Seriously Flawed Properties
Investors may run across properties for sale which have severe problems that are expensive and time-consuming to remediate. Examples of these problems include:
- Pervasive mold infestation
- Extensive fire or water damage
- Cracked or buckling basement walls, indicating foundational weakness
- Outdated plumbing or electrical wiring
Only through careful calculation of what the repairs/upgrades will cost and consideration of the resources (financing, free or low-cost services of contractors, etc.) available to make the repairs/upgrades can investors determine whether it makes sense to buy seriously flawed property. On the one hand, an individual’s real estate investment plan may not be flexible enough to permit taking on such a risk. On the other hand, the remediation of serious problems will greatly increase the marketability of a property, making it a valuable asset in an investor’s portfolio.
Distressed Sellers, Foreclosures, and REOs
A property may have fallen into disrepair because its owner is in financial distress because of loss of employment, divorce, or illness. If a property is on the verge of foreclosure, its owner may be ready at a discount. If a property is in foreclosure, an investor may succeed in outbidding others for it at the sheriff’s sale. If a sheriff receives no third-party bids for a foreclosed property, the lender to which the property returns will be eager to get the non-performing “real estate owned” (REO) off its books.
Other properties may have buildings or homes that are brand-new or not quite finished, but the developer/builder has run out of funds to continue the project and – particular these days – cannot convince a bank to lend it more money. Moreover, if there are far fewer buyers for those properties than the developer/builder had anticipated; the desire to unload the properties quickly may lead to considerable concessions made to interested investors.
A Final Word of Caution
Stephen DiClemente, a real estate agent with Re/Max Tri County in Hamilton, New Jersey, notes that “most fixer-uppers are bought by investors, and most investors want to tie up as little of their own money as possible in the transaction.” Nonetheless, he adds, “With the current financial climate, banks are looking for a larger financial commitment from the investor.” This makes it crucial for buyers of fixer-uppers to “make sure that there is enough capital left after the purchase to complete the renovations,” Clemente says.
In addition, DiClemente cautions investors who plan to rent, rather than sell, fixer-upper residential properties after repairs, that “the competition for renters has increased” due to extensive foreclosures, job losses, and economic uncertainty. In fact, he notes that “a much larger percentage of homes on the market for sale are now dually listed as rentals.”
In short, investing in fixer-uppers is not an easy road to riches. Instead, it is a road full of potential pitfalls and uncertainty. But the careful investor who is ready to look at many ugly properties may find a true gem under layers of rust, grime, and red ink.