When prices are falling, houses aren’t worth fixing up. In a previous post I explained why I am increasing rents and selling my rentals when they become vacant and I am unable to increase rents. The same is true for fixing houses.
Because most of the homes I own are in “bubble” areas where prices rose very rapidly for 5 years prior to the current recession, prices are now falling 2-3% PER MONTH. Let’s say I buy a 1500 square food “fixer” for $78,000 that needs about $20,000 and a month to fix before I offer it for sale.
At the time of purchase, the home would have had a total retail value of $129,900 when it was fixed up, but that figure will change over time. Once on the market, the repaired home would be competing for buyers with many other homes of comparable size and in similar neighborhoods, but at current prices that are about 3% less; We’ll say $125,000.
Now the fun begins. Buyers today are being trained to expect to buy below comparable MLS prices. In bubble markets, more homes are sold through short sales, REO auctions, and foreclosures than through the MLS at “appraised” retail values. As a result, NO ONE seems to be willing to pay the listed price.
Let’s say after 3 months I get an offer from a fully qualified buyer that I know will close. The only problem is that it costs $115,000. The closing is set for 60 days. After paying commissions, repair, and storage costs, I’ll get about $10,000. So far, six months have slipped through my fingers. If you sold two of these per year, you would be earning less than those who qualified for welfare payments.
What is the solution? My next post will have the answer.