Fixing Up Homes To Sell Can Be Risky

By: LAUREN BAIER KIM: The Wall Street Journal Online
Lauren Baier Kim offers advice to a couple thinking about investing in properties in need of a little elbow grease.

Question: My husband and I recently bought a house. The house was in good condition, but we made some minor changes to it. It was a great experience. We are thinking of doing this kind of work as a second job. My husband has a good income, but I am a full-time student. We have $50,000 in savings, but I'm not sure we're doing the right thing. Is it a good idea to buy houses to fix and sell?

-- Shabnam Razavi

Purchasing houses that need repair, fixing and reselling them can be profitable. This year is shaping up to be another record-breaker for sales. Sales of existing homes are expected to rise 2.8% to 6.97 million this year, according to the National Association of Realtors. This means that generally most homeowners are having little difficulty in selling their homes.

What makes rehabbing lucrative is that fixer-uppers sell, on average, for 24% less than do houses in good condition, according to NAR. So, if you get a good price for such a home in an appreciating housing market and don't overspend on repairs, you have a good chance to come out ahead.

There are risks involved. If the housing market takes a downturn, or if you make a poor choice when selecting a house, you could end up in the red. You should buy in a neighborhood sought-after by buyers -- e.g., one that is safe and has good schools -- unless you want to bet that the area is on its way up and will attract buyers.

Key to your endeavor is understanding your target housing market and how well and for how much homes sell. You can get a feel for it by reading real-estate listings in the paper and online. You can also join a local real-estate investors club. You can find clubs in your area by visiting www.nationalreia.com, the Web site for the National Real Estate Investors Association (NationalREIA). You could also take a real-estate course at a nearby community college.

The best properties to rehab are those that need minor repairs, such as new sheetrock, trim, cabinets, flooring, carpeting and landscaping. These relatively cheap fixes go a long way in giving a home an appealing appearance to buyers. Be careful when making these changes. "You can get carried away in a $100,000 neighborhood and put in Corian countertops and all these beautiful things, and you will make the repairs too pricey to profit," says Steve Herbert, vice president of NationalREIA and the National Association of Responsible Home Rebuilders and Investors.

Avoid homes that need major construction work. "Any kind of structural damage is probably going to be too costly to make a good profit," says John Grice, a real-estate agent with Downing-Frye Realty in Bonita Springs, Fla., who has expertise in fixer-uppers. Choose homes that need the kind of work that matches your abilities, he suggests.

It's best to do most of the repairs yourself, but when you contract work out, have a good idea of what to expect in terms of price. "You don't have to be a roofer, but you have to understand the value of a roof in your area," Mr. Herbert says. "So when you get a contractor, you know if he is charging too much."

Your savings should work to your advantage. Buyers who succeed at turning around fixer-uppers "often have quick availability to loans or cash so they can make strong and quick offers to motivated sellers," says Bob Walters, chief economist at Quicken Loans. Talk with a mortgage banker before starting out, he suggests.

You mention that you rehabbed your own home. Sprucing up your main residence for resale can be a good money maker, thanks to an Internal Revenue Service tax break. "As long as you live in a place for two out of five years, you can walk as an individual with $250,000 profit tax free, $500,000 if you are a couple," Mr. Herbert says.


Ms. Kim is a senior editor at RealEstateJournal.com. June Fletcher is on book leave. The "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.