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In my last post, I was examining the profitability of buying a home in need of fix-ups to illustrate how major repairs are not feasible in a falling market, unless a home can be bought at really low prices. In the illustration above, a house was bought for $75,000 and sold for $115,000 in six months at a meager profit. How could this be made more profitable?
First, I try to look at houses from the perspective of their cost per square foot, without assigning value to the land they sit on. If a home is for “repair,” I want to be able to sell it for $70,000 per square foot after all costs in a market where competing MLS homes are priced at $100,000. This means that a 1500 square foot house would have a net price of $105,000 for me. This ensures a quick sale and easy loan approval.
With that in mind, I don’t want to pay more than $40 per square foot to buy a house like this, and no more than $5 per square foot to fix it up. So, on a 1500 sq ft top to repair, that limits my cash purchase price to around $60,000 and my repair costs to around $7,500. Repair may include interior and exterior paint and patching, new entry door and hardware, a new garage door, upgraded bathroom fixtures, new kitchen sink and laminate countertops, new appliances, switches and wall plates, mini-blinds, and carpeting . The carpet would be last, but many of the other jobs could be done at the same time by different workers.
The repair would not include new kitchen cabinets, new roofs, extensive plumbing, new windows, or major electrical work. If I have all my ducks in a row, with available labor and materials and a set schedule, I would expect to be able to complete my fix in about a week to ten days, and have the house back on the market as the carpeting was being installed and completed the final items on the to-do list.
After being fixed up, this home will be a steal compared to other homes on the market and will sell much faster; maybe in a month. Figuring about 4 months to sell and close the house up on the outside, I would expect the fair market sales price to deteriorate around $10,000, if you were selling at retail, or $100 per square foot. But I’m selling for $70 per square foot, or $105,000 net after all costs. You should be able to get this price even when the market falls.
So what’s the problem if I’m going to end up with the same amount of money as in the previous post? First, I was able to shorten the time by a full month, or a 3% less drop in price. Second, I only paid $67,500 for the fixed up house and made about $37,500 in four months instead of six. If you could do this 3 times a year, you would make more than $100,000 instead of $20,000.
In the next post, I’ll explain how you could make more money without making any of the above repair premium offers.