Sotheby’s International Realty

Fixer Properties

Buy and Flip

I love properties I can fix and resell.

It’s how I made a small fortune in my 30’s.

Los Angeles real estate is aging. Today, you can drive any neighborhood and observe a 1940’s styled home sitting next door to a hyper-modern structure. Clearly, the forward looking neighbor took a risk at re-building his property in a neighborhood where his property would be the most valuable property on the block. From an investment stand-point, his property value is stunted by the existing structures. But his loss is your gain!

This sort of creeping gentrification works to the advantage of the follow-up homebuyer who utilizes the momentum of a neighbor who built the modern structure. The advantage you have in buying a fixer is that you know that the city is likely to approve future plans to upgrade your location. And if you play your card right, you can avoid the pitfalls he suffered if you involve the right people to streamline the effort. This might include knocking on your neighbor’s door and asking him for the agents, architect and contractors who built his property. At least to inquire about whether they could offer some advice.

I buy and sell properties with Sotheby’s International Realty. My clients are investors who recognize that an exceptional home is simply a frame for an exceptional life. People who truly care about where they call home can see the potential in a property and erase from their mind the current dwelling and imagine a structure where they can live and thrive.

My expertise is finding that diamond in the rough and helping my clients do the math. What’s it going to take to convert an old structure into a dream home worth much more than the initial investment? Here’s some tips.

Do the Math:

Figuring out what you should pay to buy a fixer-upper starts with a simple equation. First, add up the costs to renovate the property based on a thorough assessment of the condition of the house. Be tough with this estimate, which should include materials and labor — yours and other people’s. Next, subtract that from the home’s likely market value after renovation, drawn from comparable real estate prices in the neighborhood. Then deduct at least another 5 to 10 percent for extras you decide to add, unforeseen problems and mishaps that have to be dealt with, and inflation. What’s left should be your offer.

It’s essential that the real estate contract include an inspection clause. At best, the inspection will assure you that the house is a good investment; at worst, it will help you back out of the deal. Often with fixer-uppers, it’s something in between. The inspector will document a serious problem or two, and you can use the findings to get the seller to pay for repairs or negotiate the sale price downward.

If the house needs significant structural improvements, many real estate experts recommend avoiding it altogether. That’s because major repairs — plumbing and electrical system overhauls, foundation upgrades, and extensive roof and wall work — are usually “invisible” and hardly ever raise the value of the house enough to offset the cost of the renovation.

Pick a Project that Pays:

The ideal fixer-uppers are those that require mostly cosmetic improvements — paint touchups, drywall repairs, floor refinishing — which generally cost much less than what they return in market value. New lighting fixtures, doors, window shutters, and siding, as well as updated kitchens and bathrooms, are also lucrative improvements.

Falling in between structural and cosmetic renovations are major additions needed to bring the house in line with its neighbors, such as a family room or third bedroom in a community of three-bedroom homes. Such projects usually cost as much as or more than they return in market value (the exception to this is adding a bathroom, which can be worth twice as much as its cost).

Sometimes it’s possible to fold cosmetic improvements into a structural repair to increase the value of a fixer-upper. If you’re replacing the roof, for example, you could add a skylight at the same time. Or you could install a bay window where there was dry rot in a wall. But you also don’t want to over-improve: For maximum resale value, remodeling investments should not raise the value of your house more than 10 to15 percent above the median sale price of other houses in your area, according to the National Association of Home Builders.

In places where housing costs have run up significantly and are approaching a peak, even a fixer-upper that seems reasonably priced may be too expensive. A large-scale renovation job can take many months, if not years, to complete, and if home prices fall or stay flat during that period, it’s possible to come out at the end of the project with a house that’s not nearly worth the investment.

Line Up the Money:

One of the most challenging aspects of purchasing a fixer-upper is paying for the renovation. Understandably, most people don’t have much extra cash after making the down payment and paying closing costs, so coming up with additional money to cover repairs or remodeling can be difficult.

For small projects, credit card debt is an option. Interest rates are high and the interest isn’t tax deductible, but there are no up-front costs, such as appraisal and origination fees. It’s also possible to borrow against the cash value in a 401(k) retirement plan, life insurance policy, or stock portfolio. In each of these cases, there’s no credit check and the interest rates are relatively low — on par with that of a typical mortgage — but again, the interest is not tax deductible.

By far the most popular funding choice for a fixer-upper is a renovation loan, either through a home equity line of credit or a mortgage. Home equity lines can generally be borrowed against 90 percent of the equity that the homeowner will have in the house after the repairs and remodeling are completed. To illustrate: If a person buys a $250,000 fixer-upper with a down payment of $25,000, and the house will be worth $425,000 post-renovation, the homeowner will have $200,000 in equity. Even before the work is done, the borrower is eligible for a $180,000 home equity loan. The interest rate on a home equity loan is about the same as for a mortgage, but only up to about $100,000 in interest is tax deductible.

Even more advantageous is a renovation loan tied to the first mortgage. Similar to equity lines, these loans can be borrowed against the house’s value after the work is finished, but like any mortgage, the interest is tax deductible up to $1 million. Renovation loans are offered by almost all mortgage lenders as well as through Fannie Mae’s HomeStyle program and Freddie Mac’s Home Works!

Hire Me to Help Locate a Prime Fixer:

I began my career as a lawyer looking to make a buck improving real estate. My first investment was $42,000 which I flipped and made $220,000 two years later after living in it for a period. My next investment netted me $350,000 and my most recent netted me $1.9 million. It doesn’t take much vision to recognize that an old property can be reconfigured into something beautiful and worth more than you invested. The trick is doing it efficiently. Let me help.

 

*Sean Erenstoft is a licensed real estate agent working with Sotheby’s International Realty in Beverly Hills. He is knowledgeable about the aging properties in Los Angeles and monitors emerging neighborhoods. If you are interested in being a pioneer for profit, give Sean a call at (310) 613-8887. He’s also online at www.EstatesInLA.com.  In addition to this blog: Sean Erenstoft Discusses “Fixer Properties” in Los Angeles, additional articles can be reviewed at:  www.LArealty.blog.