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Fixer? Break it down

Check your math before buying on the cheap with dreams of renovation, experts advise.

January 07, 2007|Marnell Jameson | Special to The Times

MARRY in haste. Repent at your leisure. That old saw could apply just as well to buying a fixer.

Before you fall in love and rush to buy and renovate a rundown old house that has a certain charm, take some time to get to know it better. A little due diligence, experts say, can save a lot of heartbreak -- and serious money.

Todd Hays is a serial fixer.

The 45-year-old publicist just sold his 12th renovation project and is working on his 13th.

"I do it because I love to do it," he says, standing in his newest acquisition, an 80-year-old home in Pasadena. "I would do it even if I didn't make money doing it, though I don't want to lose money." Mostly, he says, he has made a profit -- sometimes more than others.

For him, the decision whether to buy a fixer or walk away from it comes down to his heart and math. "I need to know I'm going to love the house when it's done and that to do what I want will make financial sense."

Hays lives in all his projects while fixing them, and saves money by doing much of the work himself.

But certain flaws in a prospective home, even one that he loves, will kill the deal. For Hays, deal breakers include expensive but essential upgrades that won't show, such as foundation, extensive plumbing or electrical work.

He avoids expensive projects to undo previous upgrades. For instance, he decided against buying an old Craftsman whose owners had stuccoed over wood siding.

Hays also steers clear of homes in danger of sliding down hillsides, and would think twice about buying a home that has been in a fire or flood.

"But the real deal breaker comes down to a home being overpriced for the amount of work it needs," he says. To make sure the property pencils out, Hays makes a detailed list -- down to specific types of doors and hardware -- of what all the improvements he has in mind would cost. Then he adds 10%. "People who have never done this should add 20%. There are always surprises."

He then tracks every dollar he puts into the home renovation on his computer. "I know -- to the penny -- what I paid, what I invested and what I net."

Andy Heller, 44, co-author of "Buy Even Lower: The Regular People's Guide to Real Estate Riches," agrees that those new to renovation should proceed with caution. He recommends buyers get good appraisals and inspections up front and be prepared to walk away from certain flaws.

Fifteen years ago, when he and his partner, Scott Frank, started buying homes to renovate and sell, they walked away from houses with significant structural problems, foundation issues or excessive termite damage. "These homes aren't for amateurs."

Heller, who lives in Atlanta and gives seminars across the country on this subject, says, "Any offer you make should be contingent on inspection and walk-through."

When Heller and Frank walk through a home for sale, they calculate what repairs it will need and make an offer based on what they see. While in escrow, they get a professional inspection. If, after going through the home carefully, they find more that needs repair, they go back to the seller and ask for a discount based on the additional work.

"We always leave ourselves an opportunity to reopen the negotiation," Heller says. For them, a decision to buy comes down to one word: margin. "We don't care if the electrical is shot, so long as we've assessed it, built that into our offer and gotten an appropriate discount."

To determine the size of a discount, Heller suggests that a buyer have a contractor estimate how much the repair or upgrade would cost, then present that to the seller as the basis for asking to purchase at a lower price.

Heller and Frank rely on experts providing good estimates before finalizing their purchases. "Many people buy the house, then find the contractor," Heller says. "They should do the reverse."

Before closing, the pair recommend buyers walk through the house with a reliable contractor and obtain a detailed estimate of what it would cost to make it what they want.

People often get in over their heads for three reasons, Heller says: They don't properly assess the necessary repairs before they buy. They don't have a good inspector and good contractors. Or they don't have the money to do the needed repairs.

Still, even if a buyer does everything right, the market is the wild card. For this reason, Heller says, homeowners need an exit strategy. Options for owners who can't cash out when they want to include remaining in the home longer, renting the house or selling it on a lease-option.

The Southern California real estate market has primarily allowed Hays to ride the wave of appreciation and realize a nice profit. But back in the early '90s, while he waited for the market to come back, he lived for seven years in a house that he'd intended to live in for only two. As it was, he made only about $5,000 on the house.

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