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This page isn't about how to buy real estate or repair drywall. This is about the most common mistake people make when buying a fixer-upper house to sell for a profit, and how to avoid it. It is about the right approach. Details of real estate negotiating techniques, and how to analyze the profit-efficiency of various repairs and improvements can be found in many good books in any bookstore.
Many people buy a house to fix and sell like this: They see a house that looks cheap and in need of repair; they buy it; they start spending money fixing it; then they add some amount (say $10,000) that is in their head onto their costs and put the house up for sale for this price. This is so wrong.
Do you buy a house according to what the seller has into it? Of course not. You buy according to what other similar houses are selling for. So if you have $110,000 into this fixer-upper and other similar homes are selling for $105,000, how much can you sell it for? It doesn't have anything to do with what you have spent or what your profit target is, does it?
The right way is to start with the end in mind. How much will the house sell for when it is ready? Use your own knowledge of prices in the area or get help. Ask a real estate appraiser or agent how they determine value. Look at what similar houses have sold for, not what they are listed for.
Never mind the current value of the house. You need to know the value the house will have when you have finished fixing it up and listed it for sale. And by value I mean only what it is likely to sell for, because this is the only meaningful definition of value when dealing with real estate.
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Now: Calculate all costs: the costs of buying, including closing, fees, etc.; the cost of repairs; carrying costs, including interest on any loans used to buy the house, property taxes, insurance; selling costs , including commission, fees, title policy, etc. Subtract all costs from the expected sales price. Then, from this figure, subtract the profit you think makes it all worth the effort.
This gives you the absolute highest price you can pay for the house. Walk away if you can't get it for this price or less. Of course you should offer several thousand less to give yourself negotiating room. An example:
Eventual sales price: $98,000
All costs of buying: $2,000
Repairs and improvements (Get quotes before you offer) : $8,000
Interest, taxes, insurance, utilities, and other costs during
the estimated four months you'll own the property: $2500
Sales commission: $6,500
Other closing costs (fees, document preparation, transfer taxes,
title policy, etc.): $1000
Unexpected costs (always expect these): $2000
Profit you deserve: $10,000
The total expenses and profit ($32,000) subtracted from the expected sales price ($98,000) leaves $66,000. This is the absolute most you can pay for this house if you want to have a safe real estate investment. So you offer $61,000, say, and walk away if you and the seller can't settle on something under $66,000.
Always start at the end (the eventual sales price) and work your way back. This is the right way to buy fixer-upper real estate.
Use the link here to find lots of great information on how to find cheap homes.
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