You can’t manage a project without a plan for it. That’s where inspectors come in. Inspectors review and evaluate the overall condition of new and existing properties. They govern the job and work with the scope and budget, which starts when buyers are looking at a house deciding whether they’re going to take the property or not. State licensed real estate inspector Kevin Smith says the scope and budget stop problems and arguments and keeps everybody on the same page. Kevin shares how he became a real estate inspector, the challenges of the job, and the importance of getting one in your team of professionals.
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Inspectors: A Must For Private Lenders with Kevin Smith
It’s my pleasure to introduce you to Kevin Smith, who is a state-licensed Real Estate Inspector. Kevin, welcome to the show. I appreciate you coming on. For full disclosure, Kevin has done a few houses for me in the past. A good inspector is a must-have in the toolkit on your team for a private lender. Kevin, you’ve been gracious enough to come on and talk to us a bit. Let’s start back in the beginning. What’s your story?
I grew up in Texas. I’m a Vietnam vet. I had a Bachelor’s Degree in English. I couldn’t find a job in the English field when I graduated college and I started working on apartments, which brings later on to me becoming a painting contractor which grew into me becoming a rehab contractor. Rehabs are when the contractor gets a house ready for sale. He fixes everything up. He puts the paint on and gets it all market-ready. I did rehabs for about eighteen years in the Houston area. I did 175 of them and then I got my inspector’s license and this month makes 28 years as a licensed real estate inspector in Texas. I have done well-over 14,000 inspections to date.
You have a background in construction. Number one, thank you for your service and number two, you’re a liberal arts brother like me. I have a degree in philosophy when I got out of college and nobody was hiring philosophers. I couldn’t figure out why. What led you into the inspection side of things?
I’m one of the lucky ones because I pay my bills with money, I earned doing stuff that I like for a living. I liked working on houses. I liked going on different places. I like meeting new people. Not every day is a good day, but most of them are. I enjoy what I’m doing. I started out as a painting contractor and found out that I liked doing this kind of work on houses. As it went along, I had picked up more information. If I was doing a rehab, I had to bring in somebody else to do something I didn’t know how to do, like a plumber or an electrician. I’d lay awake at night thinking about questions I’ll ask the guy when he showed up on the job. I politely asked him, “Can I watch you do what you’re doing? I’m not checking up on you, but I’m curious and I want to learn more.” 99 of people out of 100 of the tradesmen were happy to share and answer my questions and give me the little tips and techniques all along the way. I wound up with the knowledge of plumbing, of electrical work, how to change appliances, how to fix sheet rocks. All the things that you’re going to run into. I already knew how to paint.
All of those rolls up into me being pretty familiar with single-family residential housing. Somebody called me over to a Rich Club meeting and said, “Why don’t you become an inspector?” I said, “What’s that?” I found out what it was and I took all the classes and I took the state exam and became an inspector. I started out doing inspections when I was still doing rehabs, and gradually within about the first eight or nine months, I was able to stop doing the rehabs and focus full-time on the inspections. My focus is investment real estate. That’s what I’m familiar with. That’s how I built my book of business. I understand investment real estate.Houses for sale is like going to a high school prom. You got to make them presentable. Click To Tweet
I’m an investor myself and I understand what investors are looking for, what they’re trying to do. I don’t write inspection reports where I’m the only one that gets paid on the deal. I take my clients, my investors out onto the property whenever they can make it, so I can take him around as I’m doing the inspection and I teach them and I show them. I say, “This is good and why. This is bad and why. You need to put this in because it’s missing. You need to tear this up because it’s a piece of junk.” An example of that would be a patio cover or a hot tub that doesn’t work that you’re going to have to put $1,500 to $2,000 into to get it to work again. I’m very conscious of profit margins and returns on investment and how the investor looks at the property, whether it’s fixing it up for sale or for rental.
That’s why you’ve done so many houses for me because of that. The first one you did for me was in Baytown and I wasn’t able to be there. When I did get to come and meet you at the property when you were inspecting it in and walk through it, it went a long way for me to understand. It makes the written word and the photos on the page come alive when you’re reading that report.
When you get up next to it and touch and smell it and see what’s going on there and watch it fall off the side of the house, then you understand this is what we do for maintenance on the house, especially for rental properties. Investors buy properties and become landlords, and if that’s your end game for real estate investment, that’s perfect for you. Landlords have to understand that one fine day, you’re going to want to divest yourself of the asset. That might be five, ten or twenty years from now. In the meantime, you have to maintain that asset. You have to keep the place locked up, so the weather doesn’t get in. You’ve got to make sure that all the health and safety considerations have been dealt with. You want to make sure that the roof stays in good condition, so you didn’t get water in the house. There are some things that you can do along the way, like with your heating and air conditioning systems that will help the health systems last longer. That’s the information that I share when I’m on the property doing an inspection for an investor.
You touched on a lot of things I’d like to unpack. Let’s start from the 30,000-foot view. We’ll get down into the nitty-gritty of inspections roles and whatnot for private lenders or hard money lenders. Let’s start off again, a high-level view. What is your job in the real estate transaction?
My job in the real estate transaction is to make sure that the buyer is informed about the condition of the property that he’s buying so he can make a rational decision about what is offers going to be. If I come in and say the investor might be a chemical engineer, he might be an accountant, his wife might be a nurse or it could be a single lady, school teacher, a social worker, whatever, a doctor, but their expertise is in other areas. My expertise is in single-family residential construction and the maintenance and repair of single-family residential construction. I can explain to them in words that they’ll understand without the jargon of what has to happen with the property. If I come in for a person that doesn’t know anything about construction and they want to do some investing, they don’t know about how to check heating and air conditioning or make an assessment of the roof or evaluate the foundation, whether it needs repair or not. When the lender comes out and he says, “This needs foundation work,” most mortgage companies are not inclined to write a mortgage on a property that has structural problems, foundation problems and a leaky roof. My job is to observe and report on the condition of the property and that’s what I do for the investors or for the buyers.
As a side note, on my primary residence, you put in your report that there was some failure in the facade of the brick and you recommended an engineer come out and take a look at it. Also with the pool, you recommended a few folks and fortunately both the engineer and the pool guy came out and said, “This is cosmetic. It’s no big deal. It’s not a structural issue. Your pool is fine.” The engineer that came out said, “You need to tuck point. Fill in your mortar on your brick and that’s it.” That’s the beauty because my wife fell in love with the house. As an investor, you should never get emotional or romantic about a property. Since this was our residence, my wife loved it and I said, “If the pool or the brick is bad, we’re staying away because that’s too much,” but it worked out. By taking your lead, I was able to figure that out. It costs a little more money upfront, but I got the loan. I sleep better now knowing that it’s a cosmetic issue on both fronts.
I recommend that other professions like a structural engineer or an electrician, probably fifteen to twenty houses out of a 100. If there’s a lot of foundation movement and I assess and evaluate that and tell you where the movement is and how much the movement and then recommend a structural engineer to qualify the foundation of your contractor. I don’t build pools so I say, “Get the pool guy in here. Anybody that you know of or you can get a referral from, a pool supply or poor repair company to come out and have a look at it.” What I recommend for the investors is that there’s a pool or a hot tub, ask these people for a pool school and a pool school is where they come out and they show you how to operate all the equipment. They show you minor repairs that you can do for yourself and they explained to you when something is a major item and if you’re going to have to call in the big boys with the knowledge and the experience to fix that. I want to make sure that the investors and other clients, my retail clients that they understand what they’re getting into.
I provide information for them to make a decision, filling in the blanks where they don’t have that background or that training. If I have a legal question, I call my attorney. If I have an accounting question, I call my CPA. I don’t have to go to get a degree in accounting and sit for the CPA exam and I don’t have to go to law school. I rent that expertise and when I call them up, I ask my questions. They give me the answer and I say, “How much do I owe you?” I write the check and there is a smile on my face because I’ve got it figured out. I get the problem solved and I can go ahead and move on from there. It’s the same way with an inspection. You’re going to spend a couple of hundred dollars getting a house inspected, but if you don’t understand what’s going on with residential construction and you don’t understand how to evaluate, it’s certainly not a crime. It means that you have experience in a different area. I was with a client, a lady who’s a professional. She is a master social worker and she deals with eating disorders. She doesn’t know about her air conditioner or a roof or any of that stuff and I don’t know about eating disorders. I told her, “I couldn’t sit down at your desk and do your job, not for the first five minutes, nor could you do nine. I’m here to help.” One of the things I always tell my clients at the end of the inspection is I want you to call me if you have any questions at all, especially if you think it’s a silly question because that’s what I’m here for.
I’m here to answer your question. You’re paying for this information. I want to make sure that get everything I can possibly give you to help you make the decision about whether or not you’re going to move forward on the property. Whether this is going to be your personal residence or if this is going to be an investment property. If it’s going to be a property you’re going to rehab and flip, which means you’re going to fix it all up and sell it on the retail market, there are some special considerations with that. If you’re going to use it as a rental property, then you might not have to go quite as far. For instance, if there are about three or four years left on it, if you’ve got to sell it, you’re probably going to want to replace it when it gets down to about three years like that or it starts needing repairs. If it’s going to be a rental property, you might hold on. You might put off replacing that roof for two years or so until you build up a little capital reserve. A capital reserve being money that you take from the income stream every month and put it aside for things like replacing roofs and replacing water heaters and turning the property over. When it comes time to do these things, you’ll have some money and you don’t have to reach into your pocket to get it.
That’s a great distinction. I’m glad that you brought it up in terms of when you purchase a house and what your exit strategy is. If it’s going to be a retail sale, fix and flip or a rental. I know with rental properties, there are codes, city, county codes. Ground-fault circuit interrupter, for example. Is there a difference between the condition of a house for retail sale versus renting out? From your perspective when you go in and look at a property, do you look with one set of glasses if you know it’s going to be a retail sale or an owner-occupant versus a rental or do you differentiate at all with that?To stop problems and arguments, everybody needs to be on the same page. Click To Tweet
I don’t differentiate these and here’s what I do. I want to evaluate the property and all the systems and all the parts of the house. After I’ve done that and informed the client about this needs to be replaced or that’s doing fine, I’ll say, “You’ve got one point of the foundation that’s down. You’re going to probably need five in there. As long as the windows and the doors are still operating, you may want to put this off until you’ve done a rental cycle,” which means you had a renter in there for a couple of years and you’ve built up a little capital reserve, and it’s not so much a strain on your budget to go ahead and repair the house. If you’re going to sell the house, you need to bring everything up. These TREC inspections, Texas Real Estate Commission inspections, are not code inspections. They are mainly based on health and safety issues and performance issues. Is it safe to live here? Ground-fault interrupter always got to go in in the places that they’re specified. We have to make the place safe and habitable, a good and habitable safe condition for the people who are going to live there and make sure that everything is working and everything is safe. You’d put your own mother in the house and not be afraid that it’s going to fall down overnight.
As far as selling the house, you’re in competition with new houses, other houses that have been rehabbed. You’re going to want to bring it up right to the top of the line. You’re going to want to take the worst-looking house in the neighborhood and bring it up to where it’s looking better than the other houses in the neighborhood that might for sale so that it’ll stand out. It’s like prom in high school and you wore this shabby dressed and she’s looking at her shoes. She doesn’t have her hair done. She doesn’t have any makeup on. She is not going to be asked to dance as much as the girl that took a little time to fix herself up and make herself presentable and attractive to the public. It’s the same way with houses for sale. You’ve got to make them presentable, take care of all the health and safety considerations and you’re going to want to make it easy for people to buy. It’s got to be clean. Everything has to work and make it so that they would be happy to live there. It doesn’t matter whether the house is going to sell for $100,000 or $450,000 as long as everything is working and it’s been all cleaned up and fixed up for that neighborhood and for that market.
What you’ve touched on is great because you do have the investment background. When people talk about rehabbing, a friend of mine came to me and said, “I’d like to flip some homes. What advice can you give me?” One of the pieces of advice was to take the worst house in the neighborhood, make it look like the best house, but price is slightly below that way you get a quick sale and don’t chase those pennies. Time is money and having an inspector that comes from that background is invaluable. I’d like to switch gears from and get a little more granular. To me, behind an attorney, an inspector is a must for a private lender. You should never loan the rehab money budget to the borrower at closing. Hold it back in escrow and then agree on a schedule of draws, two or three or four, however the project is.
I’d like to shift gears and the value that an inspector brings to someone like me. I do have a construction background, both residential and commercial. I myself was a painter for several years. That’s how I got through college. That’s how I got that philosophy degree. I do maintenance in the college town with the apartments and houses and whatnot. I have that background. Let’s say someone has some other profession. It could be whatever it is and they’re nervous about loaning on a house that needs work. That’s why banks won’t loan on a house that needs work. They want a house that’s ready to go. The inspector becomes the eyes, the ears, the nose and the fingertips for not only the investor but the private lender in that case. I know you do some draw inspections. Can you walk us through if you’re working for a hard money or private lender?
I’ve done a lot of those. They’re called draw inspections or compliance inspections. This the gospel that I preach. It’s called scope and budget. The scope of work is a complete total and absolute list of everything that you’re going to do on the project and the budget is line map on budget. There are so many dollars. Let’s say $4,000. A sheetrock repair is $600, interior painting so much, right down to the cabinet pulls, the drawer pulls. How much are you going to spend on that? Are you going to do landscaping? How much for the landscaping? There are price lists like this that are all over the internet. I use an Excel spreadsheet that’s modeled after the American Institute of Architects Draw Inspection Sheet. What we do is down the left side goes the scope of work and in the column right next to that goes the projected budget.
A draw inspection is when the contractor says, “I’ve got the roof on and I’ve got the sheetrock work done and I need some money to pay the gas.” The draw inspector will go out to the house and he will inspect the roof and make sure that it is installed in a workman-like manner and it is fully, completely and absolutely installed. Then he will recommend to the lender that they release those funds that have been escrowed for the roof repair and the sheetrock repair. The way I do it is I had this Excel spreadsheet and everybody’s got it. The contractor has a copy of it. The lender has a copy of it and I have a copy of it. Every time we do a draw inspection, it goes into a new column and we add up and down at the bottom of that column we add up everything. It has been truly and completely completed in a workman-like manner and that’s what the contractor gets as a draw.
The reason that this is so important is it resolves a lot of questions before they arise. It keeps everybody up-to-date on what’s been done and what’s been paid out. You don’t have this discussion about, “No, you didn’t pay him. You paid me for this other thing.” “No. Here’s where you got paid and here’s what you still have left.” I can’t do it for that amount of money. That’s the amount of money that you said you’re going to do it for.” The scope and the budget start at when you’re looking at the house deciding whether you’re going to take the property or not. You begin to make up a list of things that you’re going to do. It needs a new front door, it needs exterior paint. It needs some touch up on the inside. We’re going to put carpets in. We’re going to put a new dishwasher in. These are all part of the scope of work.
You want a full, complete and absolute scope of work so you know exactly what to ask for contractors for pricing on and it also builds your draw schedule. I can’t emphasize how important that is. I’ve seen investors go into properties and they said, “It’s probably going to cost us $12,000 or $15,000 to do this property.” They get in there and they fund it and then when the whole thing is all said and done, they spent $20,000 or $25,000. It hurts my stomach to watch investors do things like that. That’s why I like to have them onsite when I do the inspection so I can point all these stuff, “We didn’t realize that. I thought I was going to have to spend $25,000 putting a new heating and air conditioning system.” “No, you’re probably looking at $8,000 for a serviceable heating and air conditioning on this.” The scope and the budget, it stops problems. It stops arguments. It keeps everybody on the same page. The contractor knows what he’s got coming.
When I do these draw inspections, I go out there with my spreadsheet and I have a list of things that I’m going to draw on. I take pictures and the evening of the inspection, I send all my reports out the evening of the inspection. I send it back to the lender, whether it’s a hard money lender, a private lender and say, “This is what’s been done. Here are the pictures of it and I recommend that these funds be released in escrow so that the contractor can move on. He got to pay his guys and he’s got to buy materials for the next part. That’s the value of the scope and the budget. It governs the job and without that, it’s difficult to manage a project because you never know where you are in the project. You don’t know what the contractors got coming, “Let me look at my checkbook and see how much I’ve paid him so far.” That’s how that works and it keeps everybody on the same page.
You can’t manage a project without a plan for it. It’s like the difference between a writing a research paper and writing a letter to mom. The research paper is going to have an outline when you start out and a framework. I tell people that you’ve got to have this or you’re not going to know where you’re going to wind up and you’re going to wind up doing things that cost you a lot of money. One of the things that I do my inspections with investors is I say, “This is the order of the work. This is the rhythm of the work.” If there’s foundation work that’s necessary, you’ve got to start out by fixing the foundation. Don’t do any sheetrock work, don’t do any painting and don’t do any carpentry work, don’t put in a new roof on. You’ve got to do foundation first because everything sits on the foundation. If I jack the foundation up, wiggle it back around and put it backwards where it started when the house was built, you could get new cracks in the sheetrock. If you put a brand-new roof on the house, you will see little rings, little ripples moving across the roof of your brand-new and newly-installed roof. The only cure for it is to take that brand-new roof off and put another roof on. That’s the information I like to give my investors so that they don’t spend money that they don’t have to and they don’t make costly mistakes.You can't really manage a project without a plan for it. Click To Tweet
The rhythm of the work was a handout that you gave out at the Realty Investment Club of Houston. I still have it. I put it in a three-ring binder. I was a construction manager for a short time and we had our big three-ring binder book, but you condensed it down onto one page with nice little bullet points basically saying, “This is what you’re going to do.” It’s a great refresher because you could get excited about a project. It’s like, “Let’s make sure that the foundation is good.” I also like how you do the landscaping and get the curb appeal as soon as possible after that so that it’s not an eyesore. For a private lender, a good attorney is crucial. You want your documents good but for me, the inspector is as well.
Let’s do some simple math. There’s a house that’s going to be worth $100,000 after it’s all fixed up in the bow is put on top of it. Most lenders will not go above $65,000 or $70,000 total money lent out on that property. Let’s say there’s $50,000 to purchase the property and $20,000 to fix it up. That’s why I say they’ll never loan that full $70,000 out because I’ve heard the horror stories of, “I loaned $70,000 on a house and when foreclosed on it, I come to find out it was only worth $50,000,” because that’s what’s most paid for it. That’s why you as a lender, I mimicked the hard money in the banks and that when you submit a formal application or if it’s through a friend that I’ve loaned to before. Some of the documents besides a good title commitment is I want to see the scope of work and depending on the property, at a minimum, I want my inspector to at least look at it, a desktop review with the photos.
I offer alternatives on the inspections for investors. One is a full written inspection in compliance with the standards of practice of the Texas Real Estate Commission, which governs inspectors. The other is what I call a site visit, a verbal report. I do not write a report. The investor follows me through and I tell them what to write down and what to fix. It’s the same inspection as the one with the written report, but I don’t write the report and there is a discount for that. If they want to write down what I tell them, if they feel comfortable with that and ask all their questions and I’ll give them all the information, then we can do it that way. If you’re moving into real estate investment, you’re probably going to want written reports. If you’re going back to the lender or going back to the seller and you feel you still have some negotiation to do, then a written report is the way to go.
The reason for that is you have a license on that report. It’s the difference between a contractor who says, “I’m going to fix this and I’m going to fix that.” He doesn’t cover all the points that the inspection does. They’ll say, “I’m going to paint it and we’re going to put a roof on it. We’re going to do this and that.” That might not meet the needs in order to sell the place if it doesn’t address all the health and safety issues and the performance issues. There’s a big difference there. When it comes down to the bank, you can show the bank a proposal and it might carry some weight.
A real estate inspection from a licensed inspector, licensed to practice in the state that you’re investing in, makes all the difference in the world. They’ll say, “This guy is trained. This guy has experience. This guy has sat for the exam. This guy renews his license and has to have the MCE hours, Mandatory Continuing Education every year and he has to keep up with his trade and the practice that he’s involved in.” Once the investor has three to five houses under their belt, they feel a lot more comfortable if they do a verbal inspection and they can save a little money there because they understand, “You’ve got to tear this down and you’ve got to put this back in.” They say, “I did that two houses ago.” I say, “The electrician needs to look at this.” You say, “I use that all the time and he does an excellent job for me. I’ll get him to come over and take a look at this and I’ll get some numbers from him.”
Another thing I’m aware of when I’m talking to investors is there’s no construction jargon. I can talk to the nurse, the social worker, the accountant about equity potential bonding. They’re going to look at me like I’ve gotten lobsters growing out of my head, “We’ve got to ground some of these things. We’ve got to connect some stuff up with some wires or some pipes and gas lines and things like that. We need to connect together with wire in a certain way and bring it back to a certain spot in case of a lightning strike or in case there’s a short circuit or stuff like that.” Short circuit, for instance, like the ground-fault interrupters, the little outlets that you have with the buttons in them next to the sinks and in the garage and outside. A short circuit is electricity travels along the path normally. If it gets off that path, they call it short circuit. The problem with the short circuit is somebody can get shocked or they can get electrocuted. I’d like to keep it nice and simple. I don’t like to offend anybody’s intelligence, but I do want them to understand everything that I have to offer and everything that the house has to say for itself that they need to be aware of to make a rational decision about making an offer on the house. Whether they should go ahead with it or not.
Thank you for going over what the GFIs are. I forgot about the little buttons that go out at the wrong time when you’re trying to put your Christmas lights up or whatever. They’re code, which brings me back. As an inspector, do you look and stay on top of current construction codes?
I used to but I don’t have the time to take all the classes that are necessary to keep up-to-date code certification. As long as the health and safety issues have been resolved and those specifications are in the Texas Real Estate Commission Standards of Practice for Inspectors. We have to abide by those. We know what the health and safety issues are. That pertains mostly to houses that are brand new built. I don’t do very many of those inspections. There are a lot of inspectors that do newly built houses. There’s a thing called a phase inspection. A phase inspection starts out before they pour the concrete for the foundation. Then there’s a second phase inspection when the inspector comes out before they put the sheetrock up and it’s called a cover inspection and then there’s a third inspection which is called the final inspection with everything’s done in-house is ready to move into and all of the appliances had been installed and that’s where I come in on the analysis. As far as code, the Texas Real Estate Commission is not meant to be a code inspection. If the investor specifically wants to code inspection for some reason, I can refer to them to somebody that does that as a part of their practice.
I know a lot of investors shy away from code enforcement, very notoriously cheap people to begin with by nature. What I called my eight-year flip was a house-hacking. It was the first property that my wife and I bought after we got married. It was inspected. We flooded and we did a major rehab paid for by FEMA. I made a decision. I said, “We’re in the side of the city limits of Houston. I’m going to go ahead and go down and get a home permit and do everything above board.” I’m glad I did because at the end of the day, even though I had on my green tags and everything, I got red tagged for having a number fourteen Romex when I needed number twelve in one of the light switches. Me, being the homeowner, I can pull my own permit but I still have to have licensed contractors. Then they red-tagged me on the HVAC when I replaced the unit in the attic because the copper pipe, the elbow wasn’t covered with insulation. I was like, “If that’s all they’re going to hit me for, that’s great, but when it came time to sell, I was able to hand over all of my green tags even the red tags over to the buyer and I said, “Here you go. Here are all the receipts. Here are all the warranties.” I handed everything over and it was one of the smoothest sales processes I’ve ever seen in my life because I had all the document.
You mentioned mold and flooding for the people outside of the Houston area, Hurricane Harvey came through. It either destroyed or damaged 130,000 houses in the Houston area. There were a lot of people that came in and say, “We can fix this up for you.” They tore the sheetrock up. They tore out the insulation. They fixed some things and then make it look pretty again, but they didn’t remediate the molds properly. That’s one thing I’m concerned about in the Houston Metroplex is this issue of mold and mildew. Mold needs three things. It needs a temperature of 65 degrees. It needs a source of food, which is cellulose. It can be paper or wood or it can grow on a lot of different things and it also needs a moisture. If you remove any of those three things, it goes into a dormant state. If you pull the sheetrock insulation out of the walls and there are mold and mildew there, then that has to be treated with a biocidal agent.A real estate inspection from a licensed inspector makes all the difference in the world. Click To Tweet
A biocidal agent is something that kills the mold and mildew. We find that the mold goes into a spore state. If it does not have any moisture, the spore state makes the little molds to skin around them like the skin on an orange and it’ll stay there for years and years and just sit and waiting patiently until it gets wet. If you have a leak around the window or your roof starts to leak and water runs down the wall or something gets, it’s on the inside of the wall. As soon as the water hits that mold, it’s going to come back to life again. It’s going to pop that spore casing open and it’s going to start to multiply and all of a sudden you have a mold issue. I said I was concerned about a mold remediation in Houston. If the house was not properly remediated and you had an air quality test before and after the remediation, then you’re traveling on thin ice.
Ten years from now, somebody’s kid gets a snip and they call one of these middle-of-the-night attorneys, the hammer that does the tractor-trailer accidents and he will sue right back up the chain of title. It might have sold three times in ten years. They’ll go back and say, “You bought it from Joe and Helen.” I talk to Joe and Helen. They say, “It was fixed up when I got it.” “Sam and Martha are the ones we bought it from. “Kevin and Keith are the ones that did this back in 2017.” “Did you have your mold remediation? Did you have it inspected by a licensed sanitarian or a mold assessment consultant to determine that the types of mold and the amounts of mold that are present were not a health and safety issue?” Mold is like cancer cells. We all have cancer cells in our body but not enough to cause a problem. It’s the amount of the population. How many are there? Do we have 200,000 mold cells in the house or do we have 45 million mold cells inside the house? That’s what’s going to make the difference. It’s important that you do bear that in mind when you’re doing these houses that had been flooded or had water in for some reason.
That’s a very good point because about twenty years ago, black mold was excluded under homeowner’s policies even into the late ‘90s when I was still active and heavily active in construction and whatnot. In so many homes you would see that they got gutted, they ripped everything out and the two words, black mold, were like a death sentence to a house. I’m no expert but I know that there is a distinction between mold and mildew. Mildew is what is seen oftentimes that’s readily available to see on the outside of a house for example. Mold will be more along you get a plumbing supply, a water line leak or whatever drips. You’re dripping water on wood in an area in an air-conditioned environment, in a cool environment and it can definitely support and promote mold growth. I will take you up on that offer because we’re a little over a year past Hurricane Harvey and those numbers were staggering, the sheer amount of water.
Houston is such a humid area to begin with even on a “dry” summer August day. It’s very humid. I’ve always told people that there are mold and mildew in every single house in Houston. I would like to bring it back on at some point. Let’s talk about that because as an investor, whether you’re the active rehab or landlord or as a private lender, that is a concern because of the late-night attorney. It’s very true though that they will sue up the chain of title, all the way back to whoever they could. I tell my investor friends, “I know real estate investors are notoriously cheap, but the more our society gets litigation happy.” I’m going sue a turkey sandwich next week and I’m probably going to win. That’s how crazy it’s getting. To me it’s CYA. Does every house need to be fully inspected and have all these things, all these certifications? No. I’m not going to sit there and tell people that, but that comes with experience. As you get more involved, you’re going to notice, “Let’s go ahead and get an inspection on that,” for example. “Let’s go the mold, the air quality checked or so on and so forth.” Any house that’s been water damaged. “Just put some bleach on it. It will be fine.” No, it’s not necessarily the case.
Let me interject two things here about the bleach. Bleach is a heavy metal and when it hits those cells they say, “This is nasty stuff. This is a heavy metal and I’m not going to let it within my cell wall.” If you dilute the bleach a gallon of water and a cup of bleach and spray that on, that will kill most of it because the mold and mildew says, “This is water. I need water to live,” and it will let it within the cell wall. Then the chlorine will dissolve the cell wall and burst this little nucleus apart. The other thing is in dealing with houses that you know have had water in them, even if it’s, “We had two inches of water or three inches of water and it was in here for about six hours and then it went out and we replaced the baseboards and we replaced the carpet and everything’s fine.” Let me see your air quality report done by a mold assessment consultant who is a registered hygienist and I also want to see a document that’s provided by the State of Texas called the Certificate of Mold Remediation. That has on it the license number of the people who did the evaluation and took the air samples and the swab samples from inside and outside the house.
It will also give you information about the lab that did the testing. They have to be an accredited lab, not just some guy working on his own chemical engineering degree at the university lab on the weekends. It has to be an accredited lab and there should be a report with it that tells what biological entities are present and what the population of these entities are and what the conclusions are to the evaluation of the samples. “This is a hazardous a site. This is a non-hazardous site.” This is within the acceptable limits of these biological entities so that as you go down the line, when you sell the house, you can say, “Here are my permits. Here’s my Mold Mediation Certificate. I had everything checked. Yes, it did flood. Yes, we did fix it. Here’s the remediation protocol.” Remediation Protocol is the set of instructions to the contractor about what he will do to remediate the mold and repair the house and bring it back to not only a good and marketable condition, not just make it pretty, but make it safe and habitable too.
That’s good information for anyone whether you’re going to live in the house or invest in the house. That’s why we hire people like you, Kevin. It’s your knowledge and your expertise.
We all know investors who are so tight on a house that they’ll squeeze a nickel until the Buffalo starts to giggle. I had a conversation with an investor years ago and he said, “Why should I have to put these smoke alarm all over the place here?” I said, “You only need smoke alarms in the sleeping areas and the hallways, outside the sleeping areas on each level of the house. It’s a two-story house, you’re going to need one upstairs too, even if it’s only a game room.” He argued and argued and I said, “You can do what you want to, I’ve told you what you should do, and that’s to help you make your decision. If that house burns down and somebody gets injured or killed, they’re going to own everything that you own up to this point and everything that you’re going to own for the rest of your life, especially if there’s a fatality involved.” A $100 worth of smoke alarms, you have to do the health and safety issues. The rest of it is the cosmetic stuff. If you want to put new carpet in, fine. If you don’t, that’s fine. If you want to put hardwood or ceramic or something else, that’s fine.
Those are cosmetic issues which may or may not affect the marketability of the property, but smoke alarms, ground-fault interrupters, whether it has aluminum wiring or not, that has to be taken care of. You don’t have to rewire the house if you have aluminum wiring. It can be fixed. These are the kinds of things that I try to make the investors aware of. I’ve been writing articles for newsletters and presentation to inspector groups. I’ve got probably 400 articles. I’ve done scores of workshops. I’ve done 25 or 26 bus tours where we’d take the investors out on a bus and we take them out on the property and walk around the house and say, “This is bad, this is good, this is what you need to look for.” This is like a mini vacation and over the years investing myself, I’ve figured out, “These are the things they’re interested in and these are the things they should know.” This house is going to sell for $100,000 or $120,000. You don’t want to put a $4,000 appliance package in it, a fancy refrigerator and a Bosch dishwasher and a fancy range. That goes in houses that are specialty houses, $400,000, $350,000. You have to look around and find out what your market is and you can ask around or go visit some houses yourself. Talk to a real estate agent that’s working in that area. What do the buyers expect in this area? That’s some of the stuff that I have to offer to the investors.
That’s why an inspector is such a vital team member not only to a retail buyer, an investor, but also to the lender.
I found that the best instructors are guys that are former rehabbers or former builders or former building managers because they understand how these houses go together. They understand how they come apart. They understand where the failures are more likely. They understand how long systems last. They things that you have to do to extend the life of the systems. The important part is that if you don’t understand residential construction, you need to have somebody in there. You could start by asking another investor that’s more experienced, “Can I tag along with you when you look at your houses? I’m going to ask you some questions.” Most of the time they’ll say, “Hop in the car, but you’ve got to buy lunch.” You need to get that information from somewhere. If we were going to go out and work in the oil field tomorrow, there’s a whole different vocabulary. There’s a whole different jargon. There’s a whole different set of systems. There are processes that we need to understand and this is all learnable. It’s not rocket science.
I’ve known guys that didn’t even have a high school education that have become multimillionaires doing real estate investment, but you have to know the product. Whether you pick up a hammer or a screwdriver in your entire investment career, that’s fine. I’ve known people that all I do is pick up a ballpoint pen and write checks, but you have to know when you bring somebody out there, are they doing this job correctly or not? That’s where an instructor can come in. I tell people when I do inspections for them, whether it’s a retail account or whether it’s an investor, “Here’s my card. Here’s my phone number. Here’s my email, I want you to call me if you have questions, especially if you think it’s a dumb question because that’s what I’m here for.” I’m here to give you information so you can make a rational decision and I don’t like to see you get taken advantage of.
That’s why you’re such a vital part of the whole process. You had mentioned you’ve written articles in your workshops. If somebody wants to get ahold of you to get a little more information, what’s the best way for them to do that or if they want to hire you for an inspection?
The best way to get hold of me is by my cell phone. I’ll answer my own phone. The number to call is 713-858-1330.
You answer your own phone and your inspection reports always come out the evening of the inspection. All I can say is you say what you’re going to do and you do what you say and that goes a long way. That’s why I wanted to get you on the podcast. I’m glad that we were finally able to connect. Kevin and I have been talking about this for about close to a year and it’s finally happening. I want to thank you for coming on. I would like to plan some future shows with you as well on some specific topics where we can drill down.
One more thing. If you’re reading this blog and you’re not in the Houston Metroplex area, I don’t care if you’re in Los Angeles or Hoboken, New Jersey. If you have a question about the house and you want some information and you’re not sure where to go or how to find the information, I want you to call me because I will help you. I’m investor-friendly. I specialize in investment real estate and I don’t like to see investors make mistakes.
Thank you for that. It’s so true. You do want to help and that’s why you’re my inspector. Take him up on his offer, people. If you have a question, let him know. Even though we’re down here in Houston, I know Kevin understands a lot of different types of construction and what’s used up North, for example, in colder climates versus down here. Give him a call. Kevin, thank you so much. I look forward to working with you in the future and I look forward to having you back on another episode.
It’s been my pleasure to hopefully add to the knowledge of people who are wanting to do investment real estate, whether you’re just getting started or whether you’ve done twenty different houses. I’ve done a whole lot of inspections, thousands of houses and I still see things from time to time that I have to scratch my head and I have to call people and say, “What about this and what about that?” I’ll call another inspector, I’ll call the electrician, I’ll call a plumber and I’ll get the help I need. Don’t be shy about asking questions.
I will see you soon. Take care. Thank you so much.
About Kevin Smith
- Based in Houston, Texas
- Bachelor of Arts 1975
- Real estate inspection license 1991, Texas Real Estate Commission
- Over 14,000 inspections performed in the Houston area
- Rehab consultant to investors
- Member Realty Investment Club of Houston since 1990
- Board member, Realty Investment Club of Houston – 8 years
- Started and taught Mr. Fixit workshop or investors for 5 years
- Investor –25 houses bought and sold
- Formerly a hands-on rehab contractor
- 175 rehabs done in the Houston area
- Contributor to the Enricher investor magazine
- Contributor to numerous real estate investment newsletters
- Frequent speaker and instructor for rehab, inspection and real estate related topics
- Inspects for hard money lenders, investors and retail buyers
- Inspects single family, multi-family
- Certified Inspector of the Texas Professional Real Estate Inspector’s Association
- Board member of Texas Professional Real Estate Inspector’s Association