The 1997 Tax Act provides the incentive to Fix Up the fixer uppers and keeps $250,000 ($500,000 married) of profit TAX FREE!

The ideal candidate for a fixer upper is a house that can be purchased for 25% or more below the market value of comparable houses, which are in "move in" condition. Foreclosures are good candidates to locate your selection.

Location, Location, Location

A good fixer upper is in a good location. (Yes, the Location, Location, Location rule still applies). A good location has top quality schools, low crime rate, and no incurable defects (like next to a high traffic road, or railway, or electric tension wires etc.). While you can add items to your "good location" list like shopping convenience, proximity to worship and cultural and recreational activities, these additional preferences may be more subjective.

Structurally & Mechanically Sound

A good fixer upper should be structural and mechanically sound. A structural or mechanical problem can quickly become a money pit or lead to divorce court. Secondly, structural problems are more time consuming to fix, disrupt the household, and are almost always more expensive then originally anticipated. Third, structural and mechanical problems are usually beyond the capabilities of the average do it yourselfer. Most important, fixing a structural or mechanical problem only meets buyer's expectations; it does not add value because they can't see it.

Perhaps, if you are a contractor experienced in structural or mechanical repairs or have some unique insight, you may make an exception. For example, I was in contract for a house and hired an engineer to determine the cause of cracks in the brick veneer facing. The engineer drilled some holes and determined the house was built on a peat bog. His proposed solution would cost $60,000 to repair with no guarantee it would work. Further investigation with the town building department revealed the entire brick facing had fallen off the house two times before. Needless to say, I did not close the deal. However, the purchaser (a commercial fisherman) had an ingenious fix. He removed the brick and replaced it with siding. Since the siding was lighter and is able to move, no cracks appear. Sometimes common sense prevails. (Incidentally, I'm not sorry I didn't buy the house.)

Clean Up

The ideal fixer upper should only require cosmetic repairs and improvements. First and foremost is to clean. Everything everywhere. It may take a while but it only cost your labor and you will be able to see what is buried under all the scum. My first foreclosure took one week of solid cleaning. There were over 50 bags of clothes, left by the previous owner, given to the Salvation Army. There was spoiled food left on counters. There was soap scum on the sinks and bathtubs so you could not tell the color of the fixtures. Scrub the ceilings, walls floors. Clean the windows inside and out. Clean inside the cabinets and the garage and basement. I guarantee this simple task will make a world of difference. You won't get the "willeys" while living there and it will start to seem like home. You will also be able to tell what really needs to be done.

The clean up also must extend to the outside. Cut the grass; pull the weeds, mulch the beds remove any other debris. However, it is my recommendation, to watch the landscape through one season before you make any major changes (you may be surprised by what grows.) I almost cut down 5 Crepe Myrtles because they seemed poorly placed. Once I saw them in bloom, I decided to build a deck around them instead.

Interior Painting

Once you have done the cleaning, you are ready for paint. I love to buy houses that need paint! The biggest bang for the buck is paint. It can do wonders for a shabby exterior and interior. (I know, I've been painting both on a property for the last two years.) Paint and color can dramatically alter the appearance of every home.

On the interior make sure you paint the ceiling (it doesn't have to be white). If you have children and fingerprints, select a satin finish for the walls so they can be wiped clean. Consider painting or staining other ugly areas. Is the basement floor ugly concrete. A painted finish or painted design can perk the area up for less than a remnant piece of carpet. Is the garage full of oil stains? A coat of paint will make a prospective buyer imagine his new workshop. Do not skimp on quality of paint. Even if you are only going to be there two years, buy the best paint you can. Consult with a paint store expert for advise, like special primers etc. Also, keep in mind; if you are planning or re-selling in two years, it is best to stay neutral with the paint color scheme. Look at some design books, neutral doesn't have to mean white and off white.

Add Architecture Detail With Paint

Paint can also hide some flaws and create architecture in a plain home. For example, I had a peeling popcorn ceiling around a light fixture. To correct the problem would require wetting the ceiling and scrapping all the popcorn off. This is messy and creates a lot of dust. Second, it would need to be sanded smooth primed and repainted. I choose a simpler approach turning lemons into lemonade. I used a compass to draw a circle around the light fixture. I painted a design inside the circle to match the design on a collection of blue willow plates displayed in the room. I added some sculpy clay (look in craft stores) designs made to match the plates for texture and dimension. I now have a coordinated ceiling medallion for 3 hours of work. It probably would have taken more than a week to completely remove and repair the ceiling and I would still be dusting up the mess.

Paint Other Problem Surfaces

Consider "paint" finishes for other problem areas. I purchased a home with the ugliest pink bathroom fixtures. The layout and condition of the bathroom was fine. The ceramic tile in the bathroom was in perfect shape. (Incidentally, you can paint ceramic tile.) The simple solution was to replace the toilet and sink ($250) and have the bath tub professionally refinished in place ($250). Home Depot also sells the "epoxy" type finish to re-do bath fixtures. In short, I got a "new" bath for a fraction of the cost and headache of ripping out and remodeling the old bath ($5,000 to $10,000).

The same theory applies to kitchens. If the cabinets are sound (and the layout works) but the finish is objectionable, consider paint or stain. I spent 6 weeks painting kitchen cabinets (I also did the inside). The transformation was like a new clean kitchen. The cost was less than $100 (TSP, a chemical cleaner, sandpaper, primer and paint.) Additionally, the paint has held up for over two years and counting. To re-face the cabinets, would have cost over $6,000. To re model the kitchen would have cost a minimum of $20,000. You can also paint laminate counter tops. A little practice with faux finishes, you can create a granite, or marble counter top for pennies.

Exterior Painting

Before you complete the exterior painting identify any repairs. Correct any leaky gutters, apply fresh caulk and complete the proper prep work for the exterior. Rent a power washer to clean the exterior and let dry. If you have aluminum/vinyl siding, you may find you do not need to paint. The preparation for painting the exterior is 90% prep work and 10% painting. If you slap a new coat of paint over peeling paint, you better sell while it still looks good because it may peel before you finish the job.

Before you select colors for the exterior, drive through the neighborhood and determine the trend. You want your house to be outstanding yet blend in and fit with the neighborhood style. The architecture of the house will also influence how you paint it. If its a faded Victorian glory, then make it a super painted lady. Once it is done, it is very satisfying to see the results and watch the neighbors do a double take as they drive by.

Flooring

The next cosmetic improvement for your ideal fixer upper is the floors. Replacing the carpeting can be inexpensive. If you are planning to sell in two years, you do not have to install top of the line carpeting. However, try to select a neutral carpeting with wide appeal that will not show stains (especially if you have children). If you have one major traffic flow (hall, steps or front door) then buy a carpet which will stand up to the wear this area will receive.

If you discover hard wood floor under the old carpeting, consider refinishing the hard wood. Many buyers especially appreciate hard wood floors and the cost of refinishing the floor is less than new carpet. If the hard wood can not be refinished any more, consider painting it or even adding a design with paint or stain. (Caution: renting and using a floor sander is difficult and you can gauge and ruin the floor. Consider hiring a professional to sand the floor and apply the stain and finish your self to lower the cost.)

Repair Tiles

Finally, repair any broken or missing tiles. There has not been a house I've purchased where tile repair was not required. Luckily, each house had matching tile stored in the basement, shed or garage. Repairing tile is a job most people can do, the hardest part is using a grout saw to remove the old tile without cracking additional tiles.

Maintenance & Repair

Do not overlook performing the maintenance and repair required. Fix the toilet which rocks when you sit on it or continues to run after you flush it. Fix the leaky sink. Fix the loose door knobs. Make an initial list when you first move in of all the minor annoying things. Once you live with them for a while you tend to forget them. Once you decide to sell, they will jump up and bite you again.

Minor Updates

Consider making some minor updates. Replace kitchen knobs and pulls if the homes are dated or worn. Upgrade the light fixtures for a more contemporary look. Alternatively, if you have a period home, look for old fixtures to replace fixtures from a prior remodel. Change the faucets for a new look (period or contemporary). Sometimes the smallest detail can make a dramatic difference!

Landscaping

After a year and the change of seasons, upgrade the landscape. While sometimes a simple pruning is all a place needs, consider removing any overgrown foundation plants and replacing them with informal but inviting plantings. Re-seed any bare spots in the lawn. Consider adding or enhancing a focal point. A bird feeder, bird bath or piece of sculpture strategically placed can change the whole feel of an area. Drive through new model home communities for landscaping ideas and choice of plants. The front of the yard should have welcoming curb appeal while the back yard should have at least one inviting place to sit and enjoy the outdoors. Landscaping updates can be done very inexpensively with your own labor. Sometimes it is much more effective to remove more than what you place back in. The idea is to update the landscape without spending a lot of money. A few small evergreen bushes a handful of perennials and a smattering of annuals will do wonders for a tired neglected yard. Get a good gardening reference book to identify what exists in the yard and to determine the conditions (sun, drainage, hardiness) required for the plants you want to add.

Sweat Equity Into Tax Free Dollars

The cleaning, painting, small repairs, flooring and landscaping you do to the house do not cost very much. However, they add a great deal of sweat equity. To determine weather you should perform an improvement, use the 2 for 1 rule of thumb. Each dollar you spend to improve the property should increase the market value by at least two dollars.

What did the above work (and it is work) just earn us? We purchased the house for 25% below market. Market value in the neighborhood is $200,000 and our house was purchased for $150,000. We cleaned up the interior and exterior. We spent $5 for cleaner and bleach and four 8-hour days of our labor. The interior painting cost $300 for paint and supplies. The exterior cost $1,000 for paint and the rental of a power washer. We spent $1,000 to re-carpet the whole house using remnants. We repaired broken tiles using the tiles found in the house. The grout saw, adhesive, and grout cost $12. We spent $200 for supplies to make all the minor repairs. We spent $400 to upgrade cabinet pulls, faucets and light fixtures. We spent $200 for new plants and a week to dig out the old plants. We spent a total of $3,117 to make the repairs. We spent an average of 1-week end per month for two years finishing the work.

Our total cost is $153,117 and we can now sell the house for $220,500. ($200,000 plus 5% appreciation per year) On average homes in the U.S. have appreciated 5% in the last few years. Therefore, when we sell we have earned $67,383 tax free in two years. We get to keep all of it. There are no taxes to pay.

If your salary was $67,000 do you know how much in taxes you would have to pay? We have spent 384 hours (2 people for 1 weekend per month) of our time making these repairs. That's over $175 per hour.

Now it is time to use part of our profit for the down payment on our next house and start all over again. What an adventure! While it is a lot of work, it is also fun enjoyable and you don't have a boss to answer to.

Source: Foreclosure News of NJ, Inc
njpforeclosures.com

 

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