“I can’t believe the mortgage company approved me tobuy a condo in such bad shape.” That’s what I overheard a young lady tellher breakfast date at the coffee shop I like to visit on Saturday mornings. Theplace is always very busy. The tables are close together so it’s hard not tooverhear conversations at the adjoining tables.
Burying my head in the newspaper, I then heard her say,”But my dad remodels kitchens so I know he will make it a beauty.” Iwanted to tell the guy, “Marry her, she’s on her way to a real estatefortune.” But I kept quiet and looked away.
Purchase Bob Bruss reports online.
Then she went through a list of condo fix-up work she plansto make, such as fresh paint, new carpets and several decorating ideas. At thatpoint, the guy changed the topic. If they marry, she will obviously be the realestate tycooness in that family.
HOW TO FIND A PROFITABLE HOUSE OR CONDO. If youare a typical house or condo buyer, you probably want to purchase a new orresale residence in near-perfect, “model home,” move-in condition.That’s fine.
But expect to pay full retail market value. That is not theway to make a profitable home purchase.
If you want to profit from your home purchase, as that younglady will, buy a house or condo needing profitable improvements. Extreme casesare called “fixer-uppers.”
To be polite, some listing agents call them “tiredhomes.” Having bought and sold many profitable residences over 40-plusyears of investing, here are my top five criteria for buying a profitable houseor condo:
1. ASK HOW MUCH THE SELLER PAID. Thelonger I’m involved with real estate investing, the more important I think thiskey question is. I wish I started asking it many years ago when purchasinginvestment properties.
Even if you find a house or condo in excellent condition,before making a purchase offer, ask your buyer’s agent, “How much did theseller pay for this home?”
Most buyers don’t ask this vital question. Your buyer’sagent might be shocked. Just explain the reason you need to know is to discoverhow much negotiation room the seller has so you can buy the property. Youragent will be thrilled to learn you plan to make a purchase offer.
For example, if you learn the seller paid $100,000 for theproperty many years ago, and the comparable home sales prices in the vicinityindicate it is worth $300,000 today, that seller has lots of negotiation room.However, if your buyer’s agent checks the public records and discovers theseller paid $250,000 for that house last year, the seller doesn’t have muchnegotiation room for you to buy a profitable house at a below-market purchaseprice.
2. ASK WHY THE SELLER IS SELLING. This isa controversial question for a home buyer to ask. Only the smartest buyers dareask it. Knowing the seller’s true motivation for selling is critical if you areto buy a profitable house or condo.
Often the listing agent doesn’t know the answer. Be sure tocommunicate to your buyer’s agent, who will then tell the listing agent,”I need to know so my buyer can make a purchase offer that meets theseller’s needs.”
Sometimes, you won’t be told the truth. For example, if thereason for the home sale is a divorce, the listing agent might be reluctant toreveal that fact. However, I’ve found that to be important information so I canmake a purchase offer providing cash to satisfy both sellers.
Or, if you learn the home is in foreclosure and the lenderhas scheduled a foreclosure sale in three weeks, you better be prepared topurchase fast before the seller loses the house.
I recall one situation several years ago where I asked thenasty listing agent why the sellers were selling a home I really wanted to buyfor my personal residence. He arrogantly replied, “It’s none of yourbusiness. Just bring a cash offer.”
Not wanting to do business with him, I never made a purchaseoffer on that house. Later, I learned the sellers were very wealthy and wereretiring to Palm Springs. I could have made a low-down-payment offer and theyprobably would have carried back a mortgage on very attractive terms.
3. LOOK FOR “THE RIGHT THINGS WRONG.” This usedto be my primary criteria for buying a house or condo at a bargain below-marketpurchase price. Although this reason is still ultra-important, it is no longeras important as the first two criteria.
That condo buyer who sat at the table next to mine a fewweeks ago, understood this rule even if she didn’t have it on her profitabilitylist. By purchasing a condo needing a kitchen renovation, she was acquiring analmost instant profit opportunity, especially since her father is in thekitchen remodeling business.
“The right things wrong” mean profitopportunities. Often, all that is needed are a coat of paint and newwall-to-wall carpets. Additional profitable examples include new lightfixtures, new appliances, fresh landscaping, and bathroom updating.
Examples of the “wrong things wrong” orunprofitable improvements include a new roof, foundation repairs, new plumbingor wiring, and new windows. The reason these obviously necessary updates areunprofitable is they add less market value to the home than they cost.
4. DEDUCT FROM MARKET VALUE FOR THE COST OF REPAIRS. Mostsellers of houses and condos are well aware if their home needs repairs orupdating to current market value standards. There are two ways for buyers tohandle this.
One is to offer a low purchase price to compensate for theobviously necessary repairs. However, such an approach often upsets the sellerwho doesn’t realize how much it will cost to bring their home up toneighborhood standards.
A better approach is to offer close to current market value,based on recent sales prices of nearby comparable houses or condos, but thenlist and ask for credits for necessary repairs, such as a new roof, foundationrepairs, landscaping, and new plumbing or wiring. This method is often moreeffective because the seller then realizes all the work their”fixer-upper” needs.
5. ASK THE SELLER FOR AFFORDABLE FINANCING. Althoughhome mortgage financing is easily available today, you might be able to dobetter in the right circumstances by asking the seller to carry back a mortgagefor you. This can be especially valuable if the seller owns the home free andclear with no mortgage, you plan to immediately renovate the house to increaseits market value, and you expect to refinance or sell the home after theimprovements are completed.
To illustrate, if you offer a retiree seller a 5.5 percentinterest rate on a carryback mortgage, that’s better for you than is easilyavailable at the local bank. However, be sure there is no prepayment penalty soyou can refinance when you complete renovations to increase the home’s marketvalue.
As the old saying goes, “It doesn’t hurt to ask.”There is no easier mortgage lender than the home seller. My experience isretirees are especially anxious to finance home sales because they usuallycan’t obtain such a high yield with the safety of a mortgage on their formerresidence if you fail to make the payments and they have to foreclose. Byobtaining easy seller financing, you just increased your purchase profit evenmore.
SUMMARY: If you ask the right questions, your house or condopurchase can become a profitable investment. Whether you plan to keep your homepurchase a short time or for many years, look for the “right thingswrong” and the extra bonus profit opportunities, such as seller carrybackmortgage financing.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News