Fixer-uppers

The oft heard phrase "Buyer Beware" is never more appropriate than when considering the purchase of a fixer-upper.You really need to know exactly what you’re getting into before buying.

It’s commonly believed that fixer-upper properties represent easy money that is ripe for the taking - that you can buy it, do a little work on it in your spare time, and then resell quickly for a large profit.  Usually, this simply isn't the case. Although, with proper planning and foresight, good profits can be made by buying "distressed" properties at less than market value, making appropriate improvements and repairs, and then reselling.  And for many first time buyers who intend to live in the house while working on it, buying a fixer-upper can be the very best option. It’s less risky buying a fixer-upper when you can live in the house while fixing it. And of course, by living in the house for at least 24 months you should be able to avoid paying regular income taxes on the profits.

The most important thing to know before making a decision on such a purchase is what needs to be fixed. Any time you are spending money on improving a home with the notion of selling it later, strive to spend your money on things that buyers can easily see. Things like new paint and removing trash from the property cost little but have instant impact on curb appeal. Houses that have only cosmetic problems like peeling paint, a trashy yard, bad carpet or wallpaper are the best bet. This is especially true for the first time buyer looking to live in the house for a while before reselling. Fixing and cleaning cosmetic issues is fairly easy and inexpensive. It virtually always gives gives a good return on investment, particularly when you can do the work yourself. Kitchen and bathroom remodeling usually pays a nice return. Don’t be afraid of buying a fixer-upper in need of this kind of repair. Properties with structural damage, or a floor plan that requires major work to remedy, usually can’t be "fixed up" at a profit. 

Always have an inspection for hidden damage performed by a home inspector or construction professional before buying a fixer-upper. Make sure that satisfactory completion of such inspections are a condition of purchase in any contract you sign. Then be sure to negotiate to try and get the seller to pay for all or part of the cost of needed repairs uncovered by the inspection. Often, sellers will be willing to lower the sales price to sell the home "as is" instead of paying for the repairs.  A good rule of thumb is to pay 70% of the "as-is" value of the house in its current condition, as compared to a similar house in an "marketable condition".  This is especially true of a home is severely neglected, or if you have a distressed seller.  If you are buying with a thought to resell, it might be wise to make your contract "assignable", or that is, transferrable, where you can sell your rights another rehab investor, who will gladly pay you a fee for finding the right deal.

An illustrative example: Let's say you find a property that upon full repair is worth $350,000.  It's seriously in need of repairs and your general contractor, after getting 3 different  written estimates, from different reputable licensed contractors are all around $58,000-$63,000. You pick the general contractor you have worked with or has been recommended to you estimate for a budget of $60,000. You have worked with the contractor before, but you leave yourself a 2% margin for error for cost over-runs.  Your hard-money lender charges you 5 points, and you are not able to get conventional financing on the property, because it is too deteriorated to act as sufficient collateral for the lien by a conventional bank.  Your "carrying cost" of mortgage payments and utility bills assume a 4 month repair period and a 6 month period until the property is sold, so you guess-estimate, that you need 10 months of reserves to keep the mortgage current. What price is the property worth to you to buy it?  So, here's an example: 70% of 350,000=$245,000. 5 Points of $245,000=$12,250.  Your repair budget=$60,000+2% error margin=$61,200. Your mortgage payments are assumed to be roughly $1850/month. Your taxes and insurance are assumed at $500 per month.  So, your total 10month carrying cost=$23,500.  Your commission to sell the property in a repaired state = 6% of $350,000=$21,000.  Your total budget to turn this property around are: $21,000+$23,000+$12,250+$61,200+Your Profit+purchase price(245,000).  As you can see, in this conservative example, buying the property at 65% or 70% of the "after-repaired" value, or MRV, is the only way to make a profit, and the more quickly you resell it , the lower your "carrying costs'. 

Be careful that you don’t over pay. Especially if you plan to resell quickly, paying too much up front can doom your plans for quick profit. Research the market for reselling and have an exit plan for selling the house in place before making an offer.

If you are seeking a "handy-man" special, or you are interested in buying REO property,  I am able to aand can help you find the correct property for repair and resale.   Please fill out the form below.