What are fixer uppers?
I get asked for a fixer upper meaning all the time, and it’s really quite simple: any property that requires some amount of renovation, beyond cosmetic work (read: painting). Whether it’s an old kitchen or baths that need to be brought into this decade, or an entire whole-house gutting down to the wall studs with complete rehabbing of new electrical and plumbing as starters, fixer upper homes for sale can represent a tremendous opportunity for any investor. You can pick up some cheap fixer uppers that, once you’ve completed renovation, can earn you a tidy profit. Fixer upper houses come in all shapes and sizes, but they all have the same major component: they are waiting for some entrepreneurial person to come along, see the vision in what they can be transformed into, and know where to invest rehab dollars wisely for maximum re-sale value when the house is ultimately flipped.
The power of “no”
In my view, the most important aspect of buying a fixer upper is the ability to say “no.” You can never get too emotionally attached to your vision of what a house can be transformed into – and sold for a profit – if you don’t properly crunch your numbers, and stick within your limits. I have seen too many property investors who make the mistake of “falling in love” with a potential flip, only to slowly keep edging their counter-offers up, beyond what they originally felt was their top limit for what they would pay for the property. This is a rookie mistake. Don’t be blind to the emotional pull of it – remember – it’s not your home we’re talking about…it’s a simple business decision. And if it’s not right financially, then you move on to the next best alternative property available to make an offer on.
An example of restraint
I recently showed a property that is in need of almost a total gutting – but it’s a historical house with a rich history, and a rich price tag for renovating as well. My buyer, who’s been property investing for a long time, made an offer on it after crunching his numbers. He reasonably estimated the fix up costs, already had his team assembled for renovation, and had researched what the property could fetch upon resale, all fixed up. After his initial lowball offer (about half of the asking price) was rejected without a counter-offer, I recommended he counter with his “highest and best” offer for the property. He did so, and he came up only a small amount in price in so doing. This offer was rejected outright as well. We asked for a “come-up-to” price from the seller, but the seller would not provide one. So my buyer simply walked away from the deal…
In property investing parlance, this is known as “Next!” And he went looking for something else that would be a money-maker for him. However, he did one very smart thing before saying goodbye to this negotiation. He left the door open. He had me tell the seller that his offer would remain on the table, allowing for the seller to come back to him somewhere in the future, should the seller be unable to sell the property at the price he wanted. Very, very smart maneuver by my buyer, the seasoned pro. You just never know when a “no” can potentially turn into a “yes” by a seller.
Heed these basic rules
So when you’re searching for fixer upper houses to purchase, be sure to heed these basic rules for flipping investment properties. Never get emotionally involved in the decision-making process. Always crunch your numbers – then double check them until you feel totally sure of your financial constraints, as well as what you feel your profit will be on the investment. And last, always stick to your final number when making an offer – and don’t deviate upwards, regardless of the temptation to finish the deal. Remember, there’s always the rule of “next” – and you should move on to the next available property to make an offer on, rather than go in over your head on a potentially bad deal.
photos courtesy of profitindetroithomes.wordpress.co, stiles-law.com, consumerinformation.ca, propertymanagerpsg.com, zillow.com
So the U.S. government has just “compromised” themselves into averting a fiscal disaster by raising the debt ceiling at the eleventh hour…But the stock market ain’t buyin’ it, and either are other major world markets either. A pox on both your houses…as our bi-partisan system of government yet again proves that their sole existence is not for the commonwealth, but rather to simply stay in power.
So what is the small real estate investor to make of it all? Is this the right time to dive in and scoop up those potential property money-makers?
Well, yes…and no. It truly depends upon your time horizon for your property investments. It would appear the current stagnant economy will be staying with us for the foreseeable near-term future, and that means property values will also remain stagnant – at least in the short run. But if your time horizon is medium to long-term (say, three to five years at a minimum), then finding a property that throws off positive cash flow makes absolute sense right now. Real estate values will have had enough time within a few years to better stabilize, and you can look at increased values from overall market increases by then. And in the interim, increasing rents will also help in increasing the market value of your property.
A strong rental market
Most importantly, the rental market will remain strong. And it certainly will when most folks are not considering “trading up” their own homes, more buyers are staying on the sidelines due to fear of losing their jobs, and renting remains a safer short-term option for potential home buyers. So, as an investor, increasing your market rents gradually over the next several years will yield greater valuations on any rental property.
The investment to be wary of in this current economic climate is the fixer-upper that requires a quick turnover to make a profit. Right now, a property investor cannot be assured that the house he buys today and fixes up within a year’s time will still retain it’s value. Nor can you assume the improvements to the property will have sufficiently out-gained the current stagnation in the market, or any real estate deflation that continues to occur in so many local markets around the country.
Your time horizon is the key
So as much as the efforts of our current Congress have averted a disaster, and interest rates (for the time being) remain low, it is still a great time to look for deals on investment properties if your time horizon to hold your investment is at least three years or more out. Great deals can still be had if you can crunch your numbers and be quite satisfied the property will throw off a positive cash flow, or at the very least, a small negative cash flow you can live with until the market rebounds.