There are two types of houses. There are “pretty houses” in excellent condition. But there are also the “fix-up houses.”
The sellers of “pretty houses” usually expect to receive a top dollar sales price. Such houses can be great places to live, but they usually don’t offer immediate profit potential.
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However, sellers of “fix-up houses” are often grateful for any purchase offer. If the house is in very poor condition, mortgage lenders won’t even finance the sale. Sellers of these “really bad” houses often have no choice but to help their buyers by financing the sale.
WHAT IS A FIX-UP HOUSE? Some “fixer houses” just need minor cosmetic work. These can be great bargains if the asking price is substantially below that of comparable nearby homes in good condition.
A cosmetic fix-up house usually just needs paint inside and outside (paint is the most profitable improvement), repairing, cleaning, new carpets or floor refinishing, new light fixtures, and fresh landscaping.
In his best-seller famous book, “How I Turned $1,000 into $5 Million in Real Estate in My Spare Time,” Bill Nickerson recommended a fix-up profit formula of spending $1 to increase the home’s market value by $2.
Not every fix-up house will meet this profit criterion. But it clearly doesn’t pay to spend $1 to increase the home’s market value by just $1 or less.
TO EARN PROFITS, LOOK FOR “THE RIGHT THINGS WRONG.” As professional real estate improvers say, “Look for the right things wrong.”
That means house buyers who are looking for either a profitable investment, or a profitable personal residence, should seriously consider buying houses with the need for profitable cosmetic improvements such as those explained above.
However, unprofitable fix-up houses with the wrong things wrong include those with foundation problems, major structural defects such as horizontal wall cracks, need for an expensive new roof (some bad-looking roofs don’t cost much to replace), very old-fashioned kitchens and bathrooms that need major renovation, and serious soils problems.
For example, the house on the hill above my residence has been vacant over two years. It has very serious soil stabilization problems. Fortunately, my property is not affected.
The lot offers very little open space for a lawn or swimming pool. The one redeeming factor is a beautiful view. This is a classic example of a house with the wrong things wrong, starting with its bad foundation.
HOW TO EARN TAX-FREE PROFITS FROM A FIX-UP HOUSE. If you would like to earn up to $250,000 tax-free profits every two years (up to $500,000 for a married couple), just buy a fix-up house at a bargain price, fix it up while living in it for at least 24 months, sell for tax-free profits up to the limits of Internal Revenue Code 121, and do it all over again every 24 months.
The only drawback is living in the residence while the profitable fix-up work takes place. This tax-free home sale fix-up profit method can be reused every 24 months.
Personally, my best fix-up house experiences have been in middle-class neighborhoods in decent quality school districts. No matter how nice you fix up a house, if it is in a bad quality school district, it will have limited appeal to prospective buyers.
BUY WHOLESALE FROM A MOTIVATED HOME SELLER. The best way to profit from fix-up houses is to purchase at a below-market price from a highly motivated seller. That means the seller wants a quick sale and maximum profit is not important.
Strong seller motivations include job transfer, unemployment, illness in the family, death in the family, birth in the family, drug or alcohol problems, rental house absentee owner management problems, retirement, inheritance, and family problems.
A savvy buyer’s agent can often help arrange a profitable purchase, especially if you look like a repeat buyer with lots of future profitable business.
Before making a purchase offer, ask your buyer’s agent to determine (1) how long the seller has owned the property, and (2) the seller’s purchase price. If the seller has owned the house a long time, that means the seller usually has lots of negotiation room for the sales price and terms.
HOW TO FINANCE YOUR FIX-UP HOUSE PURCHASE. Because the property is not a “pretty house,” the seller might be having difficulty finding a buyer. The solution could be to ask the seller to finance your purchase, at least for two years while you fix up the property to make it acceptable for a mortgage lender.
If the house has no existing mortgage, your first purchase offer should provide for seller finance terms. Even if the listing agent discourages you, make your offer anyway.
Personally, I’ve lost count how many houses I purchased with seller carryback mortgage financing after the listing agent said the seller needed cash. Retiree sellers especially enjoy receiving a modest cash down payment, such as 10 percent, and a seller mortgage to provide for retirement income.
In today’s home sale market, for example, if you offer the seller a carryback mortgage at 5 percent or 6 percent interest, that’s a great investment for the home seller.
However, if the seller rejects your offer and if you have good income and good credit, your bank will probably approve your mortgage application, especially if it is for a short-term 5-year mortgage, which you expect to refinance after the fix-up work is completed.
WHERE TO FIND PROFITABLE FIX-UP HOUSES. Every community has houses available that need profitable fix-up work. A sharp buyer’s agent is invaluable for locating these wholesale gems that offer profit opportunities.
Also, don’t overlook foreclosures, REO (real estate owned by foreclosing lenders), and other distress properties. Driving around middle-class neighborhoods and jotting down addresses of potential fix-up houses can often produce results. Tell everyone you know that you are looking for a fix-up house in a good neighborhood.
HOW TO FINANCE YOUR FIX-UP IMPROVEMENTS. After you own the house needing fix-up, if you have good income and good credit you can probably finance the fix-up work with a home improvement loan from your bank. Banks love home improvement loans because they are very profitable and the default rate is virtually zero.
If you anticipate a profitable quick resale within a few months, called a “flipper,” you might want to finance the improvements on your credit cards, bank credit lines, and even borrowing on a second mortgage from a “hard money” lender, such as the local loan shark.
More details are in my special report, “Pros and Cons of Buying a Fixer-Upper House or Investment Property,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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