Beat
the Clock on Fixer-Uppers
Add
the need for speed, speed, speed to your mantra of
"location, location, location" if you've a yen to
invest in fixer-uppers
By
Broderick Perkins
The
longer you dawdle putting fixer-uppers in shape to
sell, the slimmer your profit margin. And it doesn't
matter whether you're doing some minor cosmetic work
or rehabbing the home from the basement up.
"The
amount of your profit [relates to] the speed with
which you carry out the work," says Jack Reed, a real
estate investor in Alamo, Calif. "While you are working,
you have construction and carrying costs. You have
to make a mortgage payment, insurance and taxes, but
you have no income. So you have to go like the wind,
buy it, fix it and sell it.
"But,"
concedes Reed, "that's easier said than done." Read
on for ideas on maximizing your profit.
Location:
As with any property purchase, buy fixer-upper investment
properties in areas where demand for housing will
eventually exceed supply. Foreclosures, other financially
distressed properties and properties that need more
work usually draw fewer buyers and carry lower prices.
Reed,
who publishes the "Real Estate Investor's Monthly,"
recently began seeking virtually uninhabitable homes
in senior housing communities because of the cheaper
prices that were generated by reduced demand. Older
home owners don't want the hassle of making repairs,
and younger buyers can't afford both the home's cost
and the needed improvements.
Fixer-Upper
Buying Tips
Buy
in neighborhoods where home value will increase.
Shop
during a down market.
Look
for foreclosed homes.
Tally
all the costs before purchasing to see if the home
is cost-effective.
"The
main criterion is the salability of the neighborhood,"
says Kevin Myers, president of Albuquerque, N.M.-based
StreetSmart Real Estate, Inc. "No matter how well
you do, if no one wants to buy it, there's no point
in taking on the project.
"
Timing: In the 1980s boom market, John V. Pinto, a
San Jose Realty World broker, became adept at buying,
refurbishing and selling fixer-uppers in mid-year.
He typically purchased homes in late summer, just
as the area's market moved into a seasonal lull. After
working on them during the summer months, what became
known as "Pinto Homes" were ready for occupants before
the school bell rang.
"In
this area, the best time to buy is in July and August,
when people are distracted by graduations, weddings
and other nice weather events," says Pinto. "Then,
just before the holidays, inventories diminish, but
buyers engaged in buying will look right through the
holidays.
"
Tally Your Costs Add up the following and check the
total against the potential resale value before you
buy a fixer-upper.
Purchase
price
Construction
materials
Labor
Mortgage
payments
Taxes
Insurance
Incidental
carrying costs
Selling
costs and commissions
Marketing
Your
time
The
Need for Speed: In a slow market, time works against
investors who don't calculate up front all the costs
involved in buying, repairing and then selling fixer-uppers.
Unless you know what your investment will cost and
its final sale price, cash flow problems are inevitable.
"You
have to run the numbers," says Myers, author of "Buy
It, Fix It, Sell It: Profit!" (Dearborn Publishing,
$18.95). "Figure out how much the maximum sale price
will be, and then back out your costs to get the house
in tip-top shape.
"Once
you've found a property, a home inspection can help
you calculate building costs, particularly if you
opt for a home improvement mortgage that finances
both the cost of the purchase and the improvements.
Finally,
you'll need to carefully orchestrate the entire process
of buying, contracting and sub-contracting, preparing
the property for sale and marketing the property.
"You
are working on selling it while you are working on
fixing it," says Reed. "That means you might buy it
for 60 percent and sell it for 90 percent. The idea
is to get the fast buck, not the last buck."
