Buying fixer uppers....

HardDrive · 01-16-2006, 11:27 AM

I have a job where I am pretty much a hired gun. I could cut back to 50% of my current hours (or any percentage) pretty much at will.

I have done a fair amount of renovation work, including kitchens, electric, plumbing....I have a good eye for knowing what major from minor.

Is buying distressed propertys, sinking 15-20k into renovations then flipping them a realistic idea? I would not need to make much to beat my current income, which is pretty low at the moment.

Is the following scenario realistic?

Purchase a $300 distressed property. Paint every surface on the house if needed, replace carpets if needed and deal with any major ugliness in the kitchen. If I put in 15-20k, is in unrealistic to think I could sell it for $350?

Any comment appreciated, along with horror/success stories.

Eric 951 · 01-16-2006, 11:44 AM

If you have the time, skills, and patience, it can be worthwhile.
Right now I am working on a 5-bedroom flipper purchased for 20K. My buddy and I have sunk about an additional 5K to date--new toilet/tub/sink, drywall, windows, furnace, cabinets, paint, re-roofed front/back overhangs. When complete we hope to sell for 60-70K(which is the going rate for the neighborhood.) Always plan on additional expenses though--just this past week some freakin' crackhead busted the window out of our new door, forced their way in, and stole the copper pipes from the basement plumbing to sell for scrap.

s_wilwerding · s_wilwerding's Garage

The big trick is to find properties that are about to be foreclosed, and buy them before they are. As far as I know, if you've got less than 20% equity in a house, and the bank forecloses, you get nothing, even though you have some equity in the house. So, you find the people who are about to be foreclosed, make them a lowball offer (so that they get something out of the house, rather than the bank taking it all), fix the property up a little, and sell it for $20K more.

I have a buddy who is one year younger than me (25) and he has already become a millionaire by owning a business that does what I described above. The downside is that you have to deal with some pretty seedy people in that line of work.

Big Ed · 01-16-2006, 11:56 AM

I've done 4 of these in the last 3 years...here's my thoughts in no particular order.

1. Price levels even for fixer uppers are very high right now, I don't have any current projects because I believe market risk is too high (e.g. prices may drop while I'm renovating).

2. Don't forget carrying cost! The killer to many such deals is the cost of the debt service while undergoing renovations and marketing for resale. If the resale isn't fast, your profits can be vaporized.

3. The deals where there is money to be made are usually much more involved than paint & flooring (and much north of $15-20K rehab cost). Usually the first time buyers will scoff up those places that need only cosmetics..and at a price that's higher than makes sense for an investor.

4. When you identify a potential property, be sure to speak to your local building inspector before the deal is finalized. One recent deal I did that involved significant repairs I had to bring all electrical up to current code...which was fine, though my initial plan was only to upgrade an old fuse panel. Local guy said if I was doing "significant renovation" I couldn't just do the panel.

5. I wouldn't personally buy a property for 300K if I expected to put 20 into it and sell for 350..after debt, sales charges & market risk, that's not enough margin. YMMV.

6. Make sure you know what the market value of the property will be after your renovations...work with a Buyer's broker or appraiser (key is they work for YOU not the seller) to have a handle on this prior to the deal. DO NOT BELIEVE THE LISTING AGENT WITHOUT INDEPENDENT VERIFICATION.

7. This one was my key to any rehab I took on. Make sure that the price you pay STILL MAKES SENSE if you have to rent the property. This was my escape hatch...if the market went bad while I was renovating, I wanted to be able to rent it at no worse than break even on a cashflow basis. This way I wouldn't be hemorrhaging money or be forced to sell at a big loss.

Also, I'm a real estate broker so I was able to sell my properties at half the commission (only paying the buyer's agent). That helped. I made money in 3 out of 4 deals...the 4th it took me too long to renovate the place and carrying costs killed me.

Feel free to ask any questions you might have.

LeeH · 01-16-2006, 12:15 PM

The Learning Channel has a show running right now called "Property Ladder." Watch a few episodes before you buy anything.

http://tlc.discovery.com/fansites/propertyladder/about.html

HardDrive · 01-16-2006, 01:09 PM

Thank you for the reply! Thats huge.

I was wondering about about #3. Do you have a place where you draw the line? Asbestos removal? Foundation repair?

Good point with looking for rentable propertys.

Given the current inflation of the market, is it a better idea to wait? I live in the Seattle area, and there are signs of cooling locally.

Quote:

Originally posted by Big Ed
I've done 4 of these in the last 3 years...here's my thoughts in no particular order.

1. Price levels even for fixer uppers are very high right now, I don't have any current projects because I believe market risk is too high (e.g. prices may drop while I'm renovating).

2. Don't forget carrying cost! The killer to many such deals is the cost of the debt service while undergoing renovations and marketing for resale. If the resale isn't fast, your profits can be vaporized.

3. The deals where there is money to be made are usually much more involved than paint & flooring (and much north of $15-20K rehab cost). Usually the first time buyers will scoff up those places that need only cosmetics..and at a price that's higher than makes sense for an investor.

4. When you identify a potential property, be sure to speak to your local building inspector before the deal is finalized. One recent deal I did that involved significant repairs I had to bring all electrical up to current code...which was fine, though my initial plan was only to upgrade an old fuse panel. Local guy said if I was doing "significant renovation" I couldn't just do the panel.

5. I wouldn't personally buy a property for 300K if I expected to put 20 into it and sell for 350..after debt, sales charges & market risk, that's not enough margin. YMMV.

6. Make sure you know what the market value of the property will be after your renovations...work with a Buyer's broker or appraiser (key is they work for YOU not the seller) to have a handle on this prior to the deal. DO NOT BELIEVE THE LISTING AGENT WITHOUT INDEPENDENT VERIFICATION.

7. This one was my key to any rehab I took on. Make sure that the price you pay STILL MAKES SENSE if you have to rent the property. This was my escape hatch...if the market went bad while I was renovating, I wanted to be able to rent it at no worse than break even on a cashflow basis. This way I wouldn't be hemorrhaging money or be forced to sell at a big loss.

Also, I'm a real estate broker so I was able to sell my properties at half the commission (only paying the buyer's agent). That helped. I made money in 3 out of 4 deals...the 4th it took me too long to renovate the place and carrying costs killed me.

Feel free to ask any questions you might have.

turbo6bar · 01-16-2006, 02:16 PM

Gosh, I could talk your ear off about rehabs and rental properties. I buy foreclosures, make repairs (usually cosmetic) and then rent the properties. After my portfolio got full, I started to sell off the less desirable properties.

Everything mentioned above is good advice. Big Ed is spot on. Buying for $300k and reselling for $350k = little to no profit.

The local RE investing club is bursting with new members. Everyone wants to be an investor. I don't blame them, but it means more competition. You might find newbies paying way too much. It has inflated the marketplace, so my advice is to sit tight for a while.

I have cash flowing from my freakin' wallet, but there are no good buys. I'd rather twiddle my thumbs than take big risks. Slam dunks are around the corner.

I think you should at least study your market. More than likely you'll find someone or a web site that will point you towards potential properties. Be very skeptical, though. There is only one person looking out for your best interest: YOU.

You really need to evaluate you needs and goals, and what you have to bring to the table. Do you have the means or ability to acquire cash to close on deals? Do you have good credit? Do you have a reserve fund to cover your carrying costs? This work is quite cash intensive. A credit line is mucho good.

It sounds like you might have the right mix to make it work, but it's up to you to take it to the next level (from conception to reality). Most fail to reach that next level. I'm not implying you should buy the first property you see, though. If you have some deals you'd like to present, fire away. I can give you some details of my last deals, if you'd like.
I wish you the best of luck,
jurgen

schamp · 01-16-2006, 03:25 PM

Hi, since its a real estate discussion, what about building duplexs or quads in a collage town. Bound to stay rented. Here building cost are around 100.00 a square foot. I know you have to make the numbers work, but just wanted to see what some of you guys think. Thanks, Spencer

Big Ed · 01-17-2006, 02:55 PM

Quote:

Originally posted by HardDrive

I was wondering about about #3. Do you have a place where you draw the line? Asbestos removal? Foundation repair?

Given the current inflation of the market, is it a better idea to wait? I live in the Seattle area, and there are signs of cooling locally.

#3. Any repair needed that I am unfamiliar with the cost, I get a firm quote for repair during the home inspection period. If it's too high, I renegotiate or kill the deal. But as long as I have a quote from a trusted source, no job is too scary (remember the time factor though...big jobs extend your carrying period)

The current market in the northeast has me waiting. If your market is cooling, be very careful if you proceed.

Big Ed · 01-17-2006, 02:58 PM

Quote:

Originally posted by schamp
Hi, since its a real estate discussion, what about building duplexs or quads in a collage town. Bound to stay rented. Here building cost are around 100.00 a square foot. I know you have to make the numbers work, but just wanted to see what some of you guys think. Thanks, Spencer

Spencer,

the answer depends on the rental situation in that college town. If there is an undersupply of rentals, that may work if the market rents are high enough. If there's plenty of rentals, could be a problem. Keep in mind that many college students are price sensitive.

They also may have a higher propensity to trash the place. Better build it sturdy, and choose tenants wisely.

Mike

EdT82SC · 01-17-2006, 03:07 PM

My brother just did this. He bought a 1907 house that had carpet laid over nice hardwood floors with cosmetic damage, had some poorly done remodelling, and needed paint. He refinished the floors, tore out a couple walls, and added some new ones to reconfigure existing space, replaced some lights and plumbing fixtures with period correct pieces, totally redid the kitchen, and painted the whole thing. The results are beautiful.

Here it is: www.4526-se-kelly.com