"The first profit is earned at the time of purchase" is an old real estate motto. That means the smartest buyers purchase at the right price (by not overpaying) and then use profitable methods to increase market value after the purchase.
For example, I like to buy houses needing paint. Peeling paint, the worse the better, creates a great profit opportunity. Spending a few hundred dollars, or even a few thousand dollars, on new paint is the most profitable improvement a home buyer (or seller) can make because fresh paint, inside and outside, can add thousands of profit dollars to a home's market value.
Some wrongs can make a right
On a recent United Airlines flight to San Francisco, I sat next to a young man whose employer recently transferred him to that high-cost area. He couldn't believe the outrageous asking prices for small old houses needing repairs.
But he was in a bidding contest with several other buyers for a 1,400-square-foot house. Unless that house shows profit potential, I advised, keep looking. Here are some of the "right things wrong" to look for in a home purchase:
PAINT: If a house you are considering for purchase needs paint, consider that a blessing. Of course, discount your offer price to compensate for the painting expense and inconvenience. Bear in mind that paint often adds three to five times its cost, sometimes more, to the home's value.
LANDSCAPING: Another profitable improvement is fresh landscaping. Spending a few hundred or thousand dollars on plants, lawns, decks and other outdoor improvements often adds two to three times the cost to the market value.
BATHROOMS: Buying a one-bathroom home can be very profitable if a second bathroom can be added within the existing space, such as by converting a closet or hallway into a second bathroom. But adding a second bathroom by adding to the home's perimeter can get expensive, since a foundation is needed. However, a second bathroom usually adds at least twice its cost to the home's value. In addition, it makes the home more marketable.
KITCHENS: Surprisingly, spending money on kitchens rarely adds the renovation cost to the home's market value. The most profitable approach to kitchens is to make modest upgrades, such as new counter tops and cabinet facings, rather than a complete makeover. New top-of-the-line appliances can dress up even old-fashioned kitchens. However, kitchen renovation usually makes a home more salable even if it doesn't add much market value.
LIGHT FIXTURES AND SKYLIGHTS: Among the least expensive and most profitable home improvements are new light fixtures and skylights in dark areas, such as hallways. These inexpensive improvements usually add considerably to the home's marketability. New "tunnel skylights" are especially easy and inexpensive to install in just a few hours.
CARPETS: Another extremely profitable home improvement, almost as profitable as fresh paint, is new wall-to-wall carpets. However, if existing hardwood floors are in reasonably good condition, simple sanding and varnish can make them appealing to home buyers in cities where hardwood floors are more popular than carpets.
Avoid homes with wrong things wrong
Many houses have an obvious need for unprofitable improvements. These "wrong things wrong" don't add much market value, but they are obviously necessary.
Examples of unprofitable improvements include a new roof, foundation repair, electrical upgrading from fuses to circuit breakers, termite or water damage repair, and plumbing conversion from galvanized to copper pipe. Try to avoid buying a house needing these expensive, unprofitable improvements unless you get a tremendous discount from market value.
Other examples of unprofitable improvements include room additions, such as a family room or another bedroom, and swimming pools. These costly upgrades rarely add as much market value as they cost.
How to finance home improvements
When buying a house that needs almost-immediate, profitable improvements, plan ahead to finance those improvements. Most banks and S&Ls offer improvement loans for 100 percent of the cost of renovations if you have good credit and income. Some lenders will include the remodeling costs in the home acquisition mortgage.
If the cost of improvements will be small, FHA Title I home-improvement loans up to $25,000 are easily available from many lenders, especially S&Ls, finance companies and thrift associations. Although the qualifications are easy, even for homeowners without much equity, the interest rate can be high, typically around 15 percent.
Watch out for overimprovements
Beware of the problem of overimproving a house for its neighborhood. For example, if most nearby homes have three bedrooms, a four- or five-bedroom house in that area won't sell for much more.
This is because neighborhood market values hold down the valuations of overimproved residences. That's why another old real estate motto _ "Buy the worst house in the best neighborhood" _ is profitable advice.
A good criteria for improvements, used by professional real estate investors, is each $1 spent for upgrading should add at least $2 increased market value. Better yet, buy below market value from a highly motivated seller to earn the first profit at the time of purchase.
_ Tribune Media Services