Buying a Fixer-Upper

What are “the right things wrong” with a house? If you want to profit from your home purchase by more than the current average annual market value appreciation rate in most communities, you’ll need to buy a less-than-perfect home. Here are five keys to unlock a profitable home purchase…

Buy a sound, well-located home without major defects.

Most home buyers aren’t looking for major fix-up projects. But minor cosmetic repairs are the most profitable way to enhance a home’s market value.

Presuming a house is in a decent location and doesn’t require major renovation, it is the perfect profit candidate. Paint is the most profitable cosmetic improvement of all. Spending $1 for paint often produces $5 or more in increased market value. Other examples of profitable cosmetic improvements include new carpets, floor refinishing, fresh landscaping, new light fixtures and updated window coverings. Try to avoid buying a home that needs unprofitable structural improvements, such as a new roof or foundation repairs. For example, if a house needs a new roof, that is an unprofitable but necessary expenditure because it will be costly but add little or no market value. More examples are foundation repairs, new plumbing or wiring updates, which are expensive but add zero market value.

Ask how much the seller paid for the home

This might seem like an irrelevant question for a home buyer to ask, but it is extremely important.

If the seller has owned the home for many years, he or she probably paid a low purchase price compared to today’s market value. That means the seller has lots of room to negotiate on price and terms, considering the condition of the residence.

However, if the home seller purchased it recently for a price close to today’s market value, that seller doesn’t have much room to negotiate on the sales price.

Purchase below market value to compensate for the obvious need for repairs

Some naïve home sellers think their home, which needs cosmetic repairs, should sell for just as much as the similar home down the street that was recently sold in excellent condition.

But savvy home buyers negotiate hard, emphasizing to sellers and their listing agents that the market for a home needing fix-up work is very limited. Most prospective buyers seek near-perfect homes, but the few buyers of fix-up homes must be rewarded in the form of a lower purchase price because they must encounter the work of fixing up the house.

Buy from a highly motivated home seller

Closely related to the previous key to unlocking a profitable home purchase is determining why the seller is really selling. If the seller is just testing the market and isn’t anxious to move, negotiating a bargain purchase price to compensate for “the right things wrong” can be very difficult.

However, if the seller is highly motivated for example, preparing to move to a retirement home, make a job transfer, or resolve a difficult family situation or economic problem such as a pending Glossary Item foreclosure and/or she is unlikely to hold out for the last dollar of profit.

Look for affordable financing

As home Glossary Item mortgage Glossary Item interest rates slowly escalate, it pays to look for affordable mortgage financing. The best source, by far, is the home seller. Retirees who need extra retirement income are the best source of seller financing. To illustrate, if you discover the reason for the seller’s sale is to move to a retirement home or an assisted living center, that seller probably needs extra income.

If he or she receives an all-cash sale, the best that seller can expect to receive today is 3 percent or 4 percent interest at a bank. But if you offer that seller 5 percent or 6 percent interest, secured by a mortgage on the home they know so well, you can obtain bargain financing and also help the seller.

The key to success can be to include in the purchase offer the exact mortgage payment the seller will receive each month. The Glossary Item interest rate alone is not sufficient to gain acceptance.

Don’t buy a home needing an extreme makeover

Having renovated many homes that needed profitable improvements, I know it takes weeks, sometimes months, to complete the project. Pick your purchase wisely and don’t spend more time or money than you have to on the changes needed to make the house profitable. The results of acquiring a house with “the right things wrong” can be extremely lucrative.