How to Buy and Sell a Fixer-Upper

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It just needs a little TLC, right? If you're willing to put some elbow grease into it, buying and selling a fixer-upper can be a profitable endeavor. But there's a level of risk involved, not to mention a substantial commitment of time and effort on your part, and long periods of time when you will be living in chaos and sawdust. If you're still up for the challenge, it can be a rewarding experience.

Decide on the geographic area in which you want a property. Whether you intend to live in a home or not will impact where you'll want to buy. Remember that your ideal place to live may not be the best place to invest in property.

Be prepared for an extensive search. Many fixer-uppers--particularly those in especially bad shape--don't command much attention, so you may have to hunt around. Drive through desirable neighborhoods to spot "For Sale" signs.

Keep in mind that "location, location, location" is still the mantra of real estate purchases, whether for a fixer-upper or a single family home. Steer away from properties in areas that are going downhill, because you'll have trouble recouping your investment no matter how beautiful the structure. Find out if the asking price of that fixer-upper is comparable with the prices of other homes on the block. Make sure the fixer-upper is in an area of appreciating house values. That way, your house will be worth even more when your repairs are completed, rather than less because of worsening market conditions in the neighborhood. Try to meet some of the neighbors who might give you some information on what's been going on in their block.

Look in the classifieds, and at community bulletin boards or other public spots for the magic words "fixer-upper," "needs TLC," "handyman special" or "diamond in the rough."

Review local listings of foreclosed properties in your city. When banks or municipalities have had to take ownership of a property, they're generally very motivated to hand it off to a private buyer like you (See <a href="http://www.ehow.com/how_111013_buy-foreclosed-home.html" target="_top">How to Buy a Foreclosed Home</a>). Contact real estate agents to see if they are listing a fixer-upper.

Keep an eye out for properties that need only cosmetic improvements. Houses that could use new paint, carpeting or flooring are the least expensive and offer the fastest potential turnaround. Larger problems such as bad roofs or faulty foundations are often prohibitively expensive and undermine eventual profit, depending on what you got the house for and how much you think you can sell it for.

Watch for vacant homes that have not been kept up by the owner. These forgotten houses can often have the most motivated seller you could hope to find.

If you find an appealing property with seemingly reasonable repair needs, confirm. Have the home professionally inspected. Specify that the final sale is contingent on a satisfactory complete inspection.

Accompany the inspector when he or she goes through the house for a blow-by-blow account. Then review the report in detail to see what's wrong. You may also need to get additional inspections including soil, pest, roof and seismic. Be sure the inspector generates a narrative report rather than a checklist.

Get a formal appraisal ($200 to $400) of the home's value and have your agent work up comparables. If possible, have the appraiser estimate how much the home should sell for after it is restored to good condition.

Set your target purchase price. Pros suggest bidding at least 20 percent below its potential fixed-up value.

Get several bids from contractors of how much it will cost to fix what needs to be fixed (see <a href="http://www.ehow.com/how_110416_hire-contractor-plumber.html" target="_top">How to Hire a Contractor, Plumber, Painter or Electrician</a>). Be sure to check zoning requirements and include permit fees. The house's value should increase at least $2 for every dollar you spend on improvements. Calculate the potential value of the house after renovations and be sure that it isn't higher than comparable houses on the block. Be realistic about repair costs.

Make the final sale contingent on obtaining a satisfactory bid for improvements. That way, if the bids you receive are simply too expensive, you can back out of the deal. Keep in mind that contingencies of any kind could make it hard to negotiate a lower price or even make a deal in a seller's market when competition among buyers can be intense.

See <a href="http://www.ehow.com/how_110924_shop-mortgage.html" target="_top">How to Shop for a Mortgage</a>, and pursue a mortgage that includes funds for home renovation, such as the Federal Housing Authority 203(k) program.

Make whatever repairs and renovations are necessary and then sell the property. (See <a href="http://www.ehow.com/how_111063_sell-house.html" target="_top">How to Sell a House</a>.)

Tips & Warnings

  • Be patient. Unlike the folks on Home and Garden Television's "Weekend Warriors" who make it sound as though renovations happen within a few weekends, fixer-uppers can take a long time to find and much longer to spruce up, particularly if you're holding down a day job.
  • Timing is often more important than the state of the house. If you sell during a hot market, price appreciation can help offset the cost of your improvements.
  • Don't be taken aback by properties that have been on the market for a long time. It's not unusual for some fixer-uppers to be up for sale for a year or more, depending on market conditions.
  • As a general rule of thumb, improvements that are invisible to the average home buyer or merely bring the home in line with expected minimum standards don't add to the resale value. If you make the wrong improvements, such as enlarging a closet or converting two bedrooms into a master suite when you only had two bedrooms to begin with, you won't see much, if any, return on your investment. Another potential pitfall is over-improving the home compared to other homes in the neighborhood.
  • Conditions that your home inspector finds that can warrant backing out of a deal include pest infestation, radon, significant water damage to the structure, or other major fixes. Be aware that naturally occurring threats, such as mud slides or floods, if you're located in a flood plain, may be equally dangerous. Properties should be investigated by a structural engineer as well.
  • It's a conflict of interest if your home inspector also offers to do the work he or she has stated needs to be done.

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