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Profiting with a Fixer-Upper

When approached correctly, a San Mateo fixer-upper can be financially and psychologically rewarding. It can also make home buying within the reach of those who would otherwise be unable to afford it. Some people make a career out of buying sub-par properties, renovating them and selling them for a profit. If neophyte buyers are not careful, they can be faced with a host of problems: escalating costs, schedule delays, financial set-hurtles and resale difficulties. Read on for advice to help you avoid these pitfalls.

Educate Yourself
Do your homework first. A fixer-upper is a house that has been poorly maintained and is being sold below market value. Determine the reason for the reduced price: is the roof caving in , does it need major structural work or is it just outdated. Research comparable properties in the area to calculate the home's resale potential once fixed up and weigh that against the amount of work required.

It is also important you establish your financial and physical limitations and stay within these parameters. It is easy to be captivated by a fixer-upper with great potential. But if it stretches your financial resources, even if you can scrape by to make it work, you could be left with no buffer for the unexpected. It is not uncommon during a project to unmask a new problem that requires additional money and repair time. Make sure to budget for this. You also need to be realistic about what you can tolerate. Do you plan to live in the house during the renovation? Are you prepared for the dirt and inconvenience?

Tax Incentives
Fixer-uppers also provide some tax benefits. If your fixer-upper serves as your personal residence, the profits you earn when you later sell it can be tax-free. Under Internal Revenue Code (IRC) 121, $250,000 ($500,000 if married, filing jointly) of the sale profits are tax-free as long you occupied the home for a minimum two years. There is no limit to how often you can use IRC 121 as long as it is not more often than once every 24 months. IRC 1031 was specifically written for properties other than your personal residence. In order to avoid paying capital gains taxes, you must purchase another property equal to or greater in market value and equity than the one you are selling. Make sure to consult with a financial advisor or tax accountant for detailed advice on how these incentives can best work to your benefit.

The more time you spend analyzing a property, the greater your success. Thoroughly examine all financial components. The amount of work required and the level to which it is undervalued will drive your profit potential. Always make sure you plan for the unexpected. And remember, market conditions can also influence resale ability.

Find the Right Fixer-Upper
Buying the right fixer-upper will ensure your financial and emotional success. To find just the right property, you will probably need to look at many more houses than you otherwise would.

When seriously considering a house, determine how much work it will need. Some will only require cosmetic attention (such as new paint, carpet or landscaping) and are ideal for the novice do-it-yourselfer. Others will need updating to bring them in line with comparable homes in the market, such as a new kitchen or bathroom. For someone with renovation experience or who plans to hire a contractor, this type of fixer-upper is perfect. Be cautious of the home that has major structural defects, foundation problems or needs a new roof. These are costly repairs that often do not add enough to its market value to allow you to recoup your expenses. Avoid such properties unless the purchase price is very low.

Also analyze the neighborhood. Homes in a good school district will always be easier to resell. Be realistic about a transitional neighborhood and how quickly you plan to sell the house. If the area takes longer to improve than you anticipate, your profits could be reduced.

Financial Considerations
How much you spend on improvements will affect how much you earn in profits. Estimate the renovation costs before you buy. Get a detailed bid from a contractor. It is also a good idea to have the property professionally inspected. This will reduce the chances of unanticipated and costly defects and repairs. Avoid properties that are being sold on an as-is basis with no inspections allowed.

Some experts believe that the most lucrative fixer-upper is one that requires modest work, especially if you want to do a quick resell. Painting is often the most profitable improvement you can make to a house. Other quick, cost-effective improvements include new light fixtures, new carpet or refinished wood floors, fresh landscaping, new appliances, cleaning and repairing.

A San Mateo home can require more work, such as a kitchen or bathroom renovation, may still be lucrative. You just need to evaluate the renovation costs to make sure they leave you with a profit. For example, if you anticipate the selling price at $200,000 and subtract the purchase price ($135,000), repair expenses ($40,000) and the selling expenses ($10,000), you can expect a $15,000 profit. If your calculation yields a negative profit or an amount lower than your target, you need to re-evaluate the purchase. Remember, if you scale back on the renovation, the amount you can sell the house for may also drop.

Also consider your purpose in buying a fixer-upper. If your goal is to make a quick profit, the bottom line numbers need to be the driving consideration. If you plan to make it your permanent home, then in addition to the cost/return analysis, you need to figure in the anticipated appreciation rate of the market until you sell as well as the intangible benefits of living in a house you love.