Several years ago, when the housing market was mired in the worst recession since the Great Depression, buyers shied away from houses that needed work. The buyers who weren’t put off from buying completely were interested only in turnkey homes that were in move-in condition.
It was too risky for most buyers to buy a house that needed work. But, now that the housing market appears to be recovering, buying a home to fix up seems more reasonable, but is not without risk.
There are basically two types of "fixer" buyers. One is the flipper who buys a home, spruces it up quickly and sells it at a profit. The goal is not to hold the property as an investment, but to find a buyer as soon as possible after the redo is complete.
Flippers should avoid buying homes that have major problems to remedy, which will eat into profits. A way to maximize profit and minimize carrying costs during the rehab period is to buy at a low price with all cash. Buy in areas where employment and transportation are good so that you will have a pool of buyers for your product when it’s ready to sell.
Select the neighborhood carefully. Is it conveniently located? Are homes selling quickly? What is the average "days on market" from list date to sale date? This information is critical to knowing how fast you can turn the property over to a new buyer.
For the last couple of years, institutional investors bought hundreds of devalued properties at a time, many of them foreclosures. First-time buyers who needed to qualify for a mortgage in order to buy were muscled out. A sole-practitioner flipper should look for buying opportunities in smaller neighborhoods in good locations, near jobs and transportation.
The other type of fixer buyers are those who buy for their own use. They do not intend to flip the property, but want to increase the value of the property over time while providing a roof over their heads. This type of buyer may be able to pay more for a property than the flipper, but the price paid and the amount spent on improvements should always be well researched before making a purchase.
HOUSE HUNTING TIP: Don’t pay a Cadillac price for a home that needs a lot of work if you want to make a profit on a fixer-upper. Find out the sale price of recently sold homes in the neighborhood that were similar to the one you’re considering, but in much better condition. Be sure to overestimate how much the renovations will cost. There will always be unanticipated costs, so there’s no point in skimping on your estimate to make the numbers work.
Keep a close eye on the costs of your renovations while you’re working on the project. There’s always the temptation to improve more than you had intended once you see how good the improvements you have made look. Even though you’re improving the house for yourself, remember that you will be selling someday and you want to make a profit on the time and money you invested.
It’s a great time to buy at prices that were not possible at the peak of the market. Just make sure you know values for the neighborhood and don’t overpay for a property that needs work. Fixer buyers who paid high prices at the peak of the last market cycle not only didn’t make a profit, but some lost the homes in foreclosure.
The housing market picked up in 2012 and will hopefully continue to move in a positive direction. However, the home sale market is continually changing and varies from one location to the next.
THE CLOSING: A well-informed, level-headed approach is the best bet.