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Your Mortgage : How to Turn 'Fixer' House Into a Profitable Investment

November 25, 1990|ROBERT J. BRUSS | Bruss is a San Francisco-area lawyer, author and real estate broker

Most home buyers look at a house as a place to live. But shrewd investors look at houses as not only places to live but also as profit sources. In other words, investment-minded home buyers look at home purchases as first residences and second as an investments.

If you are planning on spending a modest amount of $17,500 or less on improvements, the best home improvement financing is a FHA home improvement loan. Not all lenders make these loans, but when you find one who does you will have found a very good loan, which is hard to beat.

However, if the home improvements are more extensive, then shop among at least half a dozen banks, S&Ls and mortgage brokers. Compare equity credit lines with home improvement loans and second mortgages. Many lenders won't require an appraisal for a home-improvement loan if you have a firm written contract from a reputable contractor.

However, refinancing your existing first mortgage may not be a viable alternative until the renovation work is completed because the house might not yet be worth enough to support a new increased mortgage amount.

Acquiring a run-down fixer-upper house offers the best profit opportunities if it has the right things wrong so you can profitably upgrade the property. But watch out for unprofitable but necessary work that can cut into a house's profit potential.

Stay away from houses needing major renovation, such as expensive foundation repairs, new roof, structural work, termite and dry-rot damage repairs, new plumbing and new wiring, which add little to a home's market value.

However, kitchen and bathroom modernization can be extremely profitable if you don't spend too much on the upgrading. Aim for $2 increased market value for each $1 in improvement cost. The most profitable major improvement is adding a second bathroom to a one-bathroom home. Profits of 200% or more are not unusual from a second bathroom.

To illustrate, I recently spent about $5,000 having a second bathroom built in a large closet in a fix-up house. This was an especially profitable change because no extra square footage had to be added to the house. The appraiser estimated that the second bathroom added $10,000 to $15,000 value to the house. A little creativity like this can go a long way toward increasing a home's market value.

Don't make the wrong improvements. The challenges of fixer-upper houses often overwhelm novice improvers who get carried away and spend more money than will be profitable.

For example, a few months ago, I inspected a fixer house where the owner wasted money on a new concrete driveway, a new carport instead of an enclosed garage, fancy kitchen remodeling but with a poor-quality tile job, and a fourth bedroom added to a house in a neighborhood where most homes have three bedrooms.

But a family room addition would have been a much more profitable improvement. The house has been listed for sale several months and hasn't sold because it is over-improved for its neighborhood and the asking price is out of line with recent comparable sales prices in the vicinity.

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