Flipping and Fixer-uppers

So you are thinking of buying a fixer upper, fixing it and reselling it.  The key is in planning, good estimating.   The oft heard phrase "Buyer Beware" is never more appropriate than when considering the purchase of a fixer-upper.  You must know exactly what you´re getting into before buying.

Flipping.  It´s commonly believed that fixer-upper properties represent easy money that is ripe for the taking - that you can buy it, do a little work on it in your spare time, and then flip it.  This isn't the case most of the time.  Although, with proper planning and thought, money can be made by buying "fixer uppers".  And for many first time buyers who intend to live in the house while working on it, buying a fixer-upper can be a great option.   By buying a fixer upper you get sweat equity.  You will gain equity in the home by bringing it up to normal standards.  The key is to buy a home below market price and to be able to put less money into it than a comparable good home.  If you can buy a ready to move in home (in top shape) for $200,000 and you want to buy a fixer upper for $150,000.  Then you should not have to spend more than $35,000 - $40,000 to fix it up to make it a deal.  It´s also less risky buying a fixer-upper when you can live in the house while fixing it. And of course, by living in the house for at least 24 months you should qualify for the IRS exemption of no capital gains.

The most important thing to know before making a decision on such a purchase is what needs to be fixed. Do a spreadsheet.  Jot down all the costs.  Give yourself a cushion for unseen expenses.  Any time you are spending money on improving a home with the notion of selling it later, strive to spend your money on things that buyers can easily see. Things like new paint and removing trash from the property cost little but have instant impact on curb appeal. Simple landscaping is the best.  Landscaping does not bring a large return. 

Houses that have only cosmetic problems like peeling paint, an overgrown yard, shag or worn carpet or lots of wallpaper are the best bet. Fixing and cleaning cosmetic issues is fairly easy and inexpensive. It virtually always gives a good return on investment, particularly when you can do the work yourself. Kitchen and bathroom remodeling usually pays a nice return. Don´t be afraid of buying a fixer-upper in need of this kind of repair. Again the key is don´t go over the top.  Do a good job, a nice job.  But if it is a $100,000 house you don´t want to put in Granite counter tops and a jetted tub.  Properties with structural damage, or a floor plan that requires major work to remedy, may not be "fixed up" at a profit. 

If you do not have construction experience or done a fixer upper before. Have an inspection for hidden damage performed by a home inspector, a friend that has experience, or construction professional before buying a fixer-upper. Michigan purchase agreements have inspections clauses in them; make sure you use that clause when doing a fixer upper.  Then be sure to negotiate to try and get the seller to pay for all or part of the cost of needed repairs uncovered by the inspection (that were unseen). Often, sellers will be willing to lower the sales price to sell the home "as is" instead of paying for the repairs.  Give the seller three choices, fix it themselves, hire a contractor to fix it, or reduce the sales price so you can fix it.

Be careful that you don´t over pay. Especially if you plan to resell quickly, paying too much up front can doom your plans for quick profit. Research the market for reselling and have an exit plan for selling the house in place before making an offer.

Remember when buying a fixer upper to put in the cost of paying a realtor to re sell it.  Many people forget this. They have figured a $6,000 profit but forgot about the selling commission.

What about the cost of the mortgage and interest?  If you aren´t living in the home, the mortgage payment is a cost!  If it is going to take 4 months to fix it up then figure the payment as an expense.  A $1500 payment adds up.  In four months it is $6000 of profit eaten up.  What happens if the house doesn´t sell right away?  What happens if you have to sit on the house for 10 months?   At $1500 a month then $15,000 of your profit is gone.

If you are not going to live in the home there is one last thing item to remember is that if it is a second home, or investment property (in Michigan) you do not get the homestead exemption.  Your taxes are going to be much higher.  Approximately 40% higher.  You have to figure that in as a cost also.    See my mileage rates to see the difference in homestead and non-homestead rates.  There is even big difference in mileage rates in Livonia real estate, Northville real estate, and Novi real estate