10 things investors should look for in fixer-uppers

“How can I make some big money in real estate?” That was the question an old friend asked me recently. He purchased two rental houses a few years ago and has enjoyed watching them appreciate in market value. But in today’s current “buyer’s market,” he said, his houses have stopped going up in value and are “stagnating,” as he put it.

Then I politely suggested that if he wants to acquire profitable houses in today’s market the best opportunities are in “fixer-upper houses,” which few other home buyers want to purchase.

PurchaseBob Bruss reports online.

TEN ATTRIBUTES OF PROFITABLE FIX-UP HOUSES. Like my friend, if you are serious about earning profits from fixer-upper houses, here are the 10 key attributes to seek:

1. Basically sound condition without major structural defects. In most communities, this means looking for three- or four-bedroom houses with good foundations and without a major need for renovation other than cosmetic fix-up. Avoid two-bedroom houses unless your town has a strong renter or buyer demand for these smaller homes.

2. Good location with a low crime rate. No matter how enticing a run-down, profit-potential house might be, if it has a poor location there’s little or nothing you can do to cure that.

For example, houses next to a noisy freeway or on a very busy street won’t appeal to most other buyers except at bargain prices so there is little you can do to raise values in an undesirable location. If most of the nearby houses are run-down and poorly maintained, they will drag down the value of your house. However, if you buy a run-down house in a good neighborhood of well-maintained homes, they will drag the market value of your home up after it is renovated.

3. Good-quality school district. Even when a house is in sound condition in a good location, if the public schools are of poor quality, that greatly hurts the resale value for fixer-upper houses. Always look for houses with school test scores at or above the median for the area where families with children are attracted.

4. Need for profitable cosmetic fix-up work, but not major unprofitable repairs. Examples of profitable cosmetic improvements include fresh paint inside and outside (the most profitable improvement you can make), new light fixtures, new carpets and flooring, and fresh landscaping.

But stay way from fixer-upper houses that need unprofitable work such as new wiring, new plumbing, foundation repairs, major kitchen and bathroom renovation, room additions, and a new roof. These expensive, unprofitable improvements rarely add more than their cost to the market value of the home.

5. Purchase price at least 30 percent below the market value of nearby comparable homes in good condition. “Buy the worst house in the best neighborhood” is a sound motto to follow. Another good motto is: “Your first profit is earned when buying at the right price.”

If the seller won’t heavily discount the sales price to compensate for a home’s run-down condition, keep looking until you find a house with profit potential meeting the criteria explained here.

6. Purchase from a motivated seller who is anxious to sell. Motivating reasons for selling a home include job transfer, pending foreclosure, divorce, health reasons, family birth or death, and unemployment.

If the home has been listed for sale at least 60 to 90 days with no offers, even if the asking price is too high, that is another indication of possible sales motivation so it may be time to make a “lowball” purchase offer.

7. Affordable low-down-payment financing. Taking over an existing mortgage (called buying “subject to”); a lease with option to buy; seller carryback financing; or a combination of these methods indicates probably easy financing.

If the house is in bad shape, avoid obtaining a new mortgage unless it is approved by the lender on an after-fix-up, market-value appraisal. After your fix-up work is completed, that’s the time to get a new mortgage, based on the home’s increased market value.

8. Seller or tenant will vacate immediately upon transfer of title. The best way to profit from a fixer-upper house is to work on a vacant structure. Attempting to make improvements while the seller or a tenant lives in the property makes the upgrading work doubly difficult.

9. Within a 60-minute drive from your current residence. During renovation of a fix-up house, it pays to visit the property nearly every day to be certain the work is getting done correctly.

When the owner doesn’t inspect frequently, the workers often don’t show up or they slack off. Incidentally, never pay contractors by the hour (except for minor work) and always pay by the job after it is finished to your satisfaction.

10. Good demand from renters and/or buyers. Unless you plan to live in the fixed-up house, it pays to consider the current demand for houses from renters and buyers. If local employment and economic conditions are good, chances are home values are stable.

However, if more people are moving out than are moving into the community, maybe it’s not the right time to invest in a fixer-upper house there unless it can be bought for a 40-50 percent discount off the market value of nearby homes in excellent condition.

CREATE A TAX-FREE, HOME-FIX-UP BUSINESS. If you are serious about earning profits from fixer-upper houses meeting the 10 criteria listed above, buying a “fixer” can become the basis for a very profitable tax-free business.

Thanks to Internal Revenue Code 121, if you own and live in a principal residence at least 24 of the 60 months before its sale, you can claim up to $250,000 tax-free capital gains. When a married couple both meet the occupancy test, up to $500,000 of profits can be tax-free.

This tax-break can be used over and over without limit. However, IRC 121 cannot be used more frequently than once every 24 months. More details are available in my special report, “How to Buy Fixer-Upper Houses With Little or No Cash for Fun and Fortune,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2007 Inman News

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