How to find fixer-upper homes with profit potential

As the volume of new and resale house and condominium salesgradually slows down in most communities from last year’s record levels, dueprimarily to rising mortgage interest rates, savvy home buyers arerediscovering a source of bargain-priced residences known as “fixeruppers.”

Retail sellers of homes in excellent condition, includingbrand-new houses, expect to earn top dollar for their “model home”condition residences. But in today’s market that has become difficult.

Purchase Bob Bruss reports online.

To illustrate, look at all the upgrade sales incentives homebuilders are offering, which weren’t available just a few months ago. Also,many sellers of resale homes are reducing their asking prices.

Traditionally, there has not been a large buyer demand forfix-up homes. The reason is they usually require work, such as painting,cleaning, repairing and landscaping. Most buyers instead prefer to buy homeswhere all they have to do is turn the key in the front door and move in.

LOOK FOR “FIXERS” WITH PROFIT POTENTIAL. Due tohigher mortgage interest rates in the mid-6 percent interest range today, manyprospective buyers can’t afford to buy the larger homes they could afford 12months ago when mortgages were in the mid-5 percent interest range.

But “fixers” can be the solution for home buyerswilling to buy a less-than-perfect home. The key to success is to buy a homewith profit potential.

Experienced real estate investors recommend buying aproperty “with the right things wrong.” That means buying a house orcondominium where well-spent fix-up dollars will add more market value than thecost.

Fresh paint, inside and outside, is known as the mostprofitable home improvement you can make. Virtually every house can benefitfrom new paint, especially when exterior paint gives a house a new look.

For example, my neighbor has owned her house since it wasbuilt more than 40 years ago. It was painted an ugly barn-red with white trim.All of a sudden, last year, she had her house painted a very attractiveoff-white with light-brown trim. Perhaps it cost $2,500 to paint the house, butI estimate the “new look” added at least $10,000 in market value.

Other examples of profitable home improvements includeadding a second bathroom to a one-bathroom house, installing new lightfixtures, adding fresh landscaping, and installing new carpets or hardwoodfloors.

These are known as “cosmetic improvements” becausethey usually aren’t very expensive but they can give the home a new look andfeel with added market value.

SOME IMPROVEMENTS ADD LITTLE OR ZERO MARKET VALUE. Butsmart buyers of “fixer” homes avoid those that need obvious butexpensive improvements that add little or no market value unless the home canbe bought at a large discount from comparable nearby homes.

The worst example is a new roof. When you spot a house forsale that has curled-up shingles, if that roof isn’t already leaking itprobably will leak soon. If you buy that house and deduct, let’s say, $5,000for the cost of a new roof, you will be lucky if spending $5,000 on a new roofadds $5,000 in market value. More likely, it won’t add any market value becausehome buyers expect houses with roofs which don’t leak.

Other examples of “the wrong things wrong” with ahouse include the need for foundation repairs, replacing old galvanized pipeswith copper pipes, rewiring to current standards, and replacing a crackeddriveway. Making these necessary improvements will likely add little or nomarket value to that residence.

“NICE TO HAVE” MARGINAL IMPROVEMENTS IMPROVEMARKETABILITY. In addition to the “profitable” and”unprofitable” home fix-up work, the third category is known as”nice to have” marginal improvements.

If you plan to stay in your home more than five years, youprobably want to make these renovations to increase your home enjoyment. Butconsider yourself lucky if these renovations add as much market value as theycost.

The two major examples are kitchen and bathroom renovations.Room additions, such as adding a family room or another bedroom, also fall intothis category. Adding a swimming pool, surprisingly, can often hurt themarketability of a home because buyers with small children frequently won’t evenconsider a home with a pool.

Having renovated dozens of rental houses, I am well awarethan money spent on kitchens, bathrooms and room additions greatly improvedmarketability but rarely added any more market value than the actualconstruction costs.

WHEN TO SELL A “FIXER-UPPER” HOUSE OR CONDO.Among the reasons fixer-upper houses and condos become available are (1)distress properties such as foreclosures, (2) the seller doesn’t want or can’tafford to fix up, (3) an heir inherited the property and wants a quick cashsale, and (4) a well-located but run-down house has become a “teardown” on a valuable lot to be replaced by a brand-new house.

Home sellers who don’t want to be bothered fixing up theirhomes for sale usually pay the penalty in a greatly reduced sales price. Butbuyers willing to fix-up the home usually benefit.

For example, many home sellers wisely don’t waste moneyrenovating kitchens and bathrooms. A smart approach is to have the home’sinterior and exterior painted, but let the buyer take on any major remodelingto suit the buyer.

However, a major mistake some sellers make is not to makeminor cosmetic improvements.

To illustrate, suppose the carpets in your home are worn andstained. Rather than replace them before listing your house for sale, youdecide to offer a $3,000 carpet replacement discount to the buyer. The reasonthat is a mistake is (1) most buyers have little or no imagination about hownice the home will look with new carpets and (2) the buyer will want a biggerdiscount than you offer.

HOW SMART BUYERS MAKE FIX-UP A PROFITABLE TAX-FREE BUSINESS. If youor your mate enjoy home decorating and fix-up, buying a fixer house or condocan become a profitable tax-free business. Thanks to Internal Revenue Code 121,primary-residence owner-occupants can earn up to $250,000 tax-free profits uponresale (up to $500,000 for a qualified married couple filing a joint taxreturn).

To qualify, you must own and occupy your principal residenceat least 24 of the 60 months before its profitable resale.

That means you can move in, take at least two years tocomplete your profitable improvements before selling, claim your tax-freeprofit, and do it all over again by purchasing another profitable fixer-upperresidence.

If you do this over and over every 24 months, you willbecome known by your friends as a “serial home seller.” An excellentnew book on this topic is “Find It, Fix It, Flip It” by MichaelCorbett, available at local bookstores, public libraries and www.Amazon.com.

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

Copyright 2006 Inman News

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