There are three types of real estate investment opportunities that should be avoided if profits are your main goal. Here they are:
1. AVOID BUYING HOUSES IN EXCELLENT CONDITION. Fortunately, the long-term trend for sound, well-located U.S. houses has always been up. But along the way, there are peaks, valleys and plateaus. “Are we in a real estate bubble?” is a question I am frequently asked. My reply is “I don’t think so, but if you find someone who knows for sure, please let me know.”
Purchase Bob Bruss reports online.
To avoid this market-value risk of buying at the top of a housing bubble, I recommend avoiding purchasing houses in excellent condition and, instead, buying so-called “fixer-upper houses” where the market value can be increased by making profitable improvements that add more market value than they cost. This technique is called “forced inflation.” It is used by smart home buyers and real estate investors to raise the market value of a property by more than the fix-up work costs.
EXAMPLE: Every community has sound, well-located but run-down houses. We see them every day. They can usually be purchased substantially below the market value of similar nearby houses that don’t need fix-up work. Having fixed-up many houses like this, and profitably resold them, I’ve found the most profitable improvements are paint (fresh paint often adds two or three times its cost to a home’s market value), new light fixtures, new wall-to-wall carpets (or refinished hardwood floors), fresh landscaping, and general clean-up and repairs. This type of fix-up work is known as “cosmetic improvement.”
Please notice I did not suggest kitchen renovation, bathroom remodeling or room additions. However, I’ve learned adding a second bathroom to a one-bathroom home will usually add at least twice the bathroom’s cost to that home’s market value, especially if you can accomplish the result without adding on to the square footage of the house (such as by converting a walk-in closet or hall space to a second bathroom). As for kitchens, either adding new cabinet fronts or installing new cabinets at reasonable cost won’t add much market value, but it will increase the desirability of a home and its appeal to future buyers.
If you want to profit from your home purchase, I suggest avoiding purchase of a house in tip-top condition. That’s the way to sell a home, but not the way to profitably buy!
2. AVOID BUYING “TEAR-DOWNS” OR “SCRAPERS.” Some homes are in such bad condition they need major structural work, such as a new foundation, new wiring and new plumbing, or they are hopelessly outdated with a bad floorplan design or other incurable defect. In the real estate business, these are known as “tear downs” or “scrapers.” Avoid such a purchase unless you can buy the property for its land value alone.
EXAMPLE: Many of the old New Orleans houses which were flooded in Hurricane Katrina are in this category. After the levees are rebuilt, strengthened and made 100 percent secure, these old run-down houses will probably be torn down and replaced by quality modular or manufactured houses built in factories and trucked to the sites.
EXAMPLE: Several months ago I inspected a $2.5 million house overlooking San Francisco Bay. The view was fantastic! However, the old house on the lot was a wreck. I knew the owner who lived there over 50 years, raised his two sons there, and died there at age 92. Nearby houses in superb condition sell for around $2.5 million. Whoever buys that property will probably either (1) fix up the old house minimally and live in it, or rent it, with the hope the property might appreciate in market value, or (2) tear down the house and build a “McMansion,” which will be an over-improvement for the neighborhood. After consulting several real estate investors about that property (whose heirs refuse to reduce the asking price), we concluded it is not a profitable opportunity.
3. AVOID TOWNHOUSES AND CONDOMINIUMS. Most townhouses and condominiums offer little profit opportunity (except possibly as long-term investments). Why? The reason is these units, which are very similar to the adjoining townhouses and condominiums, are constrained by the sales prices of those nearby properties.
Even if you can buy a run-down townhouse or condominium at a bargain price and fix it up, your profit potential is limited (no matter how nice your unit is after fix-up) by the sales prices of those comparable nearby units. Unless lots of units in the complex are being upgraded and profitably resold, and if there is a very strong buyer demand, I suggest avoiding townhouses and condominiums because of the upside market-value limits imposed by sales prices of other units in the complex.
(For more information on Bob Bruss publications, visit his
Real Estate Center).