Dear Sue,
My father is a retired contractor. He has fixed everything there is to fix in his own house and he’s starting to drive my mother crazy. She wishes that he would go back to work.
He’s been dropping hints about partnering with me to buy, remodel and resell fixer-uppers for a profit. He says that the timing is right, especially for entry-level homes.
I have confidence in my father’s abilities but I don’t know that I have the expertise for this kind of venture since my experience has been in accounting.
I understand risk and realize that not all investments are profitable. I want to minimize our risk as much as possible and maximize our potential for profit.
I am in the information gathering phase and want to know where you think we should begin and what pitfalls you think can be avoided.
~ Accounting Al
Dear Al,
Begin by building a team.
You already have the two most important team members in place. You, because of your ability to analyze and evaluate the performance of the investment, and your father, because of his ability to evaluate the condition, estimate the repair costs and he has the experience to complete the job.
Consult an attorney who will structure an appropriate partnership agreement that will not only reduce personal liability, it will include tax advantages.
Your final team member should be a Realtor who knows about local market conditions and trends.
Prepare a plan and work it. Be patient. Don’t jump into an emotional purchase. Do the numbers.
Start with demand. Evaluate the market. What price range has the most demand? If it’s in the $200,000 to $300,000 range, narrow your search and focus primarily in that price range.
Location, location, location. Buy in the best neighborhood that you can afford. Buyers will always pay more to live in a desirable area.
According to the National Association of Realtors’ 2009 remodeling cost versus value report, you should be looking for low-cost remodeling projects with the highest impact.
The kitchen is number one. Updating by adding ceramic or granite tiles is relatively inexpensive. Adding a breakfast bar, paint and new flooring is a low cost way to add value by taking years off the house.
Dated bathrooms can be renewed by re-grouting tiled counters and installing a new medicine cabinet. New plumbing and light fixtures will make the bathroom appear new.
Minor kitchen remodels, adding a deck and replacing windows, siding and the entry door are more costly but will generate the greatest return.
If your Realtor finds a home that your father thinks will work, make your offer subject to a feasibility study. Obtain written estimates before removing your contingencies and consummating the sale.
Your father’s estimated repair costs should include at least a 10 percent overage for unexpected costs/expenses.
Your financial analysis needs to include the cost to acquire the property. It also needs to include the cost to carry the property as well as the cost to sell it. Be sure to perform an after-tax investment analysis. Remember, it’s not what you make, it’s what you keep.
Your father’s right. It’s a great time to get into the fixer-upper business. With a good team and proper planning it could be a matter of good Home $$$s and Sense.
Happy New Year’s.
Sue Thompson is owner and sales manager of HomeTown Realtors in Auburn. Reach her at seesue@seehometown.com.
