may easily loose control of the situation like a bubble popping. That is why I came up with a range that I was comfortable with. Lastly, I investigated news articles about the firm. If I felt that something was amiss, or not to my personal liking, I scratched their name of the list.

Do these criteria guarantee me success? No; stocks will always carry a degree of risk, but I think that these factors help me choose firms that are doing a good job. I once worked as a senior manager where I could make a good deal of money in bonuses if I met certain financial numbers. I frequently saw managers fudging numbers in the belief that they could make it up the next quarter, so they could obtain that bonus which they needed to pay off bills. I one time discovered $10,000 in unpaid invoices for a small retail location that were hidden to make that spot appear more profitable. It took me three months, but I made the location profitable through wise planning. I came away from the experience realizing that many managers feel that it is easier to fudge than to spend the time to work. Considering the current financial crisis, I think that I cannot always trust financial numbers, but I think that these ranges play it fairly safe; however, you have to judge for yourself when picking stocks.

A buyer has the right to have a full home inspection before his purchase, but a winterized home, particularly a foreclosure can present a problem. Today I inspected a home which was following a pattern in some foreclosures that I have seen recently, and that is the plumbing fixtures are being left on. What is strange about this fact is the hose bibs for the washing machine is being left on, and the water heater drain valve is being left open. With the water being turned on, you will find water poring over your floors or attics. Generally, the firm winterizing the home should try to prevent problems from happening when the utilities are turned back on, but this practice seems designed to damage the house by trying to inspect it. The even odder aspect of this home is that the firm which did the original winterization realized that an exterior hose bib had a leak, so the bent the pipe in the wall to prevent the leak from showing up. When straightened out by the buyer, water flowed into the wall. This house really needed to be checked after the winterization.

I did not want to look at the rapid collapse of my stock portfolio. Each day last week brought more bad news, and I am not sure that I could take any action which will benefit me dramatically. Sipping my first cup of coffee this morning, I braved the currents to look at my portfolio. I wanted to laugh. I was trying to see if any stock had held its own. One of my REITs did. Glancing at other REITs in my portfolio, I saw that this was not the case with the others. The idea dawned on me that these REITs could provide a useful tool for a real estate investor who was analyzing properties.

REITs are “real estate investment trusts”, and they are the easiest way for many of us to become real estate investors. Most of us think of buying a property when considering this type of investment, and over the long run, I believe that ownership of land and building would produce a better return than a REIT, but I feel that these stocks are good for helping me round out my investments. The interesting thing about REITs is that you can find firms which specialize in one type of real estate. One could deal with medical properties, while another deals with commercial office space, and so on.

How could REITs become a useful tool for the real estate investor who wants to own their property? These stocks could show you the trend in what is considered a good property to buy. In my case, the REIT which held its own specialized in health care properties. The population is getting older and various type of facilities need to be in place to meet this need: retirement communities; medical office complexes; and hospitals for example. Investors who work together may be able to buy into such a facility, or even an investor who has the funds alone. However, I am thinking along the lines of smaller real estate investors, so you may consider networking strategies to work with other investors to purchase a building that would specialize in doctors’ offices.

There are other opportunities for analysis though. The house that you just purchased as an investment could be sold or rented. Looking at REITs that specialize in apartment buildings will show you that it is better to rent now than sell. Taking a broader view, you may have sold some homes, so you have some cash, you may wish to consider stepping up to buy an office building instead of a home to rent (the current values of REITs would suggest not to take this action).

When planning out your strategy, glancing at the trend in REITs could be a way to make a decision about your next step.

As I turned on the light in the attic, the first impressions were bad. The real estate investor had popped her head up, and she was a bit shocked as well. New lumber had been added in some unusual configurations, while older framing pieces were at strange angles. You could be left scratching your head.

First impressions of a home are not always the best. The homeowner had starting adding their own framing to shore up the roof. The primary problem was that he had not realized how that framing should be done. The secondary problem was the original framers. They had set studs at angles due to the way they wanted other parts of the home to be set.

New roof coverings may cause damage to your framing because of the weight. The original roof had been wood shingles over slats which had been placed onto the rafters. New roofing methods call for sheathing to be placed onto the rafters, and these panels can be quite heavy. This weight put greater stress on the angled studs, so the studs began to bow. To counter this downward press, new collar ties were placed from rafter to rafter. This may not have been a bad idea, but then lumber was placed at various spots and angles to help tie everything together.

The best solution is to study a bit to make a plan. Adding more framing elements is not always going to do the job of dealing with the additional weight. One great resource book to see proper framing techniques is Graphic Guide to Frame Construction by Rob Thallon. Dealing with the elements from the foundation to the roof, the book has easy to follow graphics which makes it a good quick guide for professionals or adventurous homeowners. The good aspect of the home that I was inspecting was that the roof had not deflected down too much. The ridge seems to have go down evenly. Since the ridge beam was centered between two joists, I would have added a cross member over the joists with a stud going up to the ridge beam, and then looked at my purlins and their brace.

For real estate investors, you have to take a closer look before reacting. Sometimes homeowner repairs make a problem look worse than they are. If you do not use a home inspector, have your general contractor take a look to come up with an evaluation. Or you could start learning best practices from a book like the one above.

As I drive into the neighborhood to find the home which I will be inspecting, I examine homes to see general trends. I was immediately struck by the landscaping around the homes. About half of the houses had eunonymous or hawthorne bushes close to the structures, so I guessed that there may be a problem.

As I pulled in front of the home, I spotted the heads for the sprinkler system, and I knew what I would find: damage to exterior trim and walls. How could I be so sure, when I had not stepped out of the car yet? Because I knew how the plants would grow, how the watering system would be set up, and what situation this would cause. I also knew that the pest control firm coming to produce the WDI (wood destroying insect) report would say, since I was going to say the same thing for a different reason.

You could almost say that homes need to breathe, but it would be more accurate to write that air flow is needed to prevent problems. Bushes keep air from flowing around the building, which helps moisture stay on the surfaces where it could help deteriorate that surface. This environment also encourages termites, who love to hide and love moisture. Sprinkler systems will have their water kept at the wall when blocked by the plant.

Plants should be positioned where a foot space between the leaf line of the plant and wall can be easily maintained. When you think about it, a foot is not that great of a distance. It makes a tight walking space. To help further reduce moisture on the walls, a drip irrigation system is far better than a sprinkler system. Drip irrigation places water on the ground where the roots are, so it cannot splash back against the wall and trim. Drip irrigation also saves water, since it prevents evaporation.

If you need to replant to better position your plants, wait until autumn. It is less stressful on the plant then. Minor pruning can be done throughout the year. If you do have plants against the walls, consider that damage will be more common on wood surfaces behind them, but brick and stucco can be damaged too. You have to make a consideration to improve air circulation in these areas.

When I opened up my account on igoogle to check out different news stories, I found a few sites reporting the same bit of news about the number of foreclosures being on the increase. Generally, there are sensational titles to draw you in, while the facts may be laid bare in the article. On occasion, these reports bother me because they take one fact without providing the full picture.

RealtyTrac produces good, detailed reports, which do not rely on this sensationalism. They lay the information clearly out, so you can comprehend the situation in different parts of our nation. If you are a serious investor, you should consider joining the site. This will provide you with a wealth of information that can give you an edge when looking for homes.

If you do not wish to join the site, or if you are just curious about foreclosures in your locale, they do offer general means to obtain an overview of the foreclosure situation. There are two basic means to discover specific information. First, RealtyTrac has a great press release about foreclosures each month. In this report, you can look at the national picture, but if you click on a state, you can drill down to data about the spot that you want to study. You can find out details like how many foreclosures occur in relation to how many homes with mortgages, presented in the form 1 in 500.

Another method is to look at their states index. This will present you with a map that you can click on to go down to an area. This can give you very good overview of your state quickly. I discovered that my county has the highest number of foreclosures in Texas. I also found that Texas is in the top five states with high foreclosures. Although Nevada and California far surpass us.

If you are interested in the topic of foreclosures, I suggest that you go to the source. RealtyTrac’s site is easy to use, and it is better than the sensational reports provided by the news media.

Most real estate investors know that certain regulations in their state applies to them. Hopefully, there will be a balance between protecting the landlord (real estate investor) and the tenant. Many investors are finding that some rules are favoring the tenant, in order to ensure that they have a good place to live. Some communities have taken an extra step which has angered many: forcing landlords to have their properties inspected.

This trend of having home inspectors investigate dwellings has been growing. From the reports that I have seen, few large cities have gone to this means of protecting the consumer. Each day appears to bring a report of a smaller municipality enacting this rule though. This has caused an added expense that investors had not expected. I have not seen this happen in Texas yet, but we may see such codes being debated in city councils across the nation.

With the housing crisis continuing, government (at various levels) will look at protecting the tenant over the investor, and large cities will not be immune from this desire to protect the tenant. Another factor which may drive such legislation could be news stories. Yesterday in Houston, two children died as a stairwell collapsed on them. A third child may never be able to walk again. The complex is now being examined by building inspectors as the public watches.

Finding ways to protect the public will be foremost in the minds of officials as such stories are related. Investors can take steps to protect themselves. One simple measure is to have a routine with documentation which shows what is being found. A normal basis, this should be part of your business plan. Civic associations have been suing landlords who do not take care of their buildings.

If you find that you community is about to enable such a rule, you may wish to work out a plan with a local home inspector. If you have several units or several locations, you should look into finding an arrangement to help reduce costs. Many inspectors will give a discount if they know that they could have steady work over a period. Wait till the legislation passes, because they may make a determination that a fixed price for the inspection is in order.

In the end, being a responsible landlord/investor can be the only method to keep your business on track.