By Steve Tytler
Question: It looks like the housing market might be starting to pick up so it seems like this would be a good time to find some bargains and refurbish old homes and sell them for a profit.
I have always been handy and have done most of my own remodeling work. I know a lot about building, plumbing and so on.
Is this a good time to invest?
Answer: The slow housing market over the past few years has created some bargain opportunities for smart, experienced real estate investors, but it also presents many potential traps for novice investors.
You may be able to buy a home for a bargain price, but then you have to turn around and sell it in a housing market that may be picking up but is still relatively slow. That means you have to keep the asking price low enough to compete with all the other homes for sale in your area and that may not leave much of a profit margin, especially if you spend a lot of money on improvements.
During the housing boom of the early 2000s, many people got caught up in the euphoria of the “flipper” market. It was possible to make a lot of money in a very short amount of time, but it was a very small window of opportunity.
It was like a game of musical chairs. You had to get in and get out quickly while the music was still playing because once the music stopped and home prices started falling the people still standing were stuck with overpriced properties that they couldn’t sell.
For example, I remember in early 2008 a man called my mortgage company and asked about refinancing a home that he and his wife had just spent more than a year refurbishing. They had planned to flip it and sell it for a profit, but by then home values in that area were dropping so they were planning to hold it as a rental.
The problem is that they were losing money every month because the rental income was about $300 per month less than their mortgage payments. They were planning to hold it for a couple of years and then sell to recoup their money.
I told them that in my professional opinion, home values were not likely to increase over the next several years and that their best course of action would probably be to sell the house as soon as possible and cut their losses.
The man said he couldn’t do that because his wife had too much time, money and pride tied up in the property to sell it for a loss. I don’t know what they ended up doing, but we know now that I was right, home values continued to fall significantly and if they held on for a couple more years they lost even more money.
The point of that story is that I don’t want you or anyone else reading this column to find yourself caught in a similar situation. There is money to be made in fixing up old houses and selling them for a profit but you must be very, very careful.
While having building skills is handy because it can keep your costs down when you do the rehab work yourself, the most important skill in making money in real estate is learning how to spot a bargain. And the only way to develop that skill is to spend a lot of time educating yourself about your local real estate market.
Notice that I said your “local” real estate market. Nobody can be expert on every neighborhood in Snohomish and King County, so pick a few areas close to your home and focus on them. Spend a lot of time visiting open houses on the weekends and check out the “homes for sale” listings online, including the public access version of the Northwest Multiple Listing Service at www.nwrealestate.com.
After a while, you’ll become an expert on the market value of homes in your area. You should be able to drive up to a home and quickly estimate its probable selling price within 5 percent. If you can’t do that yet, you’re not ready to start investing.
Once you have a good feel for market value, you will probably start to realize that the single most difficult challenge you face is finding a decent deal. I advise you to concentrate on the lower priced homes because that’s where most of the buyers are.
I have seen novice investors buy $500,000 fixers, spend $100,000 in repairs and upgrades and then try to resell the homes for a profit. That might work in an extremely hot housing market, but it is very risky and will not work in most housing markets.
Stick to the cheaper homes and you will always have a ready market of first-time home buyers, and you have less money at risk if the investment doesn’t work out.
Another common mistake is over-improving the property. You’re looking for homes that are primarily in need of cosmetic repairs such as new paint and carpeting. Since you have experience in remodeling, you should have a fairly good idea of how much it will cost to bring a given house up to “move-in condition.” Your goal should be to increase the market value of the home by at least $2 for every $1 you spend on improvements.
Don’t spend a lot of time and money on a fancy kitchen remodel, or on intricate detailing and expensive fixtures that most people won’t even notice. Just make the house neat, clean and presentable.
The good news is that with so many foreclosures and short-sales on the market, there are not a lot nice, clean “move in condition” houses available right now. So if you price it right, the house should sell fairly quickly.
Just be sure to go into the investment using very conservative worst-case-scenario estimates. Too many people make overly optimistic profit projections, and that is a sure road map to financial disaster.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at email@example.com.