Fixer Uppers

Houses that need some work, or "fixer uppers," can be found in even the most expensive cites for much less than other homes. In fact, even here in Tucson, where a small home will usually be over $200,000, an investor at our real estate investing club just told us he found one for $35,000. However, there are a few questions you need to ask yourself before buying a fixer upper.

First, do you want to deal with it? You don't have to fix the house yourself, as you will see in the example below. Still, you will have to deal with hiring contractors, and you'll have the stress of unexpected problems that always occur with fixing houses. A better question is how much is it worth to you to deal with it? If you end up with total of $115,000 into a house that is worth $145,000, does that $30,000 gain make it worth it?

Pick a number when you look at a house. It is up to you to decide how much you want for your trouble. How do you know what you'll gain in equity? Figure it like an investor would, as in the following example.

First, look at the house and decide what you would need to have done to make it a nice place to live. Maybe it needs a new roof, new carpeting, a stove and a dozen smaller things done. Write out all the things that you think need to be done.

Now, with the help of a real estate agent or appraiser if necessary, estimate what the house would sell for if it was the way you want it. This is your finished value. You will work backwards from here to arrive at the price you will offer.

For the sake of this example, we'll assume the house will be worth $169,000 when it is done. It needs carpeting, walls repaired, yard work, paint, a new door, new appliances, and a few other things. By calling around to get a few quotes, you determine that all this will cost $12,000 unless you do some of the work yourself. You subtract this from the $169,000.

You also subtract another $2,000 for "holding costs," for the time you can't live house while it's being fixed. This includes interest on the loan, taxes, insurance, and utilities. Subtract another $2,000 for anything unexpected.

Now you take the figure that "makes it all worth it," and subtract that too. For this example, we'll assume that it is worth the trouble for you if you get an instant equity gain of $13,000. Subtracting the repair costs, holding costs, unexpected event money, and your "profit," we arrive at $140,000.

$140,000, then, is the most you want to pay for the house. You should offer less, maybe $134,000, so you have some negotiating room. Attaching a list of the repairs the house needs to the offer might help. If you can't negotiate a price of $140,000 or less, you should probably walk away. You want a fixer upper to get a deal, not just to swing a hammer.

This chapter continues here: Fixer Upper Home