With more distressed properties on the market, home rehabbers can find the perfect home to make anew
A diamond in the rough may not look like much at first, but polish it up and it can reveal a breathtaking sparkle. The same can be said of homes with tarnished appeal: Devote extra money and effort into rehabbing one, and you can either save or reap tens of thousands of dollars, depending on if you plan to occupy it or flip it.
Distressed home deals and “handyman specials” can be found in virtually any market, provided you know where to look. But a recent report by RealtyTrac ranked 15 cities in particular as the best locations (in order) for buying fixer-upper bargains. Those cities are Detroit; Chicago; Cleveland; St. Louis; Cincinnati; Philadelphia; Milwaukee; Phoenix; Toledo, Ohio; Birmingham, Ala.; Dayton, Ohio; Columbus, Ohio; Jacksonville, Fla.; Indianapolis; and Lansing, Mich.
They are chosen based on how many bank-owned homes built before 1960 – each with estimated values below $100,000 – were in supply within those markets
While homebuyers across the country are finding that inventory on available homes for sale is tightening, those willing to buy a fixer-upper could find an easier path to purchasing and recouping the investment if they’re prepared to renovate and do their homework, real estate experts say.
“Many people cannot see beyond the fact that a home is in disrepair. As a result, the average consumer might not recognize when a fixer-upper is worth rehabilitating,” says Brandon Davis, branch manager with Residential Finance, a national lender based in Columbus, Ohio. “However, by working with seasoned real estate agents, mortgage specialists and reputable contractors, homebuyers can tap into the expertise of these professionals to find a diamond in the rough.”
Wise shoppers should request a comparable market analysis from a real estate agent and do research themselves to determine the home’s value.
Davis says it’s not uncommon to find prospective homes at 50 to 60 percent of fair market value.
For example, a recent foreclosure in northern Ohio sold for $117,000. After investing approximately $80,000 to repair and update the house, the buyer sold it five months later for $219,000 – a reasonable turnaround time and profit for a depressed neighborhood.
However, just because values are low doesn’t mean that the flawed home you have your eye on is a good investment, says Jameson Tyler Drew, broker and president, Anubis Properties, Inc., Los Angeles.
“Buying [a fixer-upper] takes all sorts of research into local economic development, demographics and levels of personal and property crime,” he says. “These will all affect your return on investment whether you’re flipping or buying for the long-term.”
With the exception of Indianapolis, Dayton and Columbus, Drew says, he would think twice about purchasing properties in any of the 15 cities listed by RealtyTrac. “All those [other markets] have serious issues that must be addressed… These are a mixture of Sunbelt and Midwest towns that never truly had high property values to begin with, and most had huge residential expansions in the last 10 years that outpaced industrial and commercial capacity.”
In addition to researching the local market carefully, it’s also important to crunch the rehab numbers before committing to a fixer-upper, says Colby Sambrotto, CEO/founder of USRealty.com in New York City.
For instance, don’t forget about real estate transactional fees. “An agent’s traditional six percent commission can wipe out” any profit you hope to make, Sambrotto says. “Also, ask the lender you plan to purchase a distressed property from if it is putting up a new crop of foreclosures on the market in the same neighborhood.” If that’s the case, your newly rehabbed home will compete against newly listed foreclosures for buyers.
Katherine Gray, real estate professional with The Lars Group at Remax in Charlotte, N.C., says shoppers should look carefully for hidden expenses prior to claiming a fixer-upper, as well.
“It’s often easy to see that a house needs a new paint job, new doors, counters, hardware, et cetera. However, many buyers don’t look for things like a broken water heater and a bad foundation,” Gray says.
Drew says the best fixer-upper properties have sewer service, at least three bedrooms and one bath, a crack-free foundation, no evidence of mold, hardwood floors and a quality roof.