Roof. Heating/ventilation/air conditioning (HVAC). Plumbing. Foundation. These are the four big ticket items when you’re evaluating a the structural integrity of a potential purchase.

Most of us investors are part timers. And lots of us are somewhat handy and know something about houses (we live in houses ourselves, don’t we?) So those first three items are things we can generally get our collective heads around. We see roof jobs every day. We change the filters on our own AC system. Most of us have replaced a faucet or two in your time. So problems, both big and small, might not phase us when it comes to the roof, the AC system, or pipes.

But foundation problems? Woah Nellie. A sloping floor or suspicious cracks in the plaster will send most investors scurrying on to the next prospect. But this might be an opportunity. Less competition = fewer bids. Fewer bids = a lower price. And we like low prices when we’re buying, don’t we?

But not all foundation problems are created equal. Here in Texas (and perhaps where you live, as well) you’ll tend to find two types of foundation: slab, and pier & beam. If you tried to dig a basement in Houston you’d be playing table tennis underwater; Houston is essentially a paved over swamp with the water table a few feet below ground. In other parts of the country you’ll have other options – a crawl space foundation or a full basement. I don’t have any first hand experience with the structures I’ll I won’t say any more about them.

What I will say, however, is that pier and beam foundation problems scare me a lot less than slab foundation problems. Slab foundations mean buried pipes and no repair access. Fixing them is expensive. Last year I had a problem with some tree roots which grew about fifteen horizontal feet under a slab foundation and busted up the plumbing under a commode (lots of nutrients down there, I guess). Visualize jackhammers and annoyed tenants.

So I probably wouldn’t consider a property with major foundation issues if it had a slab foundation. A pier & beam foundation, however, is another matter. This is the preferred method for older homes, in which the home is constructed on beams which sit on piers which are driven into the ground for stability. I own a fourplex that was built in 1935: a hurricane-proof all-brick tank of a building. I wish I had ten more just like it. But it had some foundation problems a few years ago, but with a pier & beam foundation this was cheap to fix. So if you run into a prospect like this then you might want to give it a second thought before you put it in the “too hard” box and cross it off your list; you might be passing up a property you could snag at a bargain because it scares off all the newbies.

But make sure you get a structural engineer to take a look (not a foundation repair specialist, who will be trying to sell you something). The bottom line: a prospect w/ foundation problems might be worth another look if it’s a pier & beam structure. Go ahead and wave your arms and declare the house a disaster to the seller and to your Realtor, but know in the back of your head that this is a problem that most serious part-time investors can tackle.

Note: Graphic illustration includes diagrams taken from the Foundation Repair Network. 

One economic indicator that I consult from time to time is the Global Insight quarterly study on housing prices in America. Here’s an interesting conclusion from the report: of the 330 regional markets surveyed, Houston is the most undervalued.

The Global Insight uses a number of factors in determining the theoretical price equilibrium level for each market, to include tax rates, population density, income levels, plus a somewhat nebulous “desirability factor”. So, as with all economic studies there is some art mixed in with the science, but nonetheless I find this study to be an useful data point when thinking about the relative valuation of markets.

The fact that Houston is ranked as the most undervalued market is interesting in light of the underlying economic factors and the disparity between the market’s current reactions with how it behaved in the past. Nowadays when we think about real estate bubbles we immediately think of California, Las Vegas, Florida, and other regional markets that have grabbed headlines with their flying property values over the past several years. But we forget that the poster child for real estate market collapses was Houston in the mid-to-late eighties.

Texans were knee deep in irrational exuberance long before Alan Greenspan coined the term. When the Gulf States kicked off the Arab oil embargo in response to Western support for Israel in the Yom Kippur War, the resulting spike in oil prices fueled investments in the oil industry. This, in turn, pushed property values to unsustainable heights.  Everyone wanted their own Southfork Ranch. 

Fast forward to the early years of the 21st century. Two rounds of armed conflict in the Gulf, rising demand and tightening supply have again sent oil prices into the stratosphere; and I’d argue that this time around the increases have more fundamental sustainability than in years past. Money is flowing into operational oil centers like Texas and Louisiana. But, the real estate market hasn’t responded. Yet.

The graph below shows the Department of Energy refiner acquisition cost of imported oil. 

Will property values in Houston and other economic centers for energy go up? In the short term, perhaps not. Economic malaise and a jittery credit market will help to continue to keep a lid on the prices, but I love the fact that the downside risk in undervalued markets is relatively low. Currently, investors in some markets need to plop down a 40% down payment in order to get into an property that generates breakeven month-to-month cashflow. Getting into an undervalued one where 5% does the trick feels pretty prudent.

Expect to see more of this issue...

As the presidential election looms, the issue of immigration - particularly illegal immigration - will move into the spotlight.   This has implications for all Americans, but it may have a particular relevance for landlords. 

An article in today's New York Times discusses the issue of local statues which impose penalties on landlords who rent to illegal immigrants.  In particular the article chronicles the story of Riverside, New Jersey, which is re-thinking legislation which it passed a year ago which criminalized employing or renting to an illegal immigrant.  The law has had the unintended consequence of driving away residents in large numbers, which has had an unexpectedly large impact on local businesses.  It appears that citizens who once lobbied for the law are now re-thinking their position. 

From the landlord's point of view, this is a sticky issue.  I live in Texas, a border state.  Regardless of your political affiliation it's obvious that illegal immigrants are firmly woven into the economic and social fabric of our society here.  I'm trying to imagine operating under legislation which requires me to ascertain an applicant's legal status.  Is that SSN real or bogus?  How about the ID card that the applicant has provided?  Or the driver's license?

There is an easy solution that many landlords will turn to: just don't rent to anyone who seems "suspicious".  This, obviously, is a law that invites investors to turn to discriminatory practices. 

I'm not a policeman or a Immigration Service agent.  That's not my job.  I'm a real estate investor, and part of being an investor is to offer safe, affordable housing - places where families want to create homes - and to do so profitably.  I'd strongly disapprove of a law that tries to turn me into a government enforcement agent. 

These are bad laws, and landlords should be vocal in their disapproval when they pop up locally. 

I'm interested in your opinion on this issue...

Last week I made a brief reference to a bad experience that I recently had with a Farmers Insurance agent.  Here's how the sordid little drama played out. ¹

 The characters

	the Investor is played by Christopher Smith
	the Lender is played by Wells Fargo
	the Insurer (aka, the Villain) is played by a Houston based Farmers Insurance Agent 2

The setting: 

The Investor makes a New Years Resolution to sell a high-end rental property and use a 1031 exchange to reinvest in a multi-family property.  He sells property the property to the current tenant and identifies a fourplex to buy, negotiates a deal, and heads to closing. 

Act I:  Week of closing

The Investor calls the Insurer for a quote.  The Insurer provides a written Farmers quote.  The Investor accepts the quote and asks the Insurer to proceed and provide coverage.  The Investor calls the Insurer several times to ensure everything is in place; the Insurer assures the Investor that everything is in order.  The Insurer says they're having some problems getting the printout, but not to worry. 

Act II:  The closing - Friday the 13th of April

At closing the Lender calls the title company to inquire about the insurance binder, which hasn't been received.  The title company calls the Insurer.  The Insurer gives verbal confirmation of coverage.  Based on verbal confirmation the Lender instructs the title company to proceed with the closing. 

But…drumroll…it turns out that the Insurer had quoted the Investor in error, but for some reason doesn't want to admit his mistake.  Farmers, as it turns out, is not writing coverage for multi-family properties in Houston. 

Instead of admitting his mistake, the Insurer scrambles around to find a quote from a third party carrier but doesn't tell the Investor; he just tries to slip a revised invoice to the title company after the closing - considerably more money for less coverage. 

However, the Insurer takes no steps to bind the policy.  None of the paperwork is in place.  Based on the Insurer's fraudulent statements the property closes with no insurance in place. 

The Investor now owns the property, but unbeknownst to him (and the Lender) there is no coverage. 

Act III: The cleanup

On Wednesday of the following week the Investor gets a call from the Lender.  "Hey man," the Lender states, "you need to call your insurance guys."  So the Investor calls the Insurer.

The Investor gets insurance with another carrier on the 18th of April, five days after closing.

 --------------------

The moral of the play: 

We like to assume that representatives of major companies will behave like responsible, ethical professionals, but sometimes this is not the case. In order to avoid revealing his mistake, the Farmers Insurance agent wove a web of lies over a five day period which resulted me assuming a huge risk. 

Had a fire occurred during the uninsured period I would have entered a hellish maze of he-said-she-said which would have made a bunch of lawyers a lot of money.  Something seemed fishy from the start; had I followed up more aggressively I would have uncovered one of the agent's lies at an earlier stage.

Footnote ¹:  This of course is a stylized account of the course of events, but my official complaints to Farmers Insurance and to the State Insurance Regulatory Agency will document the Agent's fraud in explicit, meticulous, gory detail, along with supporting witnesses. 

Footnote ²:  I debated long and hard about whether or not to reveal the name of the Farmers Agent on this blog.  In the end I decided not to.  If you're a Houston based investor and want to steer clear of this guy then send me a note via the contacts page. 

Footnote ³:  In the text above I didn't list all of the false statements that the agent made.  This is just a sample of one.  And no, the agent didn't send any forms to the title company. 

I got through my Friday the 13th closing with no problems, so I'm now the happy owner of a new four-unit property in the Montrose section of Houston. 

A last hitch was getting the place insured, and to my surprise I found a dearth of companies willing to quote me a rate.  Here in a nutshell are my experiences.  Note that insurer rules and policies vary from state to state, but here's what I ran into trying to get a policy for a fourplex in Houston:

	Nationwide:  was willing to make me a quote for a policy, but required me to switch the insurance policy for my primary residence to Nationwide as a prerequisite.  I'm happy with my current insurer (USAA) so this was a non-starter.  No quote.
	Allstate:  The "good hands" people.  Refused to insure any property with galvanized plumbing.  This property has been thoroughly rennovated, including much of the plumbing - but the building was built in the '30s, which essentially insures that there is still some of the stuff around.  No quote.
	State Farm:  Agent informed me that they consider a four-unit multi-family residence to be an apartment - meaning: commercial.  The agent referred me to a relative of his who got me a quote from a small carrier which was prohibatively expensive. .
	USAA:  I've used USAA before and have generally been hapy with them.  But unfortunately there is a limited number of non-owner occupied properties that they're willing to invest for any individual, and I'm already maxed out.  No quote.
	Farmers:  Gave me a fast on-the-spot quote over the phone at a good rate. ***see update, below

So the winner: Farmers. I'm a new customer.   ****  Update:  See below

Lesson:  I waited too late in the game to take care of this so I caused myself some unnecessary stress.  Do yourself a favor; start early and give yourself some slack time. 

**** April 18th Update - Farmers: run for your life.  I'm in the middle of a post-closing horror story that I'll write about soon (when I have time).  But consider this an official revocation of the blue ribbon that I'd awarded Farmers.  Stay tuned...