Buying fixer-upper? Don't expect goldmine

Fixer-upper properties come in many varieties. Cosmetic fixers usually offer the biggest return on your investment. And, they tend to be a lot less costly than homes that require major renovation.

An ideal cosmetic fixer would be a house that had been somewhat neglected, but that has no serious structural problems. It could be passed over by other buyers because it needs an exterior paint job, new landscaping, new kitchen appliances, floor coverings, updated lighting fixtures and interior paint.

In a down market, these houses can be hard to sell if there is a large inventory of new homes in the area being discounted in price in order to sell. In older established resale markets, buyers usually gravitate to the listings that are in the best condition and leave the fixers for someone else.

It can be difficult to find a good cosmetic fixer in areas such as the San Francisco Bay Area. There, many listing agents advise sellers to prepare their house for sale in order to sell more quickly and for more money. Even so, cosmetic fixers do come along.

Aside from the challenge of finding a diamond in the rough, paying for the fix-up costs can be a show-stopper for many buyers. With the recent credit crisis, most lenders require larger cash down payments. Equity lines of credit are still available, if there is sufficient equity in the house.

It's difficult to buy, fix up and flip a house in this market. Many markets around the country may not yet have seen the bottom of this cycle. A strategy that works for some buyers, particularly if they can do some of the work themselves, is to buy the house and fix it up over time while they live there.

If you claim the house as your primary residence and live in it for over two years, you will be entitled to up to $500,000 of tax-free gain (for a married couple filing jointly; $250,000 for a single filer) when you sell.

It's unlikely that you will realize a sizable gain in a short period of time in the current market. At present most areas aren't experiencing appreciation. This is why it's risky to buy a fixer in this market with the aim of making a fast profit.

HOUSE HUNTING TIP: Larger fixer projects can be problematic and should be carefully thought through, with help from professionals, before going ahead. Special attention should be paid to the scale of the project, the projected costs including an allowance for cost overruns, and the ultimate market value of the house when the renovation is complete.

Once you start changing the footprint of the house, pushing out or changing supporting walls, gutting the kitchen and bathrooms and rearranging the floor plan, the costs can become astronomical. That's OK, if you can afford it and if you plan to enjoy the finished product for a long time to come.

However, it wouldn't be wise to make such an investment if you were planning on moving again within the next five years. You probably wouldn't recoup your investment.

One option would be to scale back the project to something more manageable and less expensive. One risk of remodeling a property is overimproving it for the market. It doesn't make good financial sense to do a $500,000 renovation to a house that's worth about $500,000 in its present condition if all the other sales in the neighborhood top out at $750,000.

THE CLOSING: However, if it gives you a house you can live in the next 15 or 20 years, you'll have a chance of recouping some or all of your costs through home-price appreciation.

Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

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