Question: With the housing market slowing down, 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?
D.S., Everett
Answer: The slow housing market will create some bargain opportunities for smart real estate investors, but it also presents many potential traps.
You may be able to buy a home for a bargain price, but then you have to turn around and sell it in a very slow housing market. 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.
Many people got caught up in the euphoria of the “flipper” market when the housing market was hot. But it’s like a game of musical chairs. You have to get in and get out while the music is still playing. Once the music stops, in this case when home values stop going up, the people still standing are stuck with overpriced properties that they can’t sell.
Just last week, a man called my mortgage company and asked about refinancing a home that he and his wife had spent more than a year refurbishing. They had hoped to sell it for a profit, but home values in that area have been dropping, and now they are planning to hold it as a rental house. The problem is that they are losing money every month because the rental income is about $300 a month less than their mortgage payments. They plan to hold it for a couple of years and then sell to recoup their losses.
I reluctantly had to tell him that in my professional opinion, home values are not likely to increase over the next several years and that the best course of action might be to sell the house and cut their losses. But he says he can’t do that because his wife has too much time, money and pride tied up in the property to sell it for a loss.
I am relating that story because I don’t want you to find yourself in the same situation. There is money to be made in fixing up old houses and selling them for a profit, and it is easier to find deals in a housing market such as this, 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, 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 an expert on every neighborhood in Snohomish and King counties, 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 today’s housing market.
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 dollar 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.
Finally, always to go into any real-estate investment using worst-case-scenario estimates. Too many people make overly optimistic profit projections, and that is a sure road map to financial disaster.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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