Types of Fixer-Upper Properties
Variety of Distressed Real Estate Available for the Investor
Jan 26, 2009
Investors may be interested in property that has one or more serious defects – such as foundational, asbestos, or mold problems – that has many superficial defects (chipped paint, old windows, etc.), or that has a mix of serious and superficial problems.
Regardless of the type of distressed property involved, investors need to understand how to enhance the value of a fixer-upper by bringing it out of distressed status and making it attractive to buyers or renters.
Cosmetic Flaws and Return on Investment
Some properties suffer from only superficial problems. In residential and commercial buildings, changing the carpets, washing and painting the walls, and disinfecting and cleaning kitchens and bathrooms may be all that is needed. Outside, overgrown weeds and vines may need to be cut down or destroyed, grass may need to be mowed, and fencing may have to be replaced. The material for correcting these types of problems is not expensive, and investors may be able to do some of the work themselves.
Nonetheless, the easier the flaws are to correct, the smaller the investor’s profit is likely to be. In other words, a house that simply needs a coat of paint will likely mean a significantly smaller return on investment than a house that needs a new roof or heating system. Generally speaking, the more trouble an investor is willing take on, the greater the value that the investor will restor to a property.
Outdated Design
A property loses market appeal when the design and style of a building on it has become outmoded due to changing tastes, needs, and environmental considerations. In a house, for example, the cabinets, lighting, and layout of the kitchen or the tile, tub, and toilet in the bathroom may be decades behind consumer tastes. Outdated systems and appliances in a building also reduce the value of a property; an old electrical system may not support modern refrigerators, dishwashers, digital televisions, and personal computers.
Particularly in a stagnant real estate market, the average buyer will not bother with property that the times have left behind. On the other hand, the knowledgeable investor knows that there is a gem beneath that dated look.
Although a property with outmoded design or features may present an opportunity to buy low and sell high after some updates, the location of the property is always a key consideration. No matter how modern and attractive a fixer-upper becomes, it will not rent or sell if it is surrounded by other distressed properties. If the surrounding properties are in good condition and their value reflects this, an investor can feel confident that updating an outmoded property will raise its value.
Due Diligence Always Applies
There are many other types of distressed properties but, in any case, buying a fixer-upper is not an excuse for investors to ignore their due diligence responsibilities. The way for investors to control risk and improve their chance of success is to understand the characteristics, past performance, and potential of a property. In other words, real estate investors must know what they are buying.
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