How To Lose Money On A Fixer Upper Home
A fixer upper home seemed like a good investment, but we had little experience. We had bought, fixed and sold a home in Montana for a profit, and completed the project in only a few months. However, we were new to the Tucson area, and didn't quite have a grasp on the home values. In Tucson, two identical houses can be ,000 apart in price if they are three blocks apart.
Then there was the fact that the styles are different from anything we had in Michigan. They put corrugated steel fences around expensive homes here, and the people talked about how pretty they are! If we were to do a fixer upper, it would be good to have some help figuring not only home values, but also what buyers want.
We went to the Arizona Real Estate Investors Association meeting, and I announced that we had money to invest in a fixer upper home. We were looking for partners. Our names and phone number were written down on the overhead projector along with the others, and about three days later we got a call.
Bill and Diane were nice people. They had an accepted on a house, and looking at the comparison sales they had found, it seemed like a good buy. They had rough estimates of the rehabilitation and remodeling costs, which is what they needed our money for. A third couple was involved, so the expected ,000 profit would be split three ways. We agreed in principle to the deal, and arranged to meet the other partners at the house after closing.
Fixer Uppers Versus Remodels
Three couples with six opinions - this can be a problem. Why did the beautiful wood floors have to be torn up and replaced with carpet? Why they couldn't at least be carpeted over without the expense of tearing them out? My wife and I thought it a crime to stucco and paint the beautiful brick exterior of the home, but we were assured that buyers here like it that way better. The ceiling in the add-on family room was a bit low, but raising it seemed too expensive and unpredictable.
Plans became new plans, and weeks of stressful anticipation evolved into stressful worrying. Houses in the area were selling for less than we initially thought, that the rehab cost would be more than we thought, and all the other partners expected to do much of the labor, rather than hire it out. Projected profits dropped from ,000 down to ,000 each, and we felt there might actually be a loss.
We dropped the deal. Fortunately, the other partners had procrastinated for weeks on our signing of the joint venture agreement. They would find a way to do it without us and split the profit two ways. We learned that this wasn't a fixer-upper in any case - it was a remodel. As I write this, it is more than three months past the projected completion date, and the home still isn't ready to sell. I hope they make a profit, but I am happy to have avoided the months of stress.
Other Fixer Upper Lessons
At another meeting of our investment club, a man told us about a fixer-upper he had bought years earlier, using credit cards for a down payment. He still hadn't finished it, and it looked like he was going to lose a lot of money in the end. He had no plan, which broke rule number one of the list below:
1. Have a clear plan.
2. Make sure everyone involved understands the plan and agrees to it.
3. Know what the home will sell for before you even make an offer.
4. Subtract ALL the costs (purchase price, selling costs, repairs, loans, other holding costs) AND your desired profit from the expected sales price. This gives you the highest price you can safely offer.
Learning what to do is a start, but learn what not to do too. Learn from our mistakes and those of others. That way, you won't lose money on your fixer upper home.
About the Author: Steve Gillman writes on all real estate topics. Visit his website for:
1. A photo of a beautiful house he and his wife bought for ,500.
2. A free book on how to save thousands buying your next home.
3. A free real estate investing course.