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Find a Fixer-Upper That Has a Profitable Future

Why Fixer Houses Are A Great Strategy

Evaluating Commercial Real Estate

Find a Fixer-Upper That Has a Profitable Future

  By ROBERT J. BRUSS, SPECIAL TO THE TIMES

With home mortgage interest rates at or near record lows, it's a great time to buy.

But how can you buy a home to take advantage of these rates and make a profit down the road?

The easiest way to earn a profit on a house or condominium purchase is to buy a residence needing cosmetic fixes

Look for property that needs easy fixes, such as interior and exterior painting (the most profitable improvement of all), new wall-to-wall carpet or refinished hardwood floors, new light fixtures, minor repairs and fresh landscaping.

But avoid buying a home that needs major work, which doesn't add market value. Examples include a new roof, foundation repairs, new plumbing, new wiring, kitchen remodeling and bathroom renovation.

Presuming the property you want to purchase meets the easy-fix tests, here are other factors required for a profitable home purchase:

* A basically sound, modestly priced residence without major structural defects.

Although it's possible to profit from buying luxury fixer-upper houses in the high-price range, sticking to bread-and-butter houses that more potential buyers can afford is best.

If you are buying to turn a profit, you'll probably want to sell the residence within a year or two after fix-up, so buy a home near the median sales price in your vicinity. Median price means an equal number of homes sell above and below the sales price.

* A good location. This doesn't mean buying in only the best neighborhoods. Be sure to ask local police about the crime rate for the neighborhood.

Part of buying in a good location includes checking the quality of the local public schools, even if you don't have children. Top-quality schools enhance home value appreciation, whereas poor-quality schools keep down home values. Local realty agents should have school statistics, based on test scores, readily available.

* Buy at least 25% below the market value of comparable nearby homes in good condition.

If you want to make a profitable home purchase, it's essential to buy well below full-market value to allow room for improvement costs. Whether you resell your home soon after fix-up or keep it for long-term investment, buying below market value is key.

* Purchase from a motivated seller. An important key to buying a home below market value is to purchase from a motivated seller.

Examples of highly motivated sellers include those who must sell due to a birth in the family (need a bigger house), death in the family, unemployment, illness, divorce, marriage, drug or alcohol problems, foreclosure, management headaches (if it's a rental house), retirement and financial problems.

Ask why the house is being sold so you can tailor a purchase offer to meet the seller's needs.

To illustrate, if you learn the seller is retiring and moving to live close to relatives, that seller might be an excellent candidate for seller carry-back mortgage income at a favorable interest rate, such as 6% in today's market.

* Acquire a home with affordable mortgage financing. As an owner-occupant home buyer, if you have steady income and decent credit, you can probably obtain a mortgage for 90%, 95%, 97%, 100% or even 103% (to include closing costs) of the home's purchase price.

Be sure to get pre-approved for a maximum mortgage before starting your quest for a profitable home purchase. Then you'll know what price range you can afford.

To find profitable fixer homes that can be bought at a bargain price, there is no substitute for a top-quality buyer's agent familiar with the local market.

These agents can show you home sales listings from the multiple listing service, or MLS, for-sale-by-owner listings, and even foreclosures and other distress properties.

When you find a profitable home you want to own, get busy and make your written purchase offer. The seller will accept it or counteroffer, giving you the opportunity to accept, reject or counteroffer again. Of course, always include in your purchase offer a professional inspection contingency clause. That means, after the seller accepts your purchase offer, you have the right to hire a professional home inspector.

You can then accept the report, ask the seller to pay for repairs recommended by the inspector, buy the home as is and make the repairs at your own expense, or cancel the sale and get a refund of your earnest money deposit.

If you want other stories on this topic, search the Archives at http://www.latimes.com/archives.

August 4, 2002   E-mail story    Print
From the LA Times

• Why Fixer Houses Are A Great Strategy
  
  By Kevin C. Myers
• 
  Why fixer houses? As investors, each of us must make a decision on our overall strategy: Should I buy and hold for long-term appreciation and tax advantages? Or should I buy and quickly sell to collect my profits now? Nothing says you can’t do both....keep some properties for rentals and buy some for quick turnaround deals. But what are the advantages and disadvantages of each strategy?
  
  The Buy and Hold Strategy
  There are many variations of this basic strategy, but usually it entails buying a house or small apartment building with a small down payment (20% or less) and renting out the units. The holding period is at the discretion of the owner...it could be one year, one decade or forever. In the meantime, the owner is making payments on the underlying mortgage(s) and managing the property. During the holding period, profits are derived from positive cash flow (if any) and possibly tax advantages.
  
  But the real profits of the buy and hold strategy are dependent on price inflation--the extent to which the value of the property increases over time. And, of course, the more highly leveraged the property, the higher the return on investment. For example, let’s say you own a $100,000 house with a $95,000 mortgage which you bought with a $5,000 down payment...a typical deal. Over the next five years, the house appreciates 20% or about 4% a year. The house is now worth $120,000 and the return on your $5,000 investment is $20,000 or a whopping 400% (not counting any positive cash flow or mortgage reduction). This is the power of leverage at it’s finest!
  
  But what happens if the market stays flat...or worse yet...if the market goes down?
  
  Unheard of? If you’re lucky and the market stays flat, you come out even...your $5,000 investment is worth $5,000, five years later. Not exactly a super-duper investment. But what if the market went down 20% and the house is worth only $80,000? You are now in a situation known as being “upside-down.” You owe $15,000 more than you can get for the house. You have negative equity. Not a pretty picture.
  
  The point is this. Local real estate prices generally move up and down over time, in cycles. Although the long-term trend may generally be increasing, the short-term trend may be devastatingly down. Where in the cycle did you buy and where in the cycle did you sell? To a large extent, this will determine your profit outlook in using the buy and hold strategy. And it is these external circumstances leave you, as an investor, with absolutely no control over the matter. Shake the dice and take your chances
  
  Consider this from Robert Bruss, real estate expert and syndicated columnist, who wrote in his September 8, 1996 column:
  
  The quick-buck real estate profits are long gone. With a few “boom town”
  exceptions, such as Las Vegas, NV and Palo Alto and San Jose, CA, home
  prices in most cities are relatively stable today. Average home sale prices are
  appreciating about 4 percent annually on a nationwide basis, depending on
  whose statistics you believe, keeping pace with inflation. This “get rich slowly”
  economic environment has driven away the get-rich-quick real estate crowd.
  Instead, it’s the quiet low-profile real estate investors who are earning
  substantial profits today....successful investors in single-family houses, as
  well as commercial properties, specialize in fixer-upper properties.
  
  Buying property in excellent condition, hoping to somehow earn a profit, is a
  no-win situation.
  
  
  The Rehab and Sell Strategy
  I strongly favor the rehab and sell strategy. Here's why.
  
  The essence of this investment strategy is speed...buy a fixer-upper property at a bargain price, quickly rehab and then quickly sell the property. Get in, get it fixed up and get out. A simple yet very profitable and safe strategy, regardless of external circumstances. Using this technique, profits are made when you buy at a bargain price, increased as a result of the rehab process, and converted to cash when the property is sold.
  
  The key advantage of this strategy is that you, the investor, are in control of every aspect of the deal, from start to finish. You are not dependent on price inflation or any other external factors to make profits. You know going into a deal exactly (almost) what it will cost you to fix up the property and exactly (almost) how much the property will sell for at the end. And best of all, you know exactly what your profit will be because it is included in your buying decision. Uncertainties (and therefore risks) are controlled and thereby reduced substantially.
  
  Are there negatives associated with this strategy? Sure...just like any other worthwhile
  endeavor, sustained success comes to those who have created an advantage for themselves. And typically that advantage is hard work and knowledge coupled with a system of doing business. A system that, once developed, can be repeated over and over again with predictable results.
  
  What would such a system consist of? Well...really, you need several systems or subsystems. Ways to consistently find and buy properties at prices well below market value. Methods to get the work done by professionals, without impacting your profits. Techniques for financing the purchase and rehab work, using little or none of your own money, if possible. And finally, selling the property quickly and for top dollar. The secret to success of any business is
  
  Knowledge + Hard Work + System = $Profits$
  
  Do not be mislead. Real estate rehab is not a get-rich-quick scheme. The necessary
  knowledge and a system for doing business are readily available in the marketplace. But never forget the hard work ingredient. It is required and is indispensable to make the formula work. You’re not afraid of hard work are you? My business mentor (everyone should have a mentor - do you?) recently said to me, ”Most individuals do not hear when opportunity knocks, because it is disguised as hard work!”
  
  Is Owning Rental Property A Bad Strategy?
  
  Buying property and becoming a landlord...is this a bad investment strategy? Of course not. At one time, I owned 40+ rental units in three states. Even today, I own a few rentals. It is an excellent long-term investment strategy IF the timing of your purchase and sale is in harmony with your local real estate cycle. It’s much like investing in the stock market. Buy when prices are low and nobody wants the stock and sell when the market is hot. What is the status of your local real estate market? The answer to this question will guide you in the timing of your rental purchases.
  
  In the meantime....Get out there and make some quick cash with the rehab and sell strategy!
  
  About the Author . . .
  Kevin C. Myers, MBA is President of a diversified group of companies in Albuquerque, NM. He is a real estate appraiser, a private mortgage lender, a real estate educator who lectures frequently at local colleges, and an active real estate investor. Kevin has renovated numerous investment properties during his 20+ years in real estate, specializing in single-family houses.He shares a great deal of his knowledge and experience in his book - Buy It, Fix It, Sell It:
  Profit! (Dearborn Publishing).

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WEALTH WISE: Evaluating Commercial Real Estate , Jeff Neal
Wednesday April 2, 1:30 pm ET

Beyond the basic financial analysis and fact-finding tasks, the savvy commercial real estate investor will want to improve his or her chances for success by carefully analyzing the factors that go into this financial analysis. In this article we will discuss these key factors and offer some tips and advantages for the private investor.

One of the first things to do is to evaluate the access and availability of parking. The same considerations that apply to office buildings also apply to shopping centers. One difference is that it's more convenient for people to use public transportation when traveling to offices for the purpose of conducting business than it is for them to use public transportation to go shopping.

Is the public transportation system adequate? An excellent municipal transportation network may compensate somewhat for insufficient parking. The ideal, of course, is to have both. If parking in your building is seriously deficient, you'll have vacancy problems and your profitability will suffer. This factor may be crucial if most employees and customers arrive via their own car.

You must know your market. For example, why is office space in a certain neighborhood 100 percent occupied while just a couple of miles down the street the office space is largely vacant? One of the unique risks that accompany office investments is that they're extremely sensitive to location factors. Also, will the demand exceed the supply? Overbuilding is perhaps the most serious danger facing the office investor. In areas of population growth, developers are often stimulated to go overboard constructing new office space. If this happens, you will be protected if you have well located buildings with good management.

Sometimes overbuilding can combine with a recession to depress a market and this can last for one or two years, or longer. During this time almost everyone avoids investi there are gloom-and-doom stories in the financial press. This period can be a good time for knowledgeable investors to buy up good income property at bargain prices. Usually there will not be any new office development during this time, and when the recession is over, a shortage of office space is to be expected.

If you have developed or bought well-located property and have leases that come due during the shortage, you will be able to raise rents and your property will appreciate as if there hadn't been any overbuilding and recession at all. The best advice here is to know your market. Gather all the background information and statistics you can get. Then spend enough time observing and shopping around until you get the feel of the area and become intensely familiar with it.

Before you make a decision to buy an existing building, read all of the leases. Determine the time of renewal for each one. Check the rent levels against those in comparable buildings in the area. Carefully evaluate all information provided by the seller or agent and estimate how many expenses you can shift to your tenants. The lengths of all of the existing leases must be kept in mind as you do this, since you're locked into their terms until they expire.

As you can see, commercial real estate investments offer their own individual demands and rewards if you're a new investor. Where you put your money is your decision. There are many opportunities. Keep in mind the unique twists of commercial investing because not only can there be pitfalls, there can also be the elements that make a commercial property investments highly profitable and worthwhile ventures. Doing the necessary investigative work is critical to successful commercial real estate investing.

Happy Trading.

Jeff Neal
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
 

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