You want to buy a house because you know the current low mortgage interest rates are a real deal. So you’ve been inspecting dozens of houses at weekend open houses. But every time you make a purchase offer, another buyer offers slightly more and buys the house.
You want to buy a nice house, in decent condition, in a good neighborhood with great schools. However, that doesn’t seem to be working out. Maybe it’s time to change your focus. Have you considered fixer-upper houses?
Real estate agents have various names for houses that need repair work. Savvy agents advertise them as “handyperson specials.” Others use the words “original condition.” The only valid reason to buy such a house is to acquire a bargain-priced home or investment. This is not the type of residence most buyers want, so you will have less competition from other buyers.
Whatever you call these houses, they can be incredible bargains if you don’t mind doing a little work before or after moving in.
Some fixers are listed for sale with reputable real estate agents. Others are not openly on the market for sale, and it takes a sharp detective of a realty agent to find their owners because these houses are usually vacant.
The most profitable fixers just need inside and outside painting (the most profitable improvement of all) and other minor improvements such as new kitchen cabinets, fresh landscaping, new wall-to-wall carpets, new light fixtures and a complete cleanup. This is called a cosmetic fix-up.
Fixers to avoid are those that need major, unprofitable rehabilitation. Examples include a new roof, foundation repairs and structural work. Avoid fixers that don’t fit in their neighborhoods, such as a two-bedroom, one-bathroom house in a neighborhood of three- and four-bedroom homes.
The best fixer-upper opportunities are residences that can be bought at least 20% to 30% below what the house will be worth after fixing it. Don’t even consider houses that cry out for room additions or major remodeling; the improvement cost will usually exceed the value added (unless you buy at an incredible bargain price). Look for houses that are sound and well-located but look “tired” because they haven’t been updated for at least 20 years.
For buyer protection, it is smart to include a purchase offer professional inspection contingency clause. That means, after your offer is accepted by the seller, you have the right to hire a professional inspector who will prepare a report on the fixer-upper house. Be sure to accompany the inspector to discuss any undisclosed defects that are discovered. Oral reports are often more revealing than written reports.
For example, I purchased a fixer at an incredible bargain price that had an obvious bad crack in the fireplace. I accompanied my professional inspector. He carefully checked the chimney, climbed up in the attic and reported the crack could easily be repaired at a cost of about $150. The happy result was I bought a house that had been rejected by many buyers who saw that fireplace crack and refused to even make a purchase offer.
If the report reveals serious defects, ask the seller to give you a credit for the repair cost. Should the seller refuse to negotiate, use your home inspection contingency clause to cancel the purchase and get your earnest-money deposit refunded.
The 1997 Tax Act opened up a brand-new tax-free multimillion-dollar industry for buyers of fixer-upper homes.
If you buy and occupy your principal residence at least two of the five years before its sale (whether or not it’s a fixer-upper home), up to $250,000 per qualified home seller (up to $500,000 for a married couple filing jointly) net profits will be completely tax-free. Congress even made this tax break reusable every 24 months, without limit.
Should you enjoy buying rundown fixer houses and reselling them, you can repeat this tax-free process over and over. Just move in, live in the home at least two of the five years before its sale and claim your tax-free profits upon sale. When you do this repeatedly, you will become known among your friends as a “serial home seller.”
Robert J. Bruss is a syndicated columnist. He is a real estate investor, lawyer, broker and educator in the Bay Area.