Latest Articles

Brokerage, Consumer News, Residential Real Estate, Misc

April 17, 2018

'Fixer Upper' Properties: What You Really Need to Know

Property fixer-uppers offer opportunities for added value. Here are some terms and concepts to consider in this corner of the real estate market: 

I.  Definitions -- There are different degrees of fixing.
     A. Cosmetic repair -- Paint, landscaping, carpets, clean-up, minor repairs. (refurbishing)
     B. Rehabilitating -- Making livable again, habitable.
     C. Renovating -- To make new, restoring
     D. Remodeling -- Room additions, balcony, changing floor plan.

These are listed in order of expense, work required and expertise. They represent four "sub" Wealth Traks of Fixers.

II.  Personality Profile -- Some of the characteristics of a Fixer/investor include:

     A. Knowing how to fix and repair property -- while this is not an absolute requirement, it is a plus.
     B. Above average patience -- you are dealing with many different human beings in this process.
     C. A spirit of adventure -- who knows what you'll find when you tear into that wall.
     D. Sense of humor -- prerequisite for living
     E. Perseverance and commitment
     F. Enthusiasm
     G. Management and organizational skills -- you will be leading a team.
     H. Recordkeeping skills -- critical for tax purposes.
     I. Negotiating skills -- you may be dealing with vendors.
     J. Creative mind -- How can you change the undesirable into desirable?

If you are weak in more than a few of the above areas, maybe you should consider another Wealth Trak. It takes more time and expertise than other Wealth Traks. In the beginning, try to select properties that need only cosmetic improvement such as paint, landscaping, paneling, etc.

III.  Objectives

      A. Cash flow -- Buy low - fix - increase income (value) - hold
  • Rent for positive cash flow. To make this work, you need to buy it right which will probably mean a pretty abused property.
  • This is best accomplished in a slow market. In a slow market, properties remain on the market longer, and sellers become more motivated to be flexible both in price and terms. Additionally, if fewer people are buying, more are renting, and this increases the demand and thus the income of the rental property.
  • Before you write the offer, you must determine the value and rent of the property after the fix-up, what it will take (cash) to acquire the property, how long it will take to improve it so you can rent it out. When the market turns, you may decide to sell it for a profit and move on to your next project.
  • Can you structure the seller portion of the financing so that the first payment is not due until the property is rented?
      B. Capital Gain -- Buy - fix - increase income (value) --sell
  • This requires an active or "hot" market. The seller will probably be less flexible, but you don't expect to remain on the property any longer than required to fix it up. You've got two things working for you, the added value from your work, and the increase in value typical in an active market.
IV.  Finding the Property
     A. Find the neighborhood -- Choose an area where the "Four  Great Forces" and general principles of value work to your advantage.
     1. Close to higher price/new construction
            a. principle of integration -- life cycles of properties
               1) integration
               2) equilibrium
               3) disintegration

            b. principle of progression -- value tends toward a median

2. Scattered fix up occurring -- fixing up is contagious if one owner fixes up and increases rent, others will follow. Try not to be a "pioneer."

3. In an area that is generally well kept and stable in which the investment property is one of few that needs work. (Principle of progression)

4. Well known, high-quality school system - Physical forces

5. Small home mixed with larger homes -- Possible room additions (progression)

6. Rehab government loans and rebates available --  Political forces

7. Jobs -- Increasing or decreasing in the area; wages, going up? Economic forces

8. Transportation corridors -- Physical forces

9. Stay away from properties on busy streets or too close to schools or playgrounds.

      B. Where do I get this kind of information?
         1. City Council Person or staff
         2. County Board of Supervisors
         3. Caltrans or appropriate state Dept. of Highways
         4. Chamber of Commerce
         5. Lenders
         6. Community Planning groups
         7. Realtors
         8. Local contractors
         9. Residents
     
      C. Some things can be fixed; some can't.

1. Physical deterioration - Wear and tear due to lack of care; deferred maintenance. This is usually "curable." Sometimes it is not. Be aware of the following:
     a. Are there any suspicious cracks or breaks?
     b. Is basement free of evidence of water problems (musty smell, mold, puddling, moisture where walls and floors meet, stains)?
     c. Is it copper plumbed?
    d. Is heating and air conditioning in good working order?
    e. Is electrical wiring up to code and adequate?
    f. Is roof in good condition?

2. Functional obsolescence -- Outdated fixtures, old-fashioned design -- usually curable, may take permits,  will municipality allow it? No room for lot/height restrictions, is property up to code, is there adequate parking?

3. Economic or social obsolescence -- Declining area, you can't do anything about this; incurable.

What you are looking for are the properties with minor, cosmetic needs. These can be corrected relatively cheaply and enhance the attractiveness and resale value of the property.

D. Find a "Don't Wanter" or a "Wanter" where the owner does not have the information and expertise you have:

1. Look for the rundown properties.
     a. tall grass, weeds, needs landscaping
     b. Peeling paint
     c. abandoned vehicles on the property 
     d. Broken, boarded up windows
     e. fire damage
     f. water or wind damage
     g. Signs of mismanagement, cars on the lawn
     h. vacant

2. Look for under-improved properties.

     a. two bedroom house in a three bedroom neighborhood
     b. zoned for more units that exist on the property

3. Buy and hold or buy and sell? Depends on market conditions.

4. If buy and hold - What are fair market rents for fixed up properties? Do a rent survey and keep up with your market. Structure the purchase: 

Down Payment ____________
First Loan   ____________ Pymt___________ 
Second Loan ___________Pymt___________
Third Loan  ____________ Pymt___________
Total 
Monthly Outflow
 
            Loan Payments    ___________
            Prop taxes          ___________
            Utilities               ___________
            Insurance           ___________
           
            Total Monthly outflow  ___________
            Income                    Amt
            Cash Flow                 Amt  (       )
            Cost to rehab                          ____________
            Purchase and Acquisition Costs  ____________
            Disposition Expenses                   ____________
            Monthly Cash Flow (negative) X Time    ____________
 
            Total $$$$ into project                ____________
           
            Value at completion of project         ____________

Be sure to negotiate a subordination agreement into the purchase if you plan to refinance to do remodeling.

Is there enough profit in here for the risk you are taking?
   
V.   Structural Analysis

         A. Desirable features
 
            1. At least one bathroom on each floor
            2. Large kitchens (room for table and chairs)
            3. Entrance foyer
            4. Family room
            5. Garage
            6. Pitched roof
            7. Gas vs. electrical utilities - depends on location
            8. Room for RV parking/pool
            9. Hardwood floors under the old carpets
            10. Can you think of any?
        
        B. Undesirable features

            1. Walk through bedrooms
            2. Dark 
            3. No window in the kitchen
            4. Narrow hallways
            5. No windows in bathrooms           
            6. Small room size
            7. Not enough cupboard or closet space
            8. Flat roof          
            9. Can you think of any?
 
VI.      Improvements to the Property

         A. Low cost, high return items
            1. Yard clean -up and landscaping   
            2. Paint
            3. Wallpaper and paneling 
            4. New kitchen flooring
            5. Refinishing hardwood floors in appropriate rooms
            6. Facia           
            7. New front door
            8. Light switch plates, door knobs, light fixtures
            9. Mailbox 
           10. Scrape acoustic ceiling - plaster
           11. French doors
           12. Tile/linoleum
           13. Appliances - used or bruised
           14. House numbers
 
         B. High cost, high return items
            1. Kitchen and bathroom remodeling
            2. Addition of bathrooms and bedrooms
            3. Enclosing patio for use as a family room
            4. Addition of garage/decks/skylights/whirlpools/
              
         C. High cost, little or no return
            1. Bracing, buttressing, rebuilding the foundation
            2. Roof      
            3. New plumbing
            4. Termite work
            5. Chimney repairs
            6. Driveway repairs
            7. Repair wet basement
            8. Deteriorated bone structure

VII.    Having a Plan -- Never buy a property in poor condition unless you have the capital, know how (can be hired)and mental toughness to improve the property.

Do not over improve the property.

Use neutral colors (whites and beiges).

     A. Putting your plan together -- The complexity of this task will depend upon the complexity of the project.

     Considerations:
     Will I act as my own general or hire one?
     Will I do some or all of the work?
     Will I pick-up and deliver materials?
     Schedule the time to check up on workers frequently.
     Meeting inspectors and service people is time-consuming.
     Can I show the property to potential renters or buyers during the renovation?
           
What about Workers Compensation requirements and proof of insurance?
    1. Specify the tasks to accomplish the job and information required
        a. Existing floor plans and drawings
        b. CC & R's - should examine with contingency before purchase (see example).
        c. Soils information
        d. zoning restrictions

     2. Determine what supplies will be needed.
     3. Determine the time required, build in a fudge factor.
     4. Determine suppliers. 
     5. Prepare a milestone calendar or PERT chart.
     6. Assign tasks.
     7. Monitor results daily.
     8. Prepare for marketing before completion, prepare flyers.
     9. Be ready to sell in process.

B. Implementing the plan -- after you acquire the property, begin at once (before closing on the no-cost items).

(Saul Klein is CEO of Real Estate Electronic Publishing Company, home of RealTown.)

Related Post

2018 Real Town The Real Estate Network