How to find fixer-upper homes with profit potential

As the volume of new and resale house and condominium sales gradually slows down in most communities from last year's record levels, due primarily to rising mortgage interest rates, savvy home buyers are rediscovering a source of bargain-priced residences known as "fixer uppers."

Retail sellers of homes in excellent condition, including brand-new houses, expect to earn top dollar for their "model home" condition residences. But in today's market that has become difficult.

Purchase Bob Bruss reports online.

To illustrate, look at all the upgrade sales incentives home builders are offering, which weren't available just a few months ago. Also, many sellers of resale homes are reducing their asking prices.

Traditionally, there has not been a large buyer demand for fix-up homes. The reason is they usually require work, such as painting, cleaning, repairing and landscaping. Most buyers instead prefer to buy homes where all they have to do is turn the key in the front door and move in.

LOOK FOR "FIXERS" WITH PROFIT POTENTIAL. Due to higher mortgage interest rates in the mid-6 percent interest range today, many prospective buyers can't afford to buy the larger homes they could afford 12 months ago when mortgages were in the mid-5 percent interest range.

But "fixers" can be the solution for home buyers willing to buy a less-than-perfect home. The key to success is to buy a home with profit potential.

Experienced real estate investors recommend buying a property "with the right things wrong." That means buying a house or condominium where well-spent fix-up dollars will add more market value than the cost.

Fresh paint, inside and outside, is known as the most profitable home improvement you can make. Virtually every house can benefit from new paint, especially when exterior paint gives a house a new look.

For example, my neighbor has owned her house since it was built more than 40 years ago. It was painted an ugly barn-red with white trim. All of a sudden, last year, she had her house painted a very attractive off-white with light-brown trim. Perhaps it cost $2,500 to paint the house, but I estimate the "new look" added at least $10,000 in market value.

Other examples of profitable home improvements include adding a second bathroom to a one-bathroom house, installing new light fixtures, adding fresh landscaping, and installing new carpets or hardwood floors.

These are known as "cosmetic improvements" because they usually aren't very expensive but they can give the home a new look and feel with added market value.

SOME IMPROVEMENTS ADD LITTLE OR ZERO MARKET VALUE. But smart buyers of "fixer" homes avoid those that need obvious but expensive improvements that add little or no market value unless the home can be bought at a large discount from comparable nearby homes.

The worst example is a new roof. When you spot a house for sale that has curled-up shingles, if that roof isn't already leaking it probably will leak soon. If you buy that house and deduct, let's say, $5,000 for the cost of a new roof, you will be lucky if spending $5,000 on a new roof adds $5,000 in market value. More likely, it won't add any market value because home buyers expect houses with roofs which don't leak.

Other examples of "the wrong things wrong" with a house include the need for foundation repairs, replacing old galvanized pipes with copper pipes, rewiring to current standards, and replacing a cracked driveway. Making these necessary improvements will likely add little or no market value to that residence.

"NICE TO HAVE" MARGINAL IMPROVEMENTS IMPROVE MARKETABILITY. In addition to the "profitable" and "unprofitable" home fix-up work, the third category is known as "nice to have" marginal improvements.

If you plan to stay in your home more than five years, you probably want to make these renovations to increase your home enjoyment. But consider yourself lucky if these renovations add as much market value as they cost.

The two major examples are kitchen and bathroom renovations. Room additions, such as adding a family room or another bedroom, also fall into this category. Adding a swimming pool, surprisingly, can often hurt the marketability of a home because buyers with small children frequently won't even consider a home with a pool.

Having renovated dozens of rental houses, I am well aware than money spent on kitchens, bathrooms and room additions greatly improved marketability but rarely added any more market value than the actual construction costs.

WHEN TO SELL A "FIXER-UPPER" HOUSE OR CONDO. Among the reasons fixer-upper houses and condos become available are (1) distress properties such as foreclosures, (2) the seller doesn't want or can't afford to fix up, (3) an heir inherited the property and wants a quick cash sale, and (4) a well-located but run-down house has become a "tear down" on a valuable lot to be replaced by a brand-new house.

Home sellers who don't want to be bothered fixing up their homes for sale usually pay the penalty in a greatly reduced sales price. But buyers willing to fix-up the home usually benefit.

For example, many home sellers wisely don't waste money renovating kitchens and bathrooms. A smart approach is to have the home's interior and exterior painted, but let the buyer take on any major remodeling to suit the buyer.

However, a major mistake some sellers make is not to make minor cosmetic improvements.

To illustrate, suppose the carpets in your home are worn and stained. Rather than replace them before listing your house for sale, you decide to offer a $3,000 carpet replacement discount to the buyer. The reason that is a mistake is (1) most buyers have little or no imagination about how nice the home will look with new carpets and (2) the buyer will want a bigger discount than you offer.

HOW SMART BUYERS MAKE FIX-UP A PROFITABLE TAX-FREE BUSINESS. If you or your mate enjoy home decorating and fix-up, buying a fixer house or condo can become a profitable tax-free business. Thanks to Internal Revenue Code 121, primary-residence owner-occupants can earn up to $250,000 tax-free profits upon resale (up to $500,000 for a qualified married couple filing a joint tax return).

To qualify, you must own and occupy your principal residence at least 24 of the 60 months before its profitable resale.

That means you can move in, take at least two years to complete your profitable improvements before selling, claim your tax-free profit, and do it all over again by purchasing another profitable fixer-upper residence.

If you do this over and over every 24 months, you will become known by your friends as a "serial home seller." An excellent new book on this topic is "Find It, Fix It, Flip It" by Michael Corbett, available at local bookstores, public libraries and www.Amazon.com.

(For more information on Bob Bruss publications, visit his
Real Estate Center).

Copyright 2006 Inman News