Just in case you haven’t been paying attention, the latest statistics from the National Association of Realtors show nationwide median home prices appreciated about 15 percent in the last 12 months. Of course, some homes appreciated less in value, but others appreciated even faster.
Considering the typical homeowner paid a highly leveraged 10 percent to 20 percent cash down payment, the return on invested dollars for home buyers is too high for my calculator to compute.
Purchase Bob Bruss reports online.
Do you know of a more profitable investment than a house or condo? I don’t.
However, some houses and condos have not appreciated in market value during the last 12 months. Maybe there is an oversupply of residences available for sale in the community. Perhaps the major local employer recently announced layoffs or a factory closing. Fortunately, these local economic situations are not widespread.
But in virtually every community there are “profitable homes” to be purchased if you know how to look. Having bought and sold many profitable houses (and a few condos) over almost 40 years of real estate investing and having met many other successful investors, there are at least five criteria for buying a profitable house or condo:
1. LOOK FOR “THE RIGHT THINGS WRONG.” Having never bought a brand-new house or condo, I don’t advise buying such properties for profits. The risk is high, although there can be profits if the market value rises during construction or immediately after completion. But the buyer has little control over such situations, so I suggest staying away from new construction if you want to profit.
Instead, I recommend looking for “the right things wrong.” In other words, look for profit opportunities in the existing house or condo you buy. Yes, we’re talking about that dread term “fixer uppers.”
Virtually every real estate tycoon I know buys fixer-upper properties, upgrades and then either holds for long-term market-value appreciation or resells for quick profits.
Every community has fixer-upper houses and condos. Ask any savvy real estate agent to show you this type of residence.
However, condos have very limited fix-up potential, unless the individual unit is a “disaster,” because condo values depend on recent sales prices of comparable units.
Houses offer the best profit potential. We’re talking about “cosmetic improvements,” not major renovation.
Look for run-down houses needing interior and exterior paint, fresh landscaping, new light fixtures, kitchen upgrades such as new cabinets and appliances, bathroom improvements, and new carpets or flooring.
Avoid houses needing costly structural changes, which add little market value, such as foundation repairs, upgraded plumbing and wiring, and a costly new roof.
2. FIND OUT HOW MUCH THE SELLER PAID FOR THE HOME. Your buyer’s agent should be able to find out this vital information very easily (although a few states don’t record sales prices in the public records). Fortunately, the local multiple listing service (MLS) usually has this purchase price information easily available to MLS members.
The reason the seller’s purchase price is so important to home buyers who want to make a profitable purchase is then the buyer knows how much room the seller has to negotiate.
To illustrate, several years ago a home sold in my neighborhood for a price that I thought was a bargain. Then I learned the divorced seller (and her ex-husband) had purchased the home for several hundred thousand dollars less than the sales price. In other words, she had lots of room to negotiate on the sales price.
However, if the buyer of that home discovered the seller purchased the house a year earlier for close to the asking price, the seller wouldn’t have much negotiation room.
3. DEDUCT FROM MARKET VALUE TO COMPENSATE FOR REPAIRS. Many houses and condos are sold “as is.” An “as is” home sale means the seller must disclose known significant defects that affect market value, but the seller will not pay for any repairs.
Elderly sellers often don’t want to pay for home defect repairs and prefer to sell “as is,” especially if the buyer of the “fix-up home” is likely to make major renovations.
Buyers of profitable homes that need fix-up work should consider the cost of bringing the home up to neighborhood standards, and then deduct that amount from their purchase offer price.
4. BUY FROM A MOTIVATED HOME SELLER. The best bargain homes I’ve purchased were sold by highly motivated sellers. Reasons for selling usually had nothing to do with the home, such as a job transfer, divorce, retirement, illness, death in the family, alcohol or drug problem, and other motivations.
The worst home seller, if you want to make a profitable purchase, is an unmotivated seller who is “testing the market” to see if his/her dream price can be obtained. Once, I made a full-price, all-cash, no-contingency, full-asking-price offer, and the seller counteroffered for more. When that happens, it is not the signal for a profitable home purchase.
5. ASK FOR AFFORDABLE SELLER FINANCING. Depending on the situation, a profitable home purchase might involve affordable seller financing. Savvy home buyers always ask, “What financing exists on the home today?”
If the seller has mortgaged the home to the hilt, forget about profitable seller carryback financing.
However, if you learn the seller owns the home free and clear, your next question to the seller’s listing agent or the seller should be, “What does the seller plan to do with the sales proceeds?”
If the answer is, “Put the money in the bank,” you just struck gold!
As a home buyer that is your “green light” signal to make a purchase offer with seller financing. In today’s market, a home seller is lucky to invest his/her home sales proceeds to earn 4 percent to 5 percent interest with safety.
Just think how great your purchase offer, with a reasonable 10 percent to 20 percent cash down payment and a seller carryback mortgage for the balance of the purchase price at 5 percent or 6 percent interest, will look to that seller who doesn’t need immediate cash.
With easy seller financing like that, you just achieved a very profitable home purchase without any mortgage lender hassles.
SUMMARY: Not every home purchase will have an up-front, built-in profit. But all you need is one. Look for the “right things wrong” with the home. Then look for extra bonus profit opportunities, such as seller carryback mortgage financing.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
***
What’s your opinion? Send your Letter to the Editor to opinion@inman.com.
