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Put your financial ship in order and get ready for your next fixer upper investment house purchase.
With interest rates still historically low and sellers beating the bushes to find buyers, now is the time to put your home equity to work by refinancing your principal residence.
If you need further convincing, check out my ezinearticles.com piece Refinance Now to Take Advantage of the Buyer’s Market Perfect Storm.
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Buying fixer upper houses and converting them into rental houses is a great business. And anyone can do it. You don’t need a certificate, you don’t need a degree, and you don’t need anyone’s permission. You just do it!
To view a condensed version of how I got started in the fixer-upper business, check out my article at ezinearticles.com. This is the version with no bells or whistles, and no accompanying three-part harmony.
The townhouse closing may or may not happen today. If not, Angy has to catch a flight out of town tomorrow. In that case, we will have to sign power of attorney over to me so that I can sign for both of us at closing.
Just like the recipe for my famous extra-chewy chocolate chip cookies, the plot thickens!
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The purchase process is winding its way toward a conclusion for the fixer-upper townhouse that I am purchasing. I had the inspection done last Wednesday (naturally, I followed the inspector around so I could see the problems that he saw), the appraisal should have come in today, and we are closing Friday.
The good faith estimate from the mortgage company came in at around $650/month PITI. I plan to charge $775 for the base rent on the new townhouse. We put 20% down on the $105,000 sales price, and the seller cooperated by paying for part of the closing costs out of her proceeds at closing. (I’m going to discuss that in more detail in a future post.)
It’s a property that’s really worth a hoot because it has all the right things wrong with it. It needs paint, needs vinyl tiles replaced, needs wood putty in door holes, a few outlets are cracked, has some oil on the driveway, and it has a few leaky faucets. On the plus side, the A/C is only one year old and the roof is solid. And all the appliances work. It should take about week to get it in ship shape.
The best part about the deal is that my other unit, 3 doors down, rents like hotcakes. As soon as we put the For Rent sign up, we have people knocking on the door. I’ve been waiting for another one these units to open up at a decent price.
On another note,
There’s a good aritcle comparing oil vs. latex paints over at fliprent.com.
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The Fourth installment in the review series on my book “Fix em Up, Rent ’em Out” is now up at the locomono rei blog. This installment is entitled “Know Your Nuts and Bolts First.” The article also provides details on how to win a free copy of the book!
Some other good blog articles to check out:
In Which the Author Talks About Everything In the World, Including Real Estate at flipthyhousel.com
1031 Exchange at retalsrus.blogspot.com
How Passive is Your Passive Income? at livingoffdividends.com
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Buying fixer-upper houses, repairing them, and renting them out is a safe way to generate short-term income and long-term wealth. But, how can you be sure that a house is worth what you are offering to pay for it? Based on experience, we can eyeball the property and probably be able to make a pretty accurate estimate of its worth 90% of the time.
However, that’s not good enough. We need more information than our educated eyeball can provide. In order to:
1.) avoid any surprise defects after its too late, and
2.) negotiate a lower selling price for the house,
we hire a professional inspector to do a physical and structural inspection.
For the last post related to due diligence see Due Diligence Property Inspection, Part 8 – pest control and property damage.
Most purchase agreements require the seller to deliver the property in good physical condition with all basic systems in good shape, unless the seller discloses otherwise. Generally, the inspection process reveals deficiencies that need to be corrected, whether they were disclosed or not.
So with inspection reports in hand, you are armed to arrange for the seller to correct the noted items at his/her expense. The seller is trapped in a corner. He reads the report and sees the photos showing the inescapable evidence that repairs are needed. He either makes the repairs or you walk.
Inspect the inspectors before you hire one.
Most investors hire a property inspector based on the advice of a real estate agent, which is not necessarily a bad way to go. But, you will be spending a tidy sum to hire an inspector, so its best to interview a few before deciding. You may see a big differences in experience, qualifications, and ethical standards. I would never hire an inspector who would not allow me to accompany him during the inspection.
Tagging along with the inspector presents a great opportunity to learn about your property, and will arm you with knowledge that will be invaluable throughout your entire ownership of the house. You’re the one paying for the inspection. How can the inspector say no?
If you want a true professional, hire a full-time inspector who perform 100 inspections a year and who carries “errors and omissions” insurance. This coverage tells you that the person is working full time in the field and is participating in ongoing continuing education.
To locate certified inspectors and find out more about the inspection process see the American Society of Home Inspectors web page.
Ask for a sample of one of the inspector’s recent inspection reports prepared for a comparable property. And, require your finalists to provide you contact information for 3 people who have used their service in the last 6 months.
Price should be a secondary concern because like other professional services, they often pay for themselves. An internet estimate of inspection costs indicates that prices range from $215 to $750, with an average price of $260 (in the southwest where I live).
Earlier articles in this series:
Due Diligence Part 7, Physical and Structural Inspection
Due Diligence Part 6, Tricks Sellers Use to Avoid Inspections
Due Diligence and Fixer Upper Properties Part 5 – the “as-is” sale
Due Diligence, Part 4 — Disclosure Requirements
Due Diligence, Part 3 — Inspecting the Property
Conducting Due Diligence, Part 2 — Reviewing books and records
Conducting Formal Due Diligence
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Thinking about buying an investment property?
Check out Real Estate Investing – The 5 Magic Questions at ezinearticles.com, by Robert Rentalman (yes, Rentalman).
The MARLA formula consists of 5 magic questions that will help you quickly weed out the motivated sellers from the rest of the pack. MARLA is an acronym for Motivation, ARV (After Repair Value), Repairs, Loan balance, Asking price. For more details on the 5 magic questions, take the link above.
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The due diligence period is the time period between the acceptance of the offer and the close of escrow. This is particularly relevant to those of us investing in fixer upper houses. It is the time to find out if you really want the property. If you find something wrong with the house and don’t wish continue with the purchase, you can ask the seller for adjustments, or get out of the contract. Following the outline in “Investing in Real Estate for Dummies,” we now look the first component of actual inspection: the physical and structural inspection.
Areas that you may want to hire experts to help you inspect:
-overall condition of property
-structural integrity
-foundation, crawl space, basements, sub flooring and decks
-roof and attic
-plumbing system
-electrical system
-heating & A/C
-landscaping, irrigation & drainage
-doorways, walls & windows
-moisture intrusion
-seismic, land movement, or subsidence and flood risk
-illegal construction or additions and zoning violations
Be careful to check for water intrusion and signs of toxins and mold. These can result in property damage and negative health effects.
Tell-tale signs to watch for that might indicate serious structural issues:
Cracks: Some hairline cracks may be naturally occurring settlement of the structure over time, but if you can stick a screwdriver into the crack, something else may be going on.
Unleveled or squishy floors: Walk through the property and look for floors that slant or slope. And watch for soft spots in raised floors.
Misaligned structure: You can use a handy laser level (that seem omnipresent in the hardware stores) and see if floors, walls and ceilings are uneven or out of plumb. Watch for doors or windows that don’t open or close easily.
Grounds: Be sure the property drains properly. Excess groundwater, poor drainage, or cracked/bulging retaining wall are signs of soil issues.
Moisture intrusion: Look for ceiling/wall discoloration and stains. Living in an area where flat roofs are common, my wife and I automatically check the ceilings of all potential investment properties. Musty odors could indicate moisture issues. Sump pumps anywhere on the property are a red flag.
Plumbing leaks: Check under sinks, supply lines for faucets, toilets, dishwashers, and washing machines.
NEXT UP: PEST CONTROL AND PROPERTY DAMAGE
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Serial home sellers buy houses, live in them for at least 2 years, and then sell them and pay no federal capital gains tax. The key to making a serial home seller business work is to find houses that you can add value to. How do they do this?
They buy houses below market value that need repair
We now know, if we didn’t know it before, that prices don’t continue to rise every year at 5%. In fact, it appears that house prices may continue to drop for several years into the future.
So, that means that we have to add value to the house. We must find houses in need of repair and bring them back to their former glory, to force the value of the house to go up.
I know, you’re saying, “But Terry, your answer to everything it to buy a fix-up house. You have been promoting that forever. That’s the name of your blog, and your book, and probably your dog.”
My response is, how did you find out the name of my dog?
Actually, my response is that this is not merely an improbable coincidence, but it actually is the way to make the system work. You must find the right house in need of repair to buy before you can expect to make any money when you sell.
Key Advantages of Fixer-upper Houses
The three great advantages of buying fix-up houses are:
1.) You buy them for much less than you would pay for
a normal house, so you spend less of your investment money to get in;
2.) Because the price is less, monthly mortgage payments are also lower than if you had bought a traditional house;
3.) After the repairs are completed, the house automatically increases in value, and is valued the same as other houses in the neighborhood. This is a faster and more certain way to add value, rather than having to wait for housing prices to appreciate.
Learn to Make Repairs
Another key to making the serial home buyer/seller approach work is to make your own house repairs, as far a possible, instead of paying someone else to do it.
Never miss an opportunity to do your own repair work. Think of it as part of your educational process. You lose two ways when you hire someone to do your work. First, you lose the chance of a free education, and second you lose the money that you would have saved by doing it yourself. It may take you four hours to change an electrical receptacle or fix a toilet that won’t flush, something a professional could do in minutes. Don’t be concerned, in the long run you have learned a skill to be used for the rest of your life.
To learn more about making repairs, read “So You Want to Learn the Zen of Making House Repairs” that I posted at Amazon.com.
Where you find these properties in need of repair? Tune in to the next blog installment.
Serial Home Buyer/Seller Tax Exemption, Part 5 – sources of fix-up houses
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Want to teach your kids how to manage money? Do you want them to share your desire to develop income independence?
In the post “Do As I Do” at Overcoming Real Estate Obstacles, Carol says, “You’ll never be financially secure working for someone else. Your job, as much as you love it, is always at risk for many different reasons. Therefore, you need to make your job a bit less important. The only way to do this is to start a business of your own. You can begin small, while you’re still working. That way, you will be prepared if your fired, laid off, or the company you work for shuts down.”
And she says that the way that our kids learn about financial realities is by setting a good example. If they watch us do it, they are far ahead of the pack. I encourage you to read this excellent article.
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This of Part 2 of my reponse to a question asking, “My background is not in the building trades. How do I learn the required skills to start a business in repairing houses and renting them out?”
How to learn the appropriate skills:
3. Draw on the Past
After I got more involved in the repair work of our houses, I thought back about how my father had taught me a lot by example. I recall seeing him construct screened-in porches on various houses that we had lived in. I was too young to help out much at the time, or to appreciate what he was doing, but looking back I realize that it required a strong desire to learn the basic principals, and a sense of self-confidence to build it. He had no formal training in construction, and didn’t have reference books like I do, but he learned by observing other porches that had been built in the neighborhood.
I also have a friend who has made a career out of living frugally. He does virtually all of his own house repair and car repair work. If he gets stuck, he goes to the library and finds books to help him. It helps that he has a background in teaching vocational eduction. We have helped each other with house repair projects over the years, and he is a source of practical advice when I need help.
You too may have family members, or friends, that you can draw insight and inspiration from when it comes to making repairs.
4.Create a House Repair Library
I like to scour the fix-up book areas at used book stores for good buys. I buy a book as soon as I see it if I know that it has valuable information. In the past, I have waited to purchase the book only to return later and find that the book I had wanted was gone. The price you pay will literally be a drop in the bucket compared to the money you will save. I have books on almost every possible repair topic, including electrical wiring, plumbing, flooring, you name it. Some books that offer information on a wide variety of repairs, such as Reader’ Digest “Fix-it Yourself Manual” and Better Home and Gardens Complete Guide to Home Repair,” are also good to have. See my earlier blog for more infomation on recommended repair books.
When a book is not enough, I can usually get good advice on specific jobs at hardware stores, like Ace Hardware. And, you can sometimes get advice on difficult repairs by doing a Google search.
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