Have you seen the reality TV show Flip This House on A&E?  I’m not really plugging the show, but it’s got me thinking about fixer-upper homes and the potential they have to bring real anguish to the lives of people who buy them looking to get rich as real estate “flippers.” 

Next Saturday, the show’s about a guy named Peter who bought a home in East Atlanta at the height of the real estate boom.  He paid much more than true market value for the house, but he thinks it won’t take much work to fix the property up.  He takes on the responsibility of general contractor himself – to save money – and begins the renovation.  But he and his team discover that the home has structural damage Peter didn’t know about.  Now he’s facing a major rebuild – on a property that he paid too much for in the first place. 

Of course, buying a fixer-upper and flipping it has made some savvy real estate entrepreneurs very wealthy – those who give advice to the poor saps like Peter on the show (no offense, Peter). In case going on a reality TV show to find out how to do a fixer-upper right isn’t your thing, I’ve prepared a list of 4 don’ts and do’s for fixing up real estate.  I’ll write about the first two today; look for the last two in Wedensday’s post.

  

Don’t: Don’t get fooled into thinking that you can make a bunch of money flipping a fixer-upper without a lot of hard work

With Flip This House returning for a fourth season, there are clearly a lot of people out there who have romanticized the notion of buying a home that needs some work, fixing it up in their spare time on the weekends, and then selling it for a huge profit.  But people who succeed at fixing up homes and reselling them approach it more like a business – if making a profit is the ultimate goal.  (If, on the other hand, you’re just looking to have fun rebuilding a home, that’s a different story.) 

Do: Run your numbers to make sure the deal will be profitable

Before you sign on the dotted line, make sure all of the financials will work out in your favor.  You’ll want to consider four factors when thinking about the profit-making potential of your fixer-upper: 

1.       Location:  What kind of neighborhood is the home in?  Will your newly renovated house fit in its neighborhood?  If you buy a fixer-upper in a neighborhood where all the homes are fixer-uppers, you’ll have likely a hard time selling it for much more than you paid.

2.       Location, part 2: What are the other homes in the neighborhood like?  Generally, you don’t want to be the nicest home on the block – or the dowdiest.  If you fit in well with most of the other homes, you’ll be better off when it comes time to sell.

3.       Location, part 3: What kind of buyers does the neighborhood typically attract?  A neighborhood with lower-priced homes might attract first-time homebuyers, who typically care most about a low price, over amenities like granite countertops and fancy bathrooms.  On the other hand, in a neighborhood that attracts wealthier retirees, for example, those kinds of luxury amenities might go over well.

 4.       What could you sell the home for?  Of course, you can’t ever predict with certainty how much you’ll be able to sell your home for once you’ve fixed it up.  But a look at the recent sales prices of comparable homes in the area will give you a pretty good idea.  If you bought the house for $200,000, say, and want to re-sell it for $250,000 after putting $30,000 into renovations, but the market comps are at $215,000, you’ll probably be hard-pressed to find a buyer at your selling price. Here’s a back-of-the-envelope way to calculate how much you could potentially make on your fixer-upper:

  1. Purchase price: what you paid for the home, including real estate agent fees and closing costs

  2. Market value: the average sales price of recently sold homes in your neighborhood that are comparable to your home (once you’ve fixed it up)

  3. Estimated repair costs + 50% extra for a buffer (unexpected costs always come up)

  4. Selling expenses (including real estate agent fees, lawyer fees, and closing costs)

 Let’s consider an example:

  1. You paid $185,000 for the home, plus $15,000 in buying expenses = $200,000

  2.  Comparable homes are selling at $255,000 on average

  3. $25,000 in estimated repair costs (based on the repairs you really have to make, per the inspector’s findings, and those you really want to make) plus a 50% buffer = $37,500

  4. $17,000 in selling expenses

1 + 3 + 4 = $254,500$255,000 - $254,500 = $500 profit In this example, you’d only make a $500 profit – and you haven’t accounted for the cost of your time.   

Don’t: Don’t forgo the home inspection

I’m guessing that poor Peter from Flip This House didn’t have the home inspected before he bought it (if he did, the inspector should lose his license!).  That’s a major no-no, even if you’re planning a major renovation. 

Do: Before you buy and home (even new), always have it inspected by a reputable inspector

You should always, always, always have the home inspected before you sign the purchase agreement.  Even if you’re planning to fix it up, as Peter had, you may not know all of the issues that will need repair – issues that could add tens of thousands of dollars to your repair costs. When the inspector visits the house, ask if you can tag along.  Most home inspectors are happy to have the company, and will help you understand the work – and expense – involved in fixing the problems that he finds.  Use the inspector’s report to get a cost estimate from a reputable contractor for the renovation.  Stay tuned for the last two do’s and don’ts of fixing and flipping, coming this Wednesday.