Ask any experienced real estate agent, "What is the most difficult type of house to sell?" The answer will probably be "a fixer-upper house." The reason is most home buyers want to purchase a residence in near "model home" condition. Just turn the key in the front door and move in. That's the goal of most home buyers, especially today.
Savvy buyers who want (1) a nice home to live in and/or (2) a profitable home purchase often consider buying fixer-upper homes. Of course, these unique home buyers are usually bargain hunters who expect to pay considerably less than fair market value if the home were in near-perfect condition.
What is a fixer-upper house?
Fixer-upper house profit opportunities come in all shapes and sizes. If I had to define a fix-up house, it is one that has been allowed to deteriorate in physical condition below neighborhood standards. Check out foreclosures and short sales...the homeowners often times don't have the funds available for deferred maintenance.
As a short sale expert I have listed and sold several sound, well-located fixer-uppers, which only needed a coat of paint (the most profitable improvement of all) and a few other cosmetic repairs to make them into model-home condition.
One of the most profitable fix-ups I have seen was a run-down house in the center of a middle-class neighborhood of well-maintained houses. I had driven by it many times, wondering if anyone lived in it. Several times I stopped to knock on the door and leave my business card with my name and phone for the owner to call me about a sale. No reply. Months later, I passed and saw trucks and activity in the home. It had been sold and the owners werein the process of rehabbing the house. That extreme fix-up house required about $50,000 of renovations, but it was well worth the extensive fix-up work to bring it up to neighborhood standards. Today, even in our current market, it is worth much more than their initial investment to purchase the home and the added cost of the renovations.
Why some homeowners refuse to fix up their homes
There are five key reasons why fixer-upper houses become available:
The owner is financially or physically unable to get the home into tip-top condition before selling it. These are often called "as is" home sales because the seller refuses to pay for any repairs.
The seller inherited the run-down property and just wants a quick cash sale. So-called "probates" are often great sources of bargain fixer-upper houses with superb profit opportunities.
Distress or foreclosure properties are another source of fixer-upper houses. Some borrowers just walk away from their homes, often due to unemployment, divorce, drugs or alcohol, and other personal problems.
Using a Realtor term to describe a home, it's "tired." That means it is a basically sound home, which has not been periodically updated to current standards. Usually the homeowner doesn't want the inconvenience or expense of swapping out countertops, cabinets, plumbing fixtures, flooring etc if they are still serviceable.
The home has a serious structural problem. Fixing a structural problem often costs more than will be added to the home's market value. This type of fix-up home should be avoided, such as when a house needs major foundation repairs, which will add zero value.
Other reasons to buy
The major reason millions of other home buyers buy fixer-upper houses is profit. But I've met several "do good" investors who buy run-down houses to help improve entire neighborhoods, and make a profit at the same time. City-sponsored fix-up renovation finance programs often encourage upgrades of older historic areas by offering tax abatements.
Another important motivation is to live in the home while fixing it up. Many marriages can survive home remodeling, but some cannot. However, as explained below, this motive has important income tax benefits because the inconvenience can result in major tax benefits.
Thanks to Internal Revenue Code 121, if you own and occupy your principal residence an "aggregate" two of the five years before its profitable sale, up to $250,000 of your profit is tax-free. A married couple filing jointly can claim up to $500,000 tax-free profits. This tax benefit is available to any home seller, not just those who buy, renovate and sell fixer-upper houses. But it is an extra benefit for smart home buyers who purchase a fixer-upper house at a bargain price, move in and fix it up before selling after at least 24 months of occupancy.
A few years ago while on vacation, I actually met a couple who have done this twice since IRC 121 became effective in 1997. I call them "serial home sellers." Actually, they have a very profitable tax-free business buying, renovating and selling their fix-up houses every two years.
Another alternative, for investors, is to make tax-deferred Internal Revenue Code 1031 exchanges of fix-up houses purchased as investments. After fixing up, the upgraded house can qualify for a tax-deferred trade for another fixer-upper property of equal or greater cost. There is no minimum holding period for such investment properties.
The most profitable renovations
As explained earlier, some fixer-upper houses should be avoided if they need major structural work, which won't add much market value. But the most profitable improvements add at least $2 of market value for every $1 spent.
The best example is paint. Often, painting the exterior and interior of a house will add thousands of dollars to its market value, usually at minimal cost. Other profitable improvements that often add more value than they cost include new carpets, fresh landscaping, new light fixtures, refinished or new kitchen cabinets, cleaning and repairing. My personal value-added favorite is to add a white picket fence around the front yard.
Content provided by
Robert Bruss from Inman News