REMODELING : ‘Sweat Equity’ Could Be the Way to Enter the Housing Market
Almost everyone dreams of owning one or more houses and making lots of money, but with the high cost of Southern California real estate, fewer people are able to realize such dreams.
Yet even in pricey Orange County, where the land is often worth more than the structure sitting on it, there’s a way to span the affordability gap and enter the housing market. The answer is finding, buying and rehabilitating distressed dwellings to sell or rent.
So said Lance Fors and Shari Selover at a recent seminar at Rancho Santiago College, one of the many Southern California colleges and universities where they teach “How to Profit From Buying Fixer Houses.”
“Once you own three to four houses, you control more assets than 85% of the companies listed in the Yellow Pages,” said Fors, a full-time molecular biologist. “Working for six years in our spare time, we have become millionaires.”
Fors, a research scientist at Caltech and part-time real estate entrepreneur, has been teaching the class with computer consultant Selover for four years.
Together, they have purchased and rehabilitated and rented or sold about $7 million worth of single-family housing and currently manage a real estate portfolio in excess of $5 million, Fors said.
It all began six years ago in Pasadena when the couple purchased a fixer-up home for Fors to live in while he attended graduate school. Fors lived in the house for about a year and worked on the house with Selover.
“This was a real ‘industrial strength’ fixer,” Fors said. “It was built in 1932 and everything had to be done. I got a hernia by breaking up and carting away the kitchen tile.”
Upon completion, the couple rented the house and purchased another property. Since then, they have bought, renovated and rented more than two dozen other properties, most of which are in the San Gabriel Valley.
“Even in expensive Orange County, there are areas with great opportunities for future appreciation,” Fors said. “But it’s not easy. Only one listed property in 50 is appropriate. The key issue in capturing above average appreciation is looking for pockets in transition, areas that are changing from terrible neighborhoods to bad neighborhoods, from bad to OK, from OK to good, from good to great.”
Fors said Orange County cities in transition include Santa Ana and Garden Grove.
“It’s really communities that have fallen out of favor or have changed,” he said. “It’s driven by redevelopment in old areas and new mini-mansion development in new areas, where developers come in and start putting monster houses and turning what was a good area into a prestige address. It all changes and feeds on itself.”
The negatives in Orange County, the couple said, are high home prices and traffic. On the other hand, the air is relatively clean, and it’s a more desirable place to live than areas in the Los Angeles Basin, they said.
“It’s a struggle, but you can do it in Orange County,” Fors said. “You just have to work it really well and know what you are doing.”
The couple categorizes fixers into three categories.
Cosmetic fixers are worn, dingy and unkept, with out-of-favor decorating.
Outdated fixers have the hallmarks of cosmetic fixers, but these “grand old houses of a bygone era” also lack adequate plumbing and electrical systems.
Sleeping giants--vandalized and abandoned wrecks--are the riskiest ventures but can offer the greatest potential for profit.
“These sleeping giants, or severely distressed properties, are usually left to deteriorate because the land is more valuable than the house,” Selover said. “But if they have unusual character or style, you can move them to another location. We’ve done that four times.”
One of the best ways to find discounted properties is simply to drive around and look, Fors said. Other sources for fixers include probates, properties owned by an estate, government FHA and VA repossessions, lender foreclosures, out of area owners, out of area listings or homes listed in an office far from where they are located, and disgruntled landlords.
“Death, divorce and debt create opportunities for win/win situations which allow the investor to buy properties at a discount without taking advantage of the seller,” Fors said, adding that people in distress need to sell houses at the “quick sale value,” an amount that is typically 10% to 15% less than market price.
Fors said the major fear that keeps people out of the fixer-up market is lack of capital. But there are creative ways to finance properties, including finding a partner with working capital for the down payment or to pay the mortgage, he said.
An investment plan is needed first, outlining actions required to meet specific goals, the couple said. Such a plan should include financing, type of homes, length of time the property will be kept and whether the owner plans to live in or rent the house.
The profit comes from “sweat equity,” the idea that with one’s own labor and creativity, there is a return of $2 or more on every dollar invested.
But that doesn’t mean you have to do all the labor yourself.
“It’s both the sweat and the thinking,” he said. “Understand the value of your time. A lot of the unskilled labor, such as demo work, can be hired out at $5 to $8 an hour. And we encourage the use of top designers and landscape architects. They are worth the money.”
Not all upgrades pay off, Fors said.
It’s not profitable to out-price the neighborhood with expensive upgrades, especially in housing tracts. Avoid “fad upgrades” such as lavender laminate cabinets and “extremely personal” wallpaper. And don’t spend more than 10% of the value of the house for a kitchen remodel, unless the home is in a good location.
“The number one mistake is to fix up a house to sell it to the only person who won’t buy it--yourself,” Fors said. “To create some little artistic gem for yourself is not cost-effective. Don’t put in custom tile or (expensive) windows where not necessary. Know your price range, know your market and focus on things that really will have value.”
Those upgrades include “curbside appeal” factors such as landscaping, designer doors, specialty windows and greenhouse windows and extensions. Inside, white walls, high-tech kitchens, master bedroom suites, interesting light fixtures and brass hardware pay off.
“We go to model homes and write down recurring features because that’s what people want,” Selover said. “But buyers choose a home for its features in less than 5% of the cases. Emotions control home buyers’ decision making. People have to fall in love with the house and be able to envision themselves living there.”
To influence emotional needs, the couple concentrates on creating a well-maintained, light, airy and spacious atmosphere with a sense of privacy.
They always show houses with furniture in place to aid the buyer or renter in imagining living there.
“You have to be very careful about how things act on emotions subtly,” Selover stressed. “For instance, the biggest turnoff can be smell. We like to make our houses smell like lemon, but paint and varnish also impart a feeling of newness.”
