Fixer-Uppers and Making Money | Success is Not Guaranteed
Is the Fixer-Upper Life Right for You?
The TV show follows the adventures of hearty souls who purchase property for the sole intent of fixing it up and selling it as soon as possible. Sounds great, but readers need to be aware that flip this house is easier said than done. First, you need money. Not every bank has the expertise to successfully underwrite fixer upper loans and it generally a better bet to seek out a lender that has funded many of these loans.
Financing your fixer upper
Once you find your fixer upper you can pay cash or you can finance your house one of several ways.
1. Consider owner financing
The seller may be willing to hold the mortgage. Such financing is the fastest, cheapest, and easiest way to buy the fixer upper.
2. Apply for a mortgage loan
The lender will limit the loan amount of the mortgage loan to about 80% percent of the value of the property. You will have to come up with the money for improvements yourself.
3. Get a construction loan.
Construction Loan Application. A construction loan lender will appraise the value of the house with the improvements made. The lender will disburse funds for closing based on the purchase price and hold back the funds to be used for you to use for improvements. The lender will put that money in a construction loan fund and disburse it as the improvements are made.
Many people are enticed by the prospect of making money by repeatedly buying rundown homes, moving into them, fixing them up and reselling them for a profit. The strategy has become even more popular in recent years, thanks to homeowner-friendly changes in the capital gains portion of the federal income tax code. Given all the right circumstances, fixer-uppers can be a lucrative investment, but they're by no means a sure bet or a license to print money.
Do you have the knowledge required?
You will have to deal with sub contractors or do you the skills to make major improvements yourself? Most homeowners can paint a bedroom or install a new light fixture, but those chores are a distant cry from adding a second bathroom or remodeling an out-dated kitchen in your fixer-upper. Taking on these improvements without the necessary experience can lead to costly mistakes. Finally, if the home really only needs easy, inexpensive cosmetic repairs, are there enough value added for the fixer-upper project to be profitable?
What improvements are likely to add the most value?
As a general rule improvements that merely bring the home in line with expected minimum standards don't add much resale value. For example, new carpeting or painting dirty walls. If you spend money making the wrong improvements, you won't see much return on your investment. All houses in the neighborhood are in a range of values. Make sure that the improvements your make to your fixer upper take the sales price over the high end of the range, known as over improving.
Are market conditions in your favor?
Some markets are continuing to decline so you have to make sure you buy at the right price. If home values are depreciating in your market, your fixer-upper might be worth less than you paid for it even if you make wise improvements. The cost of carrying the mortgage for a few extra months will also eat into any profit or might even cause you to lose money.
Are you prepared to pack all your belongings, put your home on the market and move every few years? Moving is time-consuming and stressful, even when it's anticipated and welcome. Will your spouse cooperate with repeated packing and unpacking? How will your children cope with switching to a new school every few years? Will you be able to bond with your neighbors? How much will it cost to move your furniture and household goods?
Cost of Sale
Will transaction expenses such as Realtor fees, title policies, and other seller costs wipe out your profit? Even the considerable advantages of home ownership, it isn't always worth the transaction costs associated with buying a home for a short-term residency.
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