Are fixers in distressed areas a good investment?
Distressed properties or “fixer-uppers” can be found anywhere, even in more affluent neighborhoods. These properties are characterized as poorly maintained and subsequently command a lower market value than other houses in the neighborhood.Before making such a potentially expensive investment, we recommend that you seek out the least desirable house in the best neighborhood in your area; then make some calculations to determine if the potential costs to raise the fixer property’s value to its full potential market value are within your budget.
If you are a first-time buyer in the fixer category, it may be prudent to consider properties requiring only cosmetic fixes rather than run-down houses that need major structural or complex restoration.
Are there programs for fixer-uppers?
If you require financing to buy a "fixer-upper" and remodel it, consider the U.S. Department of Housing and Urban Development's Section 203(K) loan program, structured to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are ineligible.
A 203(K) loan is usually done as a combination loan to purchase and rehabilitate a "fixer-upper" property, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be executed as a rehabilitation-only loan. Investors no longer may participate—this program is no only for owner- occupants.
Owner-occupants are required to come up with only 3 to 5 percent for a down payment. HUD requires that a minimum of $5,000 be spent on improvements, and two appraisals are required. Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to cover expenses.
Are there any special tax breaks for historic rehab?
Qualified rehabilitated buildings and certified historic structures currently earn a 20 percent investment tax credit for qualified rehabilitation expenses. A historic structure is one listed in the National Register of Historic Places or so designated by an appropriate state or local historic district also certified by the government. The tax code does not allow deductions for the demolition or significant alternation of a historic structure.
Where are fixer-uppers found?
These distressed properties are found in most neighborhoods, even more affluent areas. Determining if a particular property is a worthwhile investment invariably requires some research. You’ll need to find out average property values in the area, as well as what the values for the most desirable houses in the area.
It may be best for buyers who take this route try to find a "cosmetic fixer"—a property that will be a relatively simple renovation project that can be completely refurbished with simple improvements like paint, wallpaper, new floor and window coverings, landscaping and new appliances. It’s a good idea to avoid houses that need major structural repairs.
A house with a suspiciously low price tag should be scrutinized very carefully. Your strategy for a investing in a fixer is to locate the least desirable house in the most desirable neighborhood, and then calculate if the expenses needed to bring the value of that property up to its full potential market value are within your reach
The U.S. Department of Veterans Affairs offers veterans property loan financing which can be used to buy a property, build a property, improve a property or to refinance an existing loan. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility.
Another program is the Federal Housing Administration's Title 1 FHA loan program.
What are some guidelines to follow when trying to find a contractor?
The first rule in hiring a contractor is to always checking him or her out prior to retaining them. If your state has a contractors licensing board, you can verify if there are any outstanding complaints against that contractor. You can also check your local Better Business Bureau to see if there are any complaints on file.
If no complaints have been filed, the contractor’s starting to look good, but keep investigating. Conduct interviews with the contractor candidates to find out what kind of worker's compensation insurance they carry, and be sure to get policy and insurance company phone numbers so you can verify the information.
Why is this important? Because if they are not covered, you could be liable for any work-related injury incurred during the project, so also make sure that the contractor has an umbrella general liability policy.
If they pass the insurance test, next check some of their references. And finally, don't let yourself be pressured into making a decision no matter how good a price you’re quoted or if you’re being told it’s hard to find an available contractor. A good contractor understands how personal these projects are for people, and he’ll want you to recommend him to your friends.
What kind of return can I expect on a remodeling project?
We recommend picking up a copy of Remodeling Magazine’s annual "Cost vs. Value Report'' to gain an accurate idea of what kind of return you can reasonably expect. Keep in mind that remodeling has many benefits: it improves the property’s livability and enhances “curb appeal” for buyers if you ever decide to sell.
Currently, you can count on the best remodeling returns from updated kitchens and bathrooms. Property-office additions and extra amenities in older properties are often popular and enhance potential returns. For example, you can reasonably expect to recoup 58 percent of the cost of adding a property office, according to the Cost vs. Value Report.
Property improvement resources
If you're planning on a property improvement project involving contracting help, "Ready,Set,Build: A (Click here) for a Consumer's Guide to Property Improvement Planning Contracts" offers clear directions to guide you through the process.
Discover valuable tips on selecting the right contractor, obtaining competitive bids and what language to look for in contracts. (Click here) for information on consumer rights, liens and financing.