Real Estate 14
A newspaper with issues
WEDNESDAY, DECEMBER 13, 2006
Knowing the profit potential for fixer-uppers DAYS ON THE MARKET BY JODI SUMMERS
Lots of people are looking for properties with short-term profit potential. They have this dream of finding a mildly run down property (”cosmetic fixer,” as it’s often called), rehabbing the kitchen and bath, putting in new floors, painting and, voila — a $100,000 profit! “Most homebuyers want to purchase a brand-new or resale house in near-perfect move-in condition,” notes renowned real estate columnist Bob Bruss. “That’s how to profitably sell houses, but not the profitable way to buy them.” That would be a fixer-upper with profit potential. A FIXER-UPPER WITH ‘PROFIT POTENTIAL’
Those properties, affectionately known as “fixers,” can be defined as a property below neighborhood standards. Some of these properties need foundation work and other serious renovation, but the majority of fixers with profit potential are not so deteriorated that they need to be torn down. The smart real estate speculator’s favorite type of property is the cosmetic fixer. As Bruss explains, “The most profitable fix-up homes only need a thorough cleaning, minor repairs, and fresh coat of interior and exterior paint. New carpets, fresh landscaping and new light fixtures are additional examples of profitable fix-up work that will bring the residence up to neighborhood standards.” A cosmetic fixer has “the right things wrong” — fix-up dollars will add more market value than the cost of the project. Just check out the most recent Cost vs. Value Report from Remodeling magazine — update the kitchen and master suite, add another bathroom, put in a deck ... landscape — those are some of the most prof-
itable remodels. But, simply put, fresh paint, inside and outside, can be the most profitable home improvement you can make. Unprofitable fix-up houses need structural work, which adds little or no market value. Homebuyers expect houses with roofs that don’t leak — so there’s no added value in replacing the roof. If possible, avoid properties needing expensive foundation repairs, roofing, updated wiring or new plumbing — unless they are a great deal. Keep in mind that this necessary work doesn’t show, so it doesn’t add market value. If you’re buying in a downscale neighborhood to make your investment more affordable, make sure it’s one of the areas that are forecast to improve, and confirm the economic and governmental propositions that will support these changes. Remember how Venice was 10 years ago? WHEN FIXERS COME TO MARKET
Fixer properties become available in several ways: 1. Distressed properties such as foreclosures. 2. The seller doesn’t choose or can’t afford to fix up. These homes are often advertised for sale “as is” — meaning the seller will disclose all known defects in the home, but will not pay for any repairs. 3. Probate properties are when an heir inherited the property and wants a quick cash sale. These properties must go through the local probate court.
4. A “tired” property on a well-situated piece of land with an out-dated residence with good bones. These situations are when buyers willing to fix-up the property benefit most. INTERNAL REVENUE CODE 121
The vast majority of fix-up buyers purchase for the profit potential. Thanks to Internal Revenue Code 121, fix-up profits can be tax-free when the principal residence is sold. To earn up to $250,000 tax-free profits upon sale, the owner must have owned and used the property as their primary residence for two of the last five years before sale. “A married couple can qualify for up to $500,000 tax-free capital gains if both spouses meet the occupancy test, even if only one spouse’s name is on the title,” elaborates Bruss. “But they must file a joint income tax return in the year of the home sale.” You can fix and flip your primary residence every 24 months, without limit. This formula can be used on vacation and second homes that become your principal residence to meet the 24-month ownership and occupancy test. For details, please consult your tax adviser. Jodi Summers is Director of the Investment Division at Boardwalk Realty. E-mail her at jodis@boardwalkrealty.com, or call (310) 309-4219. Visit her Web sites at www.SoCalInvestmentRealEstate.com or www.santamonicalandmarks.com.
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It's your lucky day! Build units in sexy Venice. Currently a 1,729 sq.ft. 4+2 fixer duplex on a 6,447 sq.ft. lot zoned LARD1.5. Similar lots on Rennie Avenue have more units. Check with city on Development opportunities.
Jodi Summers * Boardwalk Realty
310.309.4219 *
jodis@boardwalkrealty.com
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