The single most cost-effective investment you can make to increase the value of your house is to buy a roll or two of plastic trash bags. Stuff them with junk outside the house; everything from beer cans to raked leaves.

Nothing could be more common-sense than cleaning up the yard and exterior, right?

“You’d be surprised at how many people don’t recognize the importance of doing these kinds of things,” say real estate investors in Michigan who specialise in buying dilapidated houses, fixing them up and selling them for a profit. Their advice: When renovating a house or preparing it for sale, spend money on things a buyer can see.

Any successful investor is adept at spotting hidden value, buying low and selling high. That’s what investors do when scouting properties, generally houses 20 to 70 years old. “One of the things that we like when we drive up to a house is what we refer to as high ‘Yikes!’ appeal,” they say. They define “yikes appeal” as the state of a house in which a normal person would drive up, say, “Yikes!” and keep on driving.

A house with high “Yikes!” appeal has weeds, a boat parked in the front yard and an old car transmission on the side of the house, nestled amid beer cans. A rain gutter hangs down. Overgrown shrubs obscure the front windows, creating a dreary interior. People actually try to sell their homes in such condition, creating opportunities for bargain-hunters. Linda has ideas and knows which homes out there would be suitable for this wonderful way to make cash.

• The First Step >
• What to Look For in a Location >
• Getting the Best Price >
• An Opportunity to Make Money >
• How Much to Spend on the Fix Up >
• You’re Finished, Now What? >

Have Fun and Make Money:

One of the most profitable ways to get into the Michigan real estate market is to buy a fixer upper property. This can mean anything from a total dump that borders on “tear down” or an older home in original condition that just needs freshening up. You can be a first time buyer stretching to get into a good neighborhood, or a seasoned investor looking to add to your early-retirement portfolio. Either way, I’ve had dozens of clients make the leap into the fixer upper business. Some have done it once, moved into the house and been quite satisfied with the result. Others have gotten bitten by the bug (literally in some cases, depending on the condition of the house) and continue to refinance and buy one every few years, adding to real estate portfolios worth into the millions. Homes that need work of any kind can be a great investment in Michigan, providing you’re careful, do your homework, plan carefully, and do a good job. The following information is intended to help you with both your decision whether or not to jump into the fixer upper world, and also what to do if you feel this is the thing for you. There are whole books written on this subject and this is only intended as an overview into what can be a very involved process.

The First Step:

If you’re brand new to the fixer upper business, I have two words for you: be careful. It’s easy to make mistakes, either by under-improving the house and turning no profit, or over-building for the neighborhood and going “upside down”, spending more on the home than the home is now worth on the open market. These pitfalls can be avoided. While there are no guaranteed returns on any speculative investment, if you’re careful and watch your costs, you can not only profit handsomely and quickly build a seven figure net worth, you can do it all tax free. I’ve been involved with fixers since I bought my first dump in 1965 and got bit by many bugs myself. But just know: embarking on a real estate project of any kind is a process, not an event, involving many hours of consultation, brainstorming, creativity and good old fashioned knowhow. Even if you’re an experienced builder, the first step in your process should be to speak with an agent specializing in fixers to start the process. No, you don’t have to choose me. There are a handful of good agents in Michigan that know fixer uppers as well as I do, all of whom would do a good job for you. What I can offer over most of them is a genuine love of the game. I enjoy nothing more than helping a client turn something nobody wants into something everybody wants. It’s not all about profiting from sales commissions either. In fact, it’s probably a break even for me if I were to add up the hours I spend at the house before, during and after the project is done and one of the reasons many agents stay away from fixers. Also, as you’ll see once you read on, I usually suggest you rent or move into your fixer rather than sell it. Quite often, that can work out great for you.

The sign of a good fixer: Gas masks have to be worn while showing the house. I once showed a home to hundreds of potential buyers who all walked out immediately due to the musty smell. After I showed it to my client, he bought this older Tudor for $325,000 which, as always, was more than he wanted to spend. After some good planning and careful budgeting, four months later, it was worth $500,000.

What to Look For in a Location

You’d think that location was the most important component when choosing your fixer upper. It’s not. Certainly, it’s something to consider, but remember that the best ‘A’ locations come with ‘A’ prices. I once had a client buy a fixer that was right on a busy street, and he made over $200,000 after a year’s work, tax free. The reason? When he bought it, the price was cheap, certainly a reflection of the “bad” location. But he wisely planted some mature trees and installed a nice big fountain to create ambient noise to block out a lot of the sound. And when he was finished with his remodel, he still had the cheapest fixed up house in the area so it sold right away. So yes, be careful with your location choice, but also be price conscious and don’t turn your back on a good possibility just because it’s in a “B” or “C” location.

Never Buy a Fixer in an Area You Wouldn’t Live in Yourself.

What locations work the best? It’s too involved to answer here, but in a nutshell, if you wouldn’t live there, don’t buy it. If the market changes unexpectedly or your living situation changes, you may have to live there. There’s nothing wrong with designing your project with an eye for your own taste, provided it’s in keeping with the market.

Never Buy Any Home More Than 15 Minutes From Where You Live.

Sounds simple, I know, but I strongly advise you against buying in a “much cheaper area” two hours away, or up in Oregon. This investment isn’t a mutual fund that you put money into, then just ignore. You’ll not only want to manage your fix-up project, but you’ll want to keep an eye on it if you rent it (more on that later). If you’re putting thousands of dollars into time on the road and gas for your car, you’re eating away at your profits.

Home Depot, Michigan
Never Buy Any Home More Than 15 Minutes From a Home Depot.

Of course, it could be any major hardware store, but you’ll be amazed at how many times you go there during your fix up and how many times you’ll go during the life of your rental. It’s all about your valuable time.

Buy a Special Property.

If you’re in a condo building, buy the top floor end unit that’s in the worst condition. If you’re on a hillside, buy the worst looking house with the best view, or a long private driveway. Buy a house with the potential to have some level land. People love to have a view home with a small lawn. Buy the house with the biggest level yard in the area, the worst house in a great neighborhood or the cheapest home in the whole town. Either way, give yourself something to brag about when you tell your friends what you bought. Your buyers will do the same thing when they buy the house from you.

Write the Ad for the “After” Picture.

When you’ve decided on a potential home, make a mental note of what a magazine ad may read like after you’ve completed your project. “Gorgeous, newly remodeled four bedroom, two bath home on a sunny, level lot at the end of a cul de sac. Fully fenced yard, close to shopping, schools and downtown. Looks like a new home. Priced to sell at a bargain.” Sound enticing? It does to me and hopefully it will to your buyer.

The Least Expensive Home in the Neighborhood.

This is an old concept and certainly not mine, but it does work. You may not find the absolute cheapest house in the area, but you can get pretty close. A good rule of thumb is to do this: after you find a house you’re interested in, stand in the middle of the street and — wait, first check to make sure no cars are coming – then, stand in the middle of the street and do a slow, full turn around. If most of the houses you can see are in better shape than yours, you’ve got a contender. Also, what are the yards like and what kind of cars are in the driveways around you? Are the lawns pretty well kept and are the cars of a recent vintage? Or are the weeds overgrown and are there trucks missing their engines up on racks? Pretty simple, but you’d be surprised at how many people don’t open their eyes and look around them.

Ironically, this is exactly what many buyers still look for, though without the avocado green appliances and orange shag carpet. This is exactly what you should look for in a fixer. Find yourself an old Rancher in tired condition. Fix it up and rent it. You’ll be on your way to making a small fortune (or a large one) in Michigan. Try for the one story homes if you can, (but don’t shy away from the two-story models). Homes on one floor will appreciate more in the future as the Baby Boomers age and don’t want to climb steps. That segment of the population turned fifty-seven in 2003, the first year of the government’s retirement guideline. I also predict that level land will become more and more valuable in the future, so find a beater house with some level land or a place to create some yard of any kind.

Good Bones.

“Good bones”. It’s a well-worn phrase that means the house is basically solid, including a decent floor plan, straight walls, not a lot of dry rot or termite work and a foundation without any human remains underneath. It may be the ugliest house in the world with broken windows and such a bad smell you need gas masks to go inside. As long as the basics are in good shape, it could be an easy fixer for you. As a rule, a fixer should take you from three to twelve months to fix up and then either rent or resell. Any less than that and it probably didn’t need enough work. Any more than that and it probably needed too much. You’ll find most of the Ranchers have good bones and make for great fixers.

Getting the Best Price

Obviously, every seller wants the best price for their house, fixer upper or not, just as you’re going to want to get the highest and best price once it comes time to sell. But one of the biggest mistakes buyers often make is being too price conscious. If they can’t buy the house at “a bargain”, they pass, only to see someone else pay fair market value and go on to make a nice profit after doing their fix up. Let’s face it, the days of the “good deals” are in the past, literally. I’ve watched in sad dismay as talented fix up buyers or good builders refuse to make an offer on a well-located fixer simply because they “remember when they could have bought that house for a great price just two years ago”. And I recently heard of a talented builder who wrestled with going forward on a house over just $1,500 on a Counter Offer. He dragged his feet, hoping the seller would bend. The next day, he ended up losing the house to another builder who paid $40,000 more, fixed it up and made a profit of $175,000. Like every buyer I’ve seen since I’ve been in the business, the builder paid more than he wanted to, but he had a good agent and had confidence in his abilities and the market. So if you feel like you’re not getting a good price on the home you’re looking at, be assured that everybody feels that way. In fact, when I look back on the hundreds of homes I’ve helped people buy, not one of them has ever felt like they got a good deal at the time they bought it. Of course, after a few months they start feeling a little better. After six months or a year, they feel like they got a great deal. Check out the average selling price chart for Oakland County.

An Opportunity to Make Money

Folks, I got news for you. Real estate is likely to keep going down and then up in Oakland County. In fact, the average home has never gone down in value until now. We have no more available land. Now, I’m no economist and I’m not that good at math, but I’d say it’s a pretty safe bet that our real estate is going to continue to go down and then back up. As more people discover the quality of life we have with great schools, low crime and no real traffic, they will realize that there has never been a better time to buy homes in Oakland County than now! This is for the average home, mind you, but I suggest you stick with the average homes for your fixer upper. So while it might be painful to “pay these outrageous prices”, if you don’t, someone else will and you’ll just be paying more next year. What you’re buying with a fixer upper is an opportunity to make money. How much you make depends on the job you do. But in Michigan, it’s generally not a question of “if”, but “how much”. If you’re careful and watch what you spend, you can do pretty well.

How Much to Spend on the Fix Up

This is the hundred thousand dollar question. Be smart with your budget, and it could add $100,000 to your profit. You’ve already decided to buy a special piece of property with good bones in a good location and you’ve already committed to a price. Now what?

Plan the Work, Work the Plan.

I’ve been around construction most of my life, so I’m the first one to admit that plans often change, with or without architectural drawings. You discover that the low ceiling in the kitchen was an old drop-down and you decide to raise it two feet. You enclose that rear porch after you see how hot the summer sun is back there, or you pop in skylights at the last minute to brighten that dark hallway. Either way, you need a plan of some kind to start with, if only to determine your budget. When escrow closes at 2:00, you should have a dumpster already on the way and be ready to start your project. Try to have a general plan ready, consulting as many professionals as you need in order to stay organized. Hit it hard, six days a week and be nice to the neighbors. Your project will run smoother and you’ll make money.

Make Two Bucks on the Dollar.

This is another old phrase in terms of investment dollars spent on fixer uppers and one that is readily supported in Michigan, though it’s really a generalization or hybrid of many different returns on various phases of your development. For example, if you don’t know it already, paint, flooring and landscaping return you about 300% on your money, all things you can buy at the Home Depot. If you spend $10,000 on any of those, your house will usually go up around $30,000 in value. I love those returns and suggest you really go for it in each department: do a great paint job, put new flooring in every single room and whatever your landscaping budget is, triple it. But while your returns will be great, it’s not really worth your time to do just those three things and try for a relatively tiny profit after going through the buying and selling process. You have to do much more, which is okay as your house probably needs it anyway. This is where your investment dollars need to be watched, as your 300% gain will quickly get diluted. New windows may only get you a 50% return, but you really can’t live without them in Marin. Plus, window costs have come down so much, it’s really worth it, even if you get them from Home Cheapo. New plumbing and wiring or anything else hidden behind the walls may get you only 25% on your money. Insulation may get you a 0% return, but it’s a necessity in homes these days and your buyers (or the City Inspectors) may require it. The idea is that after you’re finished, all returns balance out to roughly 100% or $200,000 for every $100,000 you put in.

You can see that you don’t really make 100% on all your money, just on your fix up costs. You’ve risked nearly $300,000 after your down payment, carrying and fix up costs and made $150,000 on top of that, or only 50%, but you had to work for that. This isn’t some hot stock you got a tip on. You worked for this money. And while this is only a scenario and you could certainly do better or worse, it’s a guide as to what is possible in Oakland County, and most importantly, it should be tax free. If you don’t have all the necessary capital yourself, it’s highly likely you’ll find a willing investor to help you with some or all of the money. It’s not unheard of to have an investor get the original financing and provide the down payment, while you provide all the sweat and the capital to fix it up. I like this scenario, if only because you can defer much of your fix up costs, using the “six month no payments” credit cards at places like Home Depot. Don’t laugh. You just have to remember to pay off the balance at the end of six months (not a day longer) or they whack you with back interest. Another idea is to apply for house charge accounts at your local lumber yard. Buy your materials at the beginning of the month. A month later, you’ll get the bill, which isn’t due for another month. On the last day, pay your lumber bill with a credit card. A month later you’ll get that bill, which — you guessed it — isn’t due for another month after that. Pay that bill on the last day and you’ve got one, two… up to five months of free financing. Just keep your payments current and your relationships at the lumber yard intact. You’ll need great credit and larger account credit lines once you break out on your own.

Squeeze Every Last Nickel.

This is where a long-time, local agent can be invaluable. Talk to him or her at length about what the top of the market is for your project’s area, then shoot for something just below that. You never want to be the most expensive home, but it’s okay to be darn close. Also, what are buyers looking for in that area? In Oakland County, where square footage is a premium, it’s not unusual to see garages converted into family rooms. That’s because the living space is more valuable than the car space. If you have the option, you may want to research converting an existing garage, especially if another one (or carport) can be built somewhere else on the property. Garages are cheap to build as they generally have slab floors, no plumbing, minimal wiring and no insulation. But when it comes to garage conversions, opening floor plans or putting in French doors versus sliders, talk to your agent first and find out what today’s buyer is looking for. If they’re in the market every day, they should know what will bring you top dollar.

You’re Finished, Now What?

Should you rent it? Believe it or not, my first choice usually is to rent out your fixer after you’re done. That’s the safe bet and should always factor into your fix up material choices and planning decisions. If for some reason the market changes, you’ll be ready to cover yourself and protect your investment by getting a quality tenant who will make your payments and take care of the house for you. Don’t worry about tenants trashing the place. If you’re careful, it’s easy to find good quality tenants in Oakland and the way the market appreciates here, your house will be worth extra dollars once the market picks up again. Then, when you decide the time is right to sell, you can do a 1031 Tax Deferred Exchange and not pay any tax on your nice profit. That’s something your agent should also help you with when you’re ready.

Should You Sell?

If you decide to sell, hopefully you feel okay about the price you paid, and your project went more or less to plan. You should have added some square footage or made a dramatic impact on the home’s value, otherwise the market may not support your new asking price. You’ll want to factor in the state of the market when you explore selling. Not only how many other homes you’ll be competing with, but what time of year it is and what the buyer activity is like. Oakland is pretty much a twelve-month market, but like the rest of the country, there are more buyers out there in spring and summer than in the fall and winter. Your agent should help you figure out all these things. If you don’t know of anyone with fixer upper experience who is full-time, you can always call me. Anything I can do to make your project a smooth and successful one, don’t hesitate to ask.

The Linda Rea Team