One way to make money in real estate is to buy a property that no one else wants and turn it into a property that’s in high demand. Although the plan is simple, finding the right property in the right location and then buying it at the right price takes time, patience and expertise.
Finding a property can be a real challenge, particularly if you’re looking in a market that’s low on inventory. When the listing inventory is low, and buyer demand is high, you can find yourself competing even for a run-down fixer-upper.
The combination of a low asking price and perceived potential is a big draw. You need to guard against paying too much in this situation.
Years ago, a developer bought a property that was sold to settle the estate of the deceased owner. The house was in a wonderful location and had a spectacular view, but it needed a lot of work. The developer ended up in competition with another buyer and paid way over the asking price.
He put the property back on the market a year later after he’d completed the renovations. During that time, the market changed from a seller’s to a buyer’s market. The developer had trouble selling the property. After calculating the money invested and the cost of carrying the property, the developer actually lost money.
Market conditions have a big effect on how much money you’ll make on a fixer project. The ideal time to buy is at the end of a down cycle in the market, when there are few buyers and a lot of listings. This is when you might actually find a good deal. If the market turns upward while you’re renovating the property, you’ll realize appreciation in addition to the added value you create through renovations.
Financing a fixer-upper can be a challenge. If the deferred maintenance is obvious, a lender might not be willing to lend unless some of the problems are corrected before the loan is funded.