Buy With the Right Things Wrong

July 2005

Recently we heard from a homeowner who purchased in December 2004. He spent three months fixing up the home and moved in during March 2005. He reports his home has substantially appreciated in market value, presumably due to the profitable improvements he made. It sounds like this buyer bought a profitable home with the right things wrong. You can accomplish the same result. What are "the r ight things wrong" with a house? If you want to profit from your home purchase by more than the current average 5 percent annual market value appreciation rate in most communities, you'll need to buy a less-than-perfect home. Here are some keys to unlocking a profitable home purchase:

1. Buy a sound, well-located home without major defects. Most home buyers aren't looking for major fix-up projects. But minor cosmetic repairs are the most profitable way to enhance a home's market value. Presuming a house is in a decent location and doesn't require major renovation, it is the perfect profit candidate. Paint is the most p r o f i t a b l e cosmetic improvement of all. Spending $1 for paint often produces $5 or more in increased market value. Other examples of profitable cosmetic improvements include new carpets, hardwood floor refinishing, fresh landscaping, new light fixtures and updated window coverings. Try to avoid buying a home that needs unprofitable structural improvements, such as a new roof or foundation repairs. For example, if a house needs a new roof, that is an unprofitable but necessary expenditure because it will be costly but add little or no market value. More examples are new plumbing or wiring updates, which are expensive but add zero market value.

2. Ask how much the seller paid for the home. This might seem like an irrelevant question for a home buyer to ask, but it is extremely important. If the seller has owned the home for many years, he or she probably paid a low purchase price compared to today's market value. That means the seller has lots of room to negotiate on price and terms, considering the condition of the residence. However, if the home seller purchased it recently for a price close to today's market value, that seller doesn't have much room to negotiate on the sales price.

3. Purchase below market value to compensate for the obvious need for repairs. Some naïve home sellers think their home, which needs cosmetic repairs, should sell for just as much as the similar home down the street that was recently sold in excellent condition. Most prospective buyers seek near-perfect homes, but the few buyers of fix-up homes must be rewarded in the form of a lower purchase price because they must fix up the house.

4. Buy from a highly motivated home seller. Closely related to the previous key to unlocking a profitable home purchase is determining why the seller is really selling. If the seller is just testing the market and isn't anxious to move, negotiating a bargain purchase price to compensate for "the right things wrong" can be very difficult. However, if the seller is highly motivated— for example, preparing to move to a retirement home, make a job transfer, or resolve a difficult family situation or economic problem such as a pending foreclosure—he or she is unlikely to hold out for the last dollar of profit.

5. Don't buy a home needing an extreme makeover. It takes weeks, sometimes months, to complete home projects. Pick your purchase wisely and don't spend more time or money than you have to on the changes needed to make the house profitable. The results of acquiring a house with "the right things wrong" can be extremely lucrative.

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