Mark Ferguson is the creator of InvestFourMore.com, one of the top real estate blogs for agents and investors. We recently had a chance to speak with Mark about the advantages and challenges of real estate investing, and how home inspections can help identify what needs to be fixed in a home before it can be flipped or rented out.
Tell us a bit about your background. Why did you decide to create InvestFourMore.com?
I was buying as many rental properties as I could after figuring out how amazing they were as an investment. I had figured out how to finance multiple rentals with local lenders when lending was very tight for investors. I had also learned a lot about getting great deals, management, and analyzing a property.
I created the blog to talk about my rentals and the things I had learned over the years. I had no experience with writing, blogging, or marketing online; but I just started writing, and my good friend helped me set up the website. My articles were full of typos and in general pretty horrible grammatically. However, people liked what I wrote, and I got better and better over time.
If someone were to say to you, “I’m not going to invest in the real estate market, because you never know when it’s going to crash like it did a decade ago,” how would you respond?
I would say there is always risk in any investment. There is risk in walking on the sidewalk, but you have to analyze the risk and decide what the worst case scenario is. Too many people assume the worst without every researching what the worst is and how likely it is to occur. For one thing, I do not think we will ever see a crash like we did, unless there is a crazy world event that would affect every investment. There are too many investors waiting to buy up good deals, and they will not let the market drop as much as it did before. Plus, the lending guidelines are also much stricter, and companies are not building like they did before.
The other thing to consider is the investment. What are your plans? Are you flipping or holding? Either can work in down or up markets, but you have to invest the right way. If you’re flipping, you must make sure you are selling the houses fast enough to avoid market exposure to a changing market. You also have to make sure you are not assuming the market will keep going up to make your money. If you are buying rentals, you only lose money in a down market when you sell the property. If you invest wisely with enough rents coming in comparison with the prices you pay, and have reserves to cover down months, you will not have to sell. If you don’t sell, the down market does not hurt you as a rental property investor.
When you’re examining a potential property for investment purposes, what are the first things you look for in terms of the quality and the physical “health” of the home?
This depends on the type of investment. If I am flipping houses, my main concern is the profit potential and the size of the rehab. The bigger the rehab, the longer it takes and the more risk is involved. I want a higher profit potential for houses that need more work. The same goes for rental properties as well. The house will not be rented or making any money when it is being repaired. I also may have more cash invested in a big rehab compared to a small rehab on rentals depending on how I finance them.
I rarely buy houses that are in great shape, because it is tough to get a good deal on them. However, I try to avoid houses that need full gut jobs or rehabs that will take three months or longer. I will invest in older homes, but I prefer not to because they tend to need more repairs and have more surprises. The biggest things to watch out for are foundations, electrical, plumbing, heating systems, roofs, structural problems, and water damage. A meth house can also be a huge headache and turn a great deal into a money loser.
It seems like on those HGTV shows, house flippers or remodelers always find some “unexpected” or “hidden” problems that drive up the project’s cost substantially. How often does that happen in real life? Are there any signs to look for to minimize the odds of that happening?
I always budget about 20 percent more than I think a job will cost due to unknowns. It is rare when I do not have an unexpected cost on a deal. The problem with renovations is that you cannot see behind the walls or know about all the repairs until you start the job. This is why I prefer jobs that do not involve massive remodels, because the more you do, the more you will find that needs work. I would always assume it will cost more than you think, but home inspections are one way to try to limit the unknowns.
Since you’ve flipped over a hundred homes in your career, could you tell us what you think is the most difficult aspect of the entire house-flipping process?
There are many difficult aspects, but finding great contractors is the number one issue. I have had up to 19 flips at one time this year, and it is tough to find good contractors for a couple houses. We are constantly looking for new contractors, and we have to keep a very close eye on the contractors we have. As flippers, you cannot pay top dollar for the best contractors and still make money. You also cannot use the cheapest contractors because you will end up paying for it in the end with bad work and delays.
From a maintenance and upkeep perspective, are there any differences in the way you look for a rental property versus a house that you plan to flip?
When I flip houses, I know I will be selling the property in a few months. I want it to be nice, but I am not as worried about the long-term maintenance. I do not mind flipping older houses, but do not like older houses as rentals. I know the older a home is, the more maintenance it will need.
On the other hand, when I repair houses I do more work to the flips. People who are buying homes have much higher standards than renters. Renters do not care as much about the furnace, roof, windows, etc. They know if something breaks, the landlord will fix it or they can move pretty easily if needed. A buyer is much pickier and will have a home inspection done. We have to make the flips nicer and spend more on the remodel than the rentals. I will still replace items in a rental that are at the end of their life, like roofs and furnaces, to ensure they do not fail and cause bigger problems.
Given your vast experience in selling houses, have you learned enough to do the home inspections yourself if you wanted to? Or do you do that already?
I have not had a home inspection performed on a home before I bought it on the last 30 houses I have bought. I am able to walk through a home and see the major items that need to be done, and I always assume there will be more that I cannot see. I can get a very close idea of what the repairs will be.
However, I still get an inspection done after I buy the house. This might sound backward, but I can get a better deal on houses by waiving my inspection period when buying. I also want to make sure we repair all the little things that an inspector will find before we sell the home. We have the inspection done so we can tell our contractors exactly what to fix.
Finally, do you have any advice for people who are looking to hire a home inspector?
It can be very tough knowing who is good and who is not without referrals. A really good real estate agent can recommend inspectors and give you an idea of how each inspector works. Some inspectors are very picky about a home’s condition, while others are very nonchalant.
A home inspector can scare buyers off by making minor repairs seem serious. Many homes have code violations that were legal when they were built. The violations may not be a safety hazard, but they can scare buyers off. It is best to use the home inspection as a guide and have any serious items checked out by electricians, roofers, or other specialists who will know more than the home inspector. In some states, a home inspector does not have to be licensed, so do not assume they know more than the licensed professionals. Real estate agents should also help you determine what is a major repair and what is not on the inspection report.
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