Buy worst house in good neighborhood for big profits

Do you have any friends who sell their homes and moveapproximately every two years? I know several of those very smart folks. Youmay wonder why they change homes so often. No, they are not in the federalwitness protection program. But they have a very profitable reason.

They are “serial home sellers.” There is nothingillegal or immoral about that. In fact, it is extremely smart to sell yourpersonal residence every two years or so, especially if there is no tax to payon your resale profit.

Purchase Bob Bruss reports online.

TAX LAW ENCOURAGES PROFITABLE TAX-FREE HOME SALES. Just incase you have no clue what this is all about, every homeowner needs to knowthat Internal Revenue Code 121 permits tax-free principal residence salesprofits up to $250,000 (up to $500,000 for a married couple filing a joint taxreturn).

To qualify, the home seller(s) must own and occupy theirprincipal residence at least 24 of the last 60 months before its sale. But IRC121 can only be used every 24 months. If you want to maximize your tax-freesale profits, there are five easy steps:

1. Buy a sound, well-located house or condominium belowmarket value needing cosmetic fix-up work.

2. Move in and make it your principal residence.

3. Make profitable improvements to the residence that costless than the market value they add.

4. Profitably sell the house at a tax-free profit notexceeding $250,000 (up to $500,000 if husband and wife occupied the home 24 ormore of the 60 months before sale and they file a joint tax return).

5. Repeat every 24 months to become known as a tax-free”serial home seller.”

HOW TO MAKE PROFITABLE HOME IMPROVEMENTS. Ifcreating tax-free profits, while enjoying your home is appealing, especially ifyou are a handyperson or in the construction field, serial home selling can bethe perfect business opportunity. The only skill required is to recognize ahouse or condo with “the right things wrong.”

Most older houses qualify, as virtually every house morethan 10 years old needs paint inside and outside. Paint is the most profitableimprovement homeowners can make. Spending $1,000 on painting often adds $5,000to $10,000 in market value.

Other examples of homes with the “right thingswrong” include the need for new light fixtures, fresh landscaping, newcarpets and flooring, and overall cleaning and repairs. An especiallyprofitable home improvement is adding a second bathroom to a one-bathroomhouse.

However, the “wrong things wrong” with a house arenecessary but unprofitable work that doesn’t add more market value than itcosts. Unprofitable examples include a new roof, foundation repairs, newwiring, replacement of galvanized pipes with copper pipes, siding replacement,and window replacement.

Many home improvements are “nice to have,” butthey don’t add more market value than their cost. Examples include bedroom andfamily-room additions, kitchen remodeling, and bathroom upgrades. Such work maymake your home more desirable while you live there, but is unlikely to add morethan the cost to the market value.

THE MAJOR DRAWBACK OF BEING A SERIAL HOME IMPROVER. If youthink buying a run-down house, making profitable improvements while living init, and selling it for up to $250,000 (or $500,000) tax-free profit sounds likefun, think again. It’s hard work.

While you and your family are living in the house as itundergoes major renovation, that can be what TV’s Dr. Phil calls “alife-changing experience.” The disruption of not having a kitchen to cookin, or only one working bathroom for a large family, and the daily disruptionof having strangers working in your home can’t be fully described.

A few summers ago my neighbors went through such anexperience. They wisely decided to take the kids to Europe so by the time theygot back their remodeled home was almost finished. Yes, the marriage survived.

Because major home improvements can be traumatic, thesmartest serial home sellers renovate their homes before moving in. Then theyget to enjoy their fixed-up home for at least two years without the hassle andinconvenience of work in progress.

DON’T MAKE THESE COSTLY MISTAKES. Earningup to $250,000 tax-free (or $500,000 for a married couple) every two yearsexcites most people. But there are some pitfalls to avoid:

1. Don’t buy a house in excellent condition (it lacksfix-up profit potential). Instead, buy the worst house in a good neighborhood.

2. Avoid most condominiums and townhouses. The reason is nomatter how nice you fix up your unit, its maximum resale market value will beheld down by the recent sales prices of other units in the same complex. Forexample, if you fix up a condo penthouse but the other units in the buildingand the common areas are “ho-hum average,” you won’t earn muchprofit.

3. Stay away from “extreme makeover” houses, whichneed to be torn down (called a “scraper”) or renovated by movingwalls and rebuilding the interior. Profiting from such houses is extremelydifficult.

4. No matter how much potential a fixer-upper house has,stay away if it is in a bad location, high-crime area, or the public-schoolquality is poor. These three criteria will hold down resale value no matter howwell the house is upgraded.

WORK WITH A SAVVY BUYER’S AGENT TO FIND FIXER-UPPERS. Buyersof fixer-upper houses have a major advantage. Most other home buyers don’t wantthese fix-up houses. They prefer to buy a house, turn the key in the door, andmove in. That’s the way to profitably sell your house.

A sharp buyer’s agent will alert you when a fixer-upperhouse with “the right things wrong” comes on the market, whether itbe in the local MLS (multiple listing service) or a “for sale byowner” FSBO. In the current “buyer’s market” in most cities,there is little demand for these run-down houses offering profit potential.

Additional sources of profitable home purchases, which mostbuyer’s agents don’t follow, include foreclosures, probate and bankruptcysales. Vacation or second homes can also be profitable, but they have specialrisks such as fickle buyer demand, which is often seasonal and volatile.

HOW TO PAY FOR THE IMPROVEMENTS.Fortunately, most “right things wrong” fix-up houses don’t requirecostly improvements. To pay for the improvements, because the house will becomeyour principal residence for at least 24 months, many major lenders now offercombination mortgages to pay for both the purchase and the improvements.

The lender’s appraiser will evaluate both the home’s current”as is” market value and the upgraded market value after theimprovements are completed. The lender pays out the improvement portion of theloan as the work is completed.

Another finance method is to buy the house with mortgagefinancing and then obtain a home equity credit line secured by a secondmortgage to pay for the improvements.

However, this method is difficult if the home buyer doesn’thave much initial equity. More details are in my special report, “How toEarn Up to $250,000 (or $500,000) Tax-Free Profits Every 24 Months Buying andSelling Houses,” available for $5 from Robert Bruss, 251 Park Road,Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internetdelivery at www.BobBruss.com.

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

Copyright 2006 Inman News

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