Fixer Uppers - Five Steps and Two Principles

Most new investors in fixer uppers have the basic idea that you buy a house in need of some repairs and cleaning, you fix it up and sell it for a profit. That's a good start, but how do you know if there will be a profit, and what changes to make? Many investors have lost money on their renovation projects, after all.

You have to have a clear idea of the profit potential before you make an offer on a house. How do you do this? Try the following five steps.

1. Make a plan for repairs and improvements.

2. Determine what the house will sell for when it is ready.

3. Estimate the total expenses for repairs and all buying, holding and selling costs.

4. Decide what you would like for a profit for the project.

5. Subtract all projected expenses and your desired profit from the estimated selling price. The resulting figure is the most you can pay for the house if you want a safe investment. You'll want to make an offer lower than this to leave room for negotiations.

That's the safe formula for fixer uppers. It is much better than the "intuitive" process that loses so much money for unprepared investors. But it doesn't answer the question of what repairs and improvements to make. There are two important principles to consider when deciding that.

Fixer Uppers - What To Fix

The first basic principle is to do those things which pay the most for the money spent. It can be easy to put more into a fixer upper than you can recover, so you want to choose those repairs and improvements that do the most to increase the value of the property. For example, painting kitchen cupboards might cost you your time and $25, or $125 if you pay someone to do it. They may look new as a result, and so add $1,000 or more to the selling price of the house.

Actually installing new cupboards could cost $6,000 and add only $6,000 or $7,000 to the home value. In that case, the painting is clearly a better value. Of course, there will be times when the new cupboards make more sense, especially in some high-end homes. Do the math.

As you consider the options you have, always think of return on investment. You may need the help of a good real estate agent to determine this. Describe the house with all your planned changes done and see what an agent thinks it will sell for. Try another set of improvements and see if that has a better return. As you gain experience you'll know what buyers in your area value, and so what changes will pay the most. And always look for all the simple high-return improvements, like a new mailbox, a few flowers and a thorough cleaning.

One thing not mentioned yet is the cost of time. Some repairs and improvements add not just the cost of the change itself - the materials and labor - but also add to the time the project takes. Every day that goes by you are paying for interest on loans, electricity, heating, water, insurance, property taxes, and other holding costs. You have to take those into account, which brings us to the second principle: As much as possible, do those things which make the fastest return on your investment.

Suppose new windows are a possibility, and will add about $8,000 to the value of the house, while costing you $6,500. It seems that you make a profit on the investment, but what if they cannot be installed until a month after the rest of the repairs and improvements would otherwise be done. If your total holding costs are over $1,000 per month, you are probably cutting it too close and you might want to drop the new windows from the list.

It isn't just the direct holding costs either. If you turn over your fixer uppers quickly, you can make more money. There are only so many projects you can handle at once after all. If you concentrate on fast fixes you might get six houses done in a year instead of four. If you're making $15,000 on each that means $30,000 more per year. Keep that in mind the next time you try to squeeze an extra couple thousand in profit out of a project, but at the cost of a month or two of your time.

Make high-return repairs and improvements, and make fast ones. That is the basic idea. And though you'll never know for sure exactly how much value a given change will add, or even what it will cost, estimate as best you can (and get help when necessary). Perfect projections are not important for making a profit with fixer uppers. Following the right principles is.