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How fixer-uppers REALLY work

Posted by John Reed on

When I was at the gym this morning, a TV show about fixing up houses for a profit was on.

What a bunch of nonsense! And there are a ton of shows like this.

If they ever mentioned a profit figure, I missed it. On other shows like this I have seen them claim a big increase in value at the end of the show—but there is no buyer paying that price. The case histories in my books have the actual sale price.

Too nice when they bought it

What did the geniuses in the renovating reality shows do wrong? The house was too nice when they bought it. If you just buy a house in a good neighborhood that looks like it needs a little “updating” and paint and the “popcorn” ceiling replaced, you do not get it cheap enough to cover the buying and selling transaction costs, value of your time, out-of-pocket renovation costs, carrying costs, and profit. Just seeing that list of costs ought to sober you up.

I wrote a book called Fixers.  

Fixers bookIts main message is you don’t make money buying slightly-flawed houses and making them perfect. Rather, you must buy disasters and turn them into fixers then sell then as fixers.

Unlike stocks, bonds, and commodities, houses are unique. So whenever you buy one, you have to outbid the entire rest of the world. In other words, to buy a piece if real estate, you have to bid more that anyone else on earth was willing to pay for it. Scary thought, huh?

To make a profit, you have to outbid the entire world when you buy it, then incur the list of costs I gave you above, then sell it for enough more than you paid to make an adequate return on your time and investments.

Everyone else has to be scared away

To buy it cheap enough, virtually all other bidders must be scared off. What would do that?

My book has actual case histories. One was a house with an overpowering pet urine smell that hit you the moment you opened the front door. “I’m not going in there,” said the newlywed wife who had been told the house was available at a great low price. The Realtor®, the recently disappeared guru John Beck, said if they did not buy it, he would. They wouldn’t. He did.

Condemned by the Board of Health

The late real estate newspaper columnist Bob Bruss once got a house that was condemned by the board of health. A really old couple lived there and let their many cats poop in the attic insulation and let the roof leak for years, destroying much of the interior.

Another example is houses with bad foundations. Another is houses occupied by bikers or other bad tenants, especially those who refuse to let prospective owners tour it.

So you get the idea on the buying cheap. But there’s one more rule: what’s wrong must be relatively cheap to correct.

Pet urine smell, for example, generally goes away when you replace the carpet and padding and open the windows; maybe also some wood floor needs to be replaced. Then you just have a house that needs some floor covering.

Again, don’t make it move-in perfect. All you need to do is raise it up to the level where that newlywed wife is no longer afraid to enter it and buy it as a fixer.

Others overestimate the cost to correct

The basic idea is that some repairs or problems like bikers look impossible or super expensive to fix—but they’re not. Odors, filth, tilted floor, eviction of bikers, and so on have a finite cost but the vast majority of competing buyers and generally the seller and Realtor®, if any, grossly overestimate the time and cost of correction.

I was just watching one of those shows while I wrote this, They said they made a $95,000 profit after paying $191,000 plus fix-up. I am a bit skeptical about their costs because they had a lot of relatives work on it and I’m not sure they attributed a reasonable amount of the fix-up costs to that labor. I also saw no transaction costs mentioned. This was the first flip for the couple in question. $95,000 on first try? Not likely.

If it’s vacant, you have to work real fast

Another aspect I wonder about is whenever you are working with vacant property—no rent coming in—you need to work frantically, like home builders. The reason is you have carrying costs every day you own it.

How much profit you make, or even whether you make any profit at all depends on how many days it sits unrented and unsold. Frantic is the necessary speed.

The TV people make the house nice. It’s hard to make a profit doing that. You need to make the house habitable in order to buy it cheaply enough.

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