I receive e-mails regularly from people wanting to find the diamond in the rough so they can walk away with tens of thousands of dollars in one transaction, just like all the people on the infomercials.
Everyone wants the quick fixer-upper that delivers the quick buck. In some communities, that’s very doable, while in others, the properties are just unaffordable, even when the house is about to fall in. Even I would take such a treasure. I toured one such property recently with a fellow investor, and the house truly needed a lot of fixing up.
It had been a rental for several years, by the sight of it. The carpet was a mess, with bare spots throughout. It was simply filthy — there’s just no other way to describe it. It wasn’t even “broom clean,” which is what most contracts require when a renter or former owner moves out.
The walls should have been painted several years ago, and the flooring, in the kitchen had cuts and gouges all over. On the back deck, we had to be careful not to step too firmly so we wouldn’t fall through, and the back yard (it was a town house) was overgrown and unkempt. The fencing was fraught with rot and mold.
The bathrooms were filthy with rust in the sink and tub, and the faucets needed replacing. The owner had turned off the water, so we couldn’t test it. There were only a few light bulbs throughout the house, making it hard to get a good look at the crevices of the dwelling.
In the basement, the ceiling was drooping from previous water damage, and the carpet needed replacing. There also was a smell of mildew throughout.
We were drawn to the property because the listing remarks said: “Priced below other comps. Needs cosmetic fixes.”
Well — what I was seeing was more than cosmetic. In addition, when you see that the interior is in such disrepair, you have to wonder about all the stuff you can’t see in a casual visit — the attic, roofing, rot around the base of the house, termites, etc.
The investor-owner truly used the house as a commodity and did not take care of the product. In our escalated market, however, the asking price was $359,000.
So is this the type of fixer-upper you’re looking for? A comparative market analysis of that area today — 60 days later — shows properties of that type selling for up to $410,000. In a market such as this, such a gamble may be worth it.
The problem with this target property is that the owner was not offering the property as a fixer-upper, but the market showed that it could be moving up to that level. The property needed at least $25,000 in repairs, and then the marketing costs would be about another $20,000 to $25,000 — so there go the equity and your profit.
Even if you’re in a more normal market, you need a lot more equity to walk into before being willing to start polishing that diamond. There should be a projected profit margin of at least double your expenses.
Example: You purchase a fixer-upper for $150,000, put in $25,000 to fix it up, and sell it for $225,000. Your gross profit would come in at $50,000; subtract commission and closing costs of 7 percent, and you’re down to even less.
To be sure that you’re going to get the amount of money you want, you must insist on a thorough home inspection by a qualified (preferably certified) home inspector. This person will be key in finding out how much money you’re about to put out in return for your investment. In addition, you want a Realtor involved who can give you comps of the area so you know what your target price will be.
When it comes time to undertake your first fixer-upper investment, the key point is patience — and don’t let dollar signs in your eyes blind you to the reality of the return on your investment.
M. Anthony Carr is the author of “Real Estate Investing Made Simple.” Post questions or comments at his Web log (https://email@example.com).