Why fixing houses may not be the best today

When prices are falling, it’s not worth fixing houses. In a previous post, I explained why I am raising rents and selling my rentals when they become vacant and cannot raise rents. The same is true for fixing up houses.

Because most of the houses I own are in “bubble” areas where prices increased very rapidly for 5 years prior to the current recession, prices are now falling 2-3% PER MONTH. Let’s say I buy a 1,500 square foot food “fixer” for $78,000 that needs about $20,000 and a month to fix before I offer it for sale.

At the time of purchase, the home would have had a total retail value of $129,900 when fixed up, but that figure will change over time. Once on the market, the repaired house would be competing for buyers with many other houses of comparable size and in similar neighborhoods, but at current prices that are about 3% less; we’ll say $125,000.

Now the fun begins. Today’s buyers are being trained to expect to buy at prices below comparable MLS. In bubble markets, more homes are sold through short sales, REO auctions, and foreclosures than through the MLS at “appraised” retail values. As a result, NO ONE seems willing to pay the listed price.

Suppose after 3 months I get an offer from a fully qualified buyer that I know will close. The only problem is that it costs $115,000. Closing is set for 60 days. After paying commissions, repair, and storage costs, I’ll get about $10,000. So far, six months have slipped through my fingers. If you were to sell two of these per year, you would be earning less than those who qualified for welfare payments.

What is the solution? My next post will have the answer.