Question: I have always been handy and have done most of my own remodeling work.
With so many foreclosures and bank owned homes for sale, I’m considering buying and refurbishing old homes and selling them for a profit. I know a lot about building, plumbing, etc. What do you suggest?
Answer: First of all, be very cautious. Many amateur real estate investors lose their shirts trying to make a quick buck fixing and “flipping” houses for a profit.
I’ve started to hear ads again promoting schemes to “get rich quick flipping houses.” That kind of “easy money” mentality got a lot of people in trouble in the last decade when the housing boom turned into a bust.
There are great opportunities in fixer-uppers, but there are also great risks. The fact that you know a lot about construction will come in handy, however, I would still encourage you to hire a professional building inspector before you purchase any property.
A competent inspector will probably spot defects in the house that you might miss in the excitement of making a deal. Since the inspector is not emotionally involved, he or she will not rationalize their way around serious problems as so often happens when an investor thinks they’ve found a hot deal that is too good to pass up.
Another prerequisite for success in the fixer market is a very thorough knowledge of the real estate market in your area.
Visit dozens of open houses and ask a friendly real estate agent to give you a computer print-out of all the homes in your target price range that have sold within the past year. Drive by these homes and compare them to the homes currently on the market.
After awhile, 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 good deal. You must buy FAR below market value if you hope to make a profit when you sell, and that is not easy to do even in a slow buyer’s market.
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 more than $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 like we had for a couple years during the last boom, but it is very risky.
The market for lower-priced “starter” homes is always relatively strong. Homes in the middle price range, the so-called “move up” homes, are much more subject to the whims of the housing market. Currently, that market is relatively slow, although it is beginning to show signs of life. But I recommend sticking to the cheaper homes because 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 rookie mistake is to over-improve the property. You’re looking for homes that are primarily in need of cosmetic repairs such as new paint, carpeting and minor fix-ups.
Since you have experience in remodeling, you should have a 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 two dollars for every dollar you spend on improvements.
Do not 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.
Finally, you must go into the investment using “worst case scenario” estimates. Too many people make overly optimistic profit projections, and that is a sure road map to financial disaster. You can hope for the best, but always plan for the worst.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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