Considering a Fixer-Upper?
Considering a Fixer-Upper?
There are numerous houses listed less than $85,000 in Charlotte County. Reading the comments on the listings indicates most are in need of work. The listing sheets call them a handy man special, a fixer-upper, or in need of TLC. (Tender loving care) How do you go about buying, selling, or listing this type of property?
I had my first experience with a fixer-upper when I first began appraising. My husband, a seasoned appraiser and my mentor, decided the best way for me to learn about houses was to purchase a fixer-upper. However, he had not intended for me to stop at purchasing one. I was involved in renovating the house and keeping track of expenses. This valuable experience provided me with first hand knowledge of properties needing more than a little repair.
After this experience, it became evident there were more risks involved in this type of property than I ever imagined. No matter how carefully you inspect and estimate the costs, there will be more costs to repair than you first considered. There is also the problem of a market change that might not allow the house to be sold as quickly as you estimated or for the price, you expected.
Once you find a fixer-upper that you'd like to consider renovating, find a similar property that is in good condition that recently sold. Then work backwards into a value of the fixerupper using the following formula:
|1. Sale Price of the Similar Property in Good Condition:||$110,000|
|2. List all repairs and cost to cure||$ 35,000|
|3. Real Estate Tax for the holding period||$ 1,500|
|4. Insurance for the holding period $ 1,400||$1,400|
|5. Interest on loan to purchase the house Considering 6 months||$2,552|
|6. Real Estate Commission to sell (7% x $110,000)||$7,700|
|7. Risk Factor (for those unforeseen costs that will occur) 20% x estimated cost to cure||$7,000|
|8. Profit and Overhead (title work, survey, etc.) 15%X Sale Price||$16,500|
|9. Estimated Price of the Fixer-Upper "as is"||$38,348|
Item #2 is very important and requires estimates from local sources even if you decide to do all or part of the work yourself. Your time is valuable and even if you do the work, you should expect to be paid for the time.
Items 3, 4, and 5 must be considered after estimating the time to renovate and sell in 6 months. If you don't have a loan on the house, interest for the holding period should still be considered for the money that will be paid up front to purchase and renovate. If you had the money in the bank, it would be earning interest. This is an alternative investment and you should expect to earn interest over the holding period.
Item #6 is the real estate commission that would be customary upon the sale of the property. You might plan to sell the property without an agent. From experience, I think the MLS is invaluable in selling a house by reaching more people that are looking to buy. If you decide to sell by owner, FSBO, you might have a longer marketing time and would have some marketing costs to consider.
Item #7 is the risk factor for the unforeseen costs that will occur once renovation starts. No matter how careful you are in estimating the cost to cure, there will be unforeseen costs. When you start removing flooring, roofing, mechanicals, etc. you are bound to run into repairs you didn't know existed, requiring additional expenses, and don't forget building permits. If the property is in bad shape, you will want to estimate an even higher amount for the risk factor.
Item #8 is the income or profit you expect for the investment and risk factors; this is no different from a contractor. Even if you plan to buy this house for your own use, you should consider this as a business deal.
Item #9 tells you what you can afford to pay for the fixer-upper in its present condition. If the seller is not willing to sell at that price and you are not willing to accept less profit, then move onto the next property.
There are fixer-uppers on the market with varying degrees of repairs. Now is the time to seek this type of an investment. There are plenty of tradesmen to assist in the renovation and materials are readily available.
Seeking the advice of knowledgeable people is wise and will more than pay for their time and expertise. If you plan to invest in this type of property for a resale, not for your own use, consider what it could be rented for after renovation. There should always be a back-up plan for the unexpected. If the market were not right to sell, maybe renting for a short period would be necessary. Doing this you can expect an insufficient return on your investment and risk. As an example, on a $100,000 investment, current rents would range from $550 to $750 per month. The rents would not sufficiently cover mortgage, taxes, insurance, repairs, and management. However, it would help to cover some expenses until the market is right for selling.
Know the market desires before renovating. Remember one of my previous articles discussed cost versus value. Renovating for profit must be done knowing what the market return will be. This may mean hiring a consultant to assist in determining what items should be replaced to bring the most return on the money spent.
If a loan is needed to buy and make the repairs, research for lenders that will accept this type of property will be necessary. Not all lenders are willing to lend on this type of property. Money can still be made in a slow market. Research the possibilities with wise counsel from professionals.
Article written by Sandra Adomatis