12 Jul 2013
Purchasing a fixer-upper can be a highly profitable endeavour, providing that a few golden rules are adhered to.
This is according to Adrian Goslett, CEO of RE/MAX of Southern Africa, who says as with all property investments, buyers need to be sure that they are well versed and have completed the necessary groundwork before signing on the bottom line. "This is particularly true when investing in houses that require vast amounts of renovation. Knowing what to buy and what to walk away from is a key element to success with this kind of property purchase.”
He says there are a couple of reasons why certain investors specifically opt for homes that are in need of attention. Many buy fixer-uppers to turn a profit by selling them at a later stage. The fact that there is less competition in the market for these kinds of homes means that they generally sell for lower prices than most of the homes in the area. Another advantage is their potential for return on investment - especially if they were bought at a good price.
Goslett says that making the correct decisions at the start of the investment will have a massive influence on the property’s investment potential. The ideal home could be disguised under a blanket of peeling paint and various other unsightly elements that would invariably turn buyers away. Fixer-upper investors will need to see past the property’s outward appearance and envision the home’s true potential.
Goslett provides some dos and don’ts for investors looking for the perfect fixer-upper:
1. Location is vital, always
This is the number one rule when it comes to any property purchase, says Goslett. “Ask any property expert their advice about buying property and the first thing they are likely to say is: buy in the right area. This is simply because a property’s location determines so much of its value and appreciation potential.”
Buying a fixer-upper property in a good area means that the buyer has less chance of over-capitalising and thereby seeing little or no profit when they sell the property again, he explains. "The rule of thumb is to rather buy the worst house in the best area, than the best house is the worst area.”
He adds that from an investment perspective, homes that are in proximity to a range of amenities such as shopping centres, entertainment areas and good schools generally see a higher percentage of capital growth over the long term than those that aren’t.
2. Look at the property’s composition or type
Goslett says that certain types of properties are more sought-after in certain areas, depending on the demographic of buyers in that region. For example, family buyers will be looking for larger freestanding homes, while a young executive would opt for a lock-up-and go sectional title unit.
He says if the majority of homes sold in a region are sectional title units, it would make sense for an investor to purchase this kind of property. "Demand will generally drive the property prices in an area, so if a particular type of property is in high demand, it is that type of property that the buyer should choose.”
3. Consider the home’s design
Moving walls or changing the design of a home so that it flows better can be a difficult and very costly exercise. This is why it is important that the shell of the home is designed well and laid out correctly.
When it comes to the design, it is vital that the layout of the home is practical and flows well from one area to the next, says Goslett. "Often when areas or rooms of a home have been added at a later stage there can be a disconnection in the home’s layout if it has not been properly thought out."
In some instances it is better for investors to walk away than to try to correct bad design, he says.
4. Look at the home’s overall condition
Certain renovations are manageable, however, if there are too many defects or possible structural damages, the home may be more of a money-trap than a good investment option.
“Ideally the home should be in a liveable state for it to be considered a viable option,” says Goslett. “Aesthetic improvements are one thing, but major changes to the home’s structure or foundation are completely another. These kinds of properties will only eat away at possible future returns on investment instead of making them.”
He notes that other potentially costly renovations or fixes to be wary of are:
With any investment it is always better to have as much information as possible to be able to make an informed decision that will pay off in the long run, says Goslett - and for this reason it is advisable for any fixer-upper investor to call on the expertise of a professional home inspector if they are unsure or would like to make certain that a home is structurally sound.
"It is far better to find out what the renovation investment will cost upfront, rather than after it has been purchased,” says Goslett.
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