There was a time when no one wanted to buy a dilapidated “money pit.” That was before the days of high appreciation rates and low inventories of homes for sale. Now fixers are almost as popular as homes that are in move-in condition.
For example, a couple of years ago, a home that was in such bad shape that it wasn’t livable sold with nine offers. It sold for over $200,000 more than the asking price. The home was located in the desirable Crocker Highlands neighborhood of Oakland, Calif. It was easy to see that it could be a lovely home with about $250,000 of improvements. But at the $900,000 purchase price, it was hard to imagine how the buyers could turn the house for a quick profit.
In fact, the buyers didn’t fix up the house for immediate resale. They fixed it up for themselves and lived in it for a couple of years. When they sold, they did recoup their investment, but only because home prices appreciated more than 20 percent the year before they sold. However, they did not sell for significantly more than they invested, much to their disappointment.
Before jumping into a fix-up project, do your homework and be objective about the upside potential of any project you consider. The primary considerations are the price you pay, the cost of improvements, your carrying costs and the expected selling price.
The most difficult part of rehabbing for profit in this market is finding suitable property to buy at the right price. In some areas, low inventories and high prices are causing more buyers to consider buying a less expensive home that needs work. It’s hard for an investor to compete with a buyer who plans to fix up the property for himself rather than fix it up to sell for a profit.
HOUSE HUNTING TIP: The key to success is being able to walk away from a project that doesn’t make sense. If you pay too much going in, you’ll make less when you sell unless you skimp on renovations or home prices escalate. Don’t be too quick to wrap up a deal. Successful real estate investors often make offers on hundreds of candidate properties before finalizing a purchase.
Be realistic about the renovation costs. It’s wise to pad the estimates on the high side to cover for unexpected expenses. When renovating an older property, there’s always the risk of an unknown defect that will push you over budget.
The best fixer projects are the ones that need only cosmetic improvements. But, these are also the ones that attract buyers who will fix the property up for themselves. These buyers can afford to pay more because they don’t need to pay themselves a profit.
Beware of the fixers that no one wants. These might have a serious or incurable defect, like freeway noise, that will limit your upside potential. The buyers in the above example would have realized more from the sale if it weren’t for the fact that the property was subject to freeway noise.
Buying fixer-upper properties in this market is risky because of the fact that home prices have experienced extreme appreciation in some areas during the last few years. No one knows for sure where the market and home prices are heading. But, if your buy now and the market slows down and you can’t sell quickly for a profit, you’ll be looking at higher carrying costs and perhaps a lower price.
THE CLOSING: Keep in mind that your goal is making a profit. It there isn’t profit potential, save your money until you find a project that makes sense.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
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