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Profit From Fixing Up Ugly Duckling Houses : Often a ‘junker’ needs only fresh paint or landscaping to be sold at healthy gain.

<i> Bruss is a San Francisco-area lawyer, author and real estate broker. </i>

Do you sincerely want to earn big real estate profits? At the same time, do you want to find a home to buy? If you answered “yes” to either or both questions, consider the very profitable world of junker houses.

What is a junker house? A junker house is a sound, well-located house that needs improvements and can be purchased at a below-market price. In other words, it is a run-down house crying out for help.

I bought such a “yuk” house last year for $115,000 on a street where homes were selling for $175,000 to $200,000. But, the junker house I bought was in bad shape. It was the only house I’ve ever purchased that had grass growing from the roof.

Although hard to believe because of the ugly appearance, the house was basically in sound condition. But it had the right things wrong. After spending about $65,000 on improvements to put the house into first-class condition, I sold it for $240,000. You can earn similar profits too.

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Look for valuable deficiencies. Most home buyers want to purchase a house in perfect condition. To do so, they will pay top dollar. But buyers of junker houses aim to convert their houses into these “red ribbon” deals by turning their ugly ducklings into beautiful swans.

The most profitable deficiency in junker or fixer houses is peeling paint. Most prospective home buyers are turned off by a house that needs exterior or interior paint. But I rejoice because paint is the cheapest and most profitable improvement.

Other valuable deficiencies include need for landscaping, minor repairs, cleaning and new carpeting. These improvements usually raise the value of the home much more than their cost. Your aim should be to raise the home’s market value by at least $2 for every $1 spent on improvements.

However, some improvements are necessary but will add little, if any, value to the house. Examples of such unprofitable improvements include foundation repairs, termite damage, new roof, new furnace, new plumbing and new wiring. Be sure to consider these essential costs in your fix-up cost estimates.

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How to finance your junker house. Finding mortgage lenders who will finance your purchase and improvement of a junker house is not easy. Another consideration is that you probably don’t want to spend time and money putting a new mortgage on a house that you are going to substantially improve to raise its value for either resale or use as your residence.

The best approach to financing junker houses is to try to avoid having to put a new conventional mortgage on the house. Not only are lenders reluctant to loan on junk houses, but the cost will be high.

Your best source of financing is the seller. Most sellers of fixer houses realize that their property needs work. But, they usually are not in a financial position to make the necessary renovation.

If you can offer a 10% to 20% cash down payment, many sellers of these run-down houses will finance the balance of the sales price. When necessary, you might even agree to a risky two- or three-year mortgage. From your viewpoint, since you plan to fix up the house, when the work is completed you can either refinance or sell the house to pay off the seller’s mortgage.

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Other alternatives include borrowing on a bank credit line, finance company loans, credit card loans and other high-cost real estate finance sources. Since you will complete the renovation within six months, don’t fear high interest rates, because your profit will be far higher than the modest interest cost.

How to find the junker houses. Virtually every community has its share of fix-up houses. Drive down almost any street, and within a mile you can find a run-down house with unmowed grass, peeling paint and perhaps even an old jacked-up car parked in the driveway.

To find the owner, just call the local tax collector’s office to learn where the property tax bills are sent. Chances are that the owner is an out-of-town absentee investor who would love to sell to you in return for steady monthly payments, instead of having to worry about the low-class tenants who occasionally pay the rent.

In addition to keeping your eyes open for junker houses as you drive about your town, another good source of bargain fixer houses is real estate agents. Every time I meet a real estate agent I ask: “Have you got any junker houses for sale today?”

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They usually tell me about their latest listing. Unfortunately, the seller often doesn’t know the property is a junker and is asking a price that doesn’t reflect the property’s distressed condition. However, if you talk to enough realty agents you will eventually find the right junker house for you.

Still another source is the “Houses for Rent” newspaper classified ads column. The houses with the lowest rents are often fixer-upper houses, which the owner will gladly sell. If you really want to get the owner excited, offer to pay a year’s rent in advance if the owner will let you fix up the house and give you an option to buy the house.

For example, if the rent is $800 per month, your cost will only be $9,600, which is far less than a typical cash down payment. However, be sure the lease-option agreement locks in the purchase price at today’s market value because after your improvements are completed in a few months, the house should be worth far more. In the meantime, if you wish, you can live in the house while the fix-up work is being completed.


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