Wednesday, April 23, 2014
PLACERVILLE, CALIFORNIA
99 CENTS

The plight of the fixer-upper

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From page C3 | March 15, 2013 | Leave Comment

When shopping for a home, most folks look for the nicest home they can afford. They like lush landscaping, attractive flooring, granite counters and new kitchen appliances. It’s natural that they want the finest home they can afford. Selecting a home is a reflection of their lifestyle and personality and where they are going to spend lots of time with family and friends.

Home buying preferences have changed over the years. Looking back, most buyers in the 1970s wanted large homes with lots of rooms. Boxy two-story houses were popular. Buyers traded up from their modest-size, single-level home to the big two story. Now, many folks in big two-story homes are trading down to a single level. Another change has been buyer’s attitude regarding the size of a home. It used to be “the larger the better.” Size mattered. Folks would move miles away from their job in order to afford a larger home. The size of the home mattered more than its qualities. That’s changing. With family size shrinking and the cost to maintain a large home increasing, more folks today are thinking quality trumps quantity.

When I was first licensed, one of the most popular listings an agent could have was the “fixer-upper.” When we advertised a home as a “fixer” the telephone would ring off the hook. Telephone ringing has been replaced with digital chimes, tones and music and there are very few “fixer-uppers.” So what’s up with that?

A fixer is a house that needs fixing. The degree of work required is in the eye of the beholder. The house may only need some cosmetic repairs: carpet, paint, landscaping, kitchen counter tops, new appliances etc. or there could be some major ticket issues like HVAC system, new well or septic or roof. Structural issues are the most costly to correct and might include decks, foundation and flooring. Generally, if a home has issues that are easily recognized more problems will surface later.

Prior to placing their home on the market, most sellers will spend the up-front money to make any necessary repairs. That’s usually a good investment and they want to avoid the deep price discounting and stigma of being classified as a fixer. Homes in good condition simply sell at higher prices.

There are exceptions. Most banks will not do major repairs to a property, since they usually run over projected budgets and often reveal additional problems that may expose the lender to after-sale liability. Lenders are normally exempt from disclosing property defects on their REOs unless they have prior knowledge. When they “open the can of worms” they may inadvertently create numerous new problems while trying to solve one.

Estate and probate sales are typically another exception. Often the estate does not have the money, time or interest in making necessary repairs. When multiple parties and their interest are involved in the decision-making process the less likely anything will get decided.

The price is the attraction in buying a fixer. In theory, a fixer is priced “substantially” below what the market value of the home would be if the home was fixed up. The lower price would then compensate a buyer for the material and labor necessary for the repairs. When completed, the buyer would have increased equity.

The challenge is finding a fixer that is correctly priced. Most sellers and their agents underestimate the costs of the required repairs. Agents by nature are optimists and often minimize the work required. My experience is to expect the worse when the listing agent’s comments read: “needs TLC” or “bring your imagination.” Sellers may often have an emotional attachment to the home regardless of its condition and are reluctant to leave any money on the table.

Fixers are attractive to three groups of buyers. Buying a fixer in a low-inventory market may be a good option for first-time homebuyers. The lower price may allow a buyer to purchase a larger home in a better location. Long-term investors purchase fixers (converting them into rentals) and flippers look for cosmetic fixers that can quickly be spruced up and turned into a tidy profit.

There are currently 15 listings in our county that the listing agent has classified as a fixer. Here is what they have to say about the condition of the listings: “Needs some attention” “Some imagination and elbow grease required” “cash only” “HVAC no longer connected” “So much potential” “No permits” “Little TLC required” “Handyman Special” “Do not go up front stairs or on back deck.”

The biggest obstacle in buying a fixer is financing. Banks and their appraisers are more critical of a property’s conditions than in the past and will decline a loan if the property doesn’t meet certain standards. About half of fixer sales sell for cash to investors or flippers. The other half that are owner occupied are financed by either a FHA 203 (k) or FHA Streamline 203 (k). Theses federally backed loans allow buyers to roll the cost of necessary fixes into their new mortgage. The FHA streamline is a simplified version of the old 203 (k) but is limited to $35,000 in repairs.

Buying a fixer has additional risks. It should not be attempted unless accompanied by experienced agents and loan professionals. The rewards, however, can be substantial.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached at kencalhoon.com.

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