At least once a week I’ll receive a call or e-mail from someone looking for homes in the $50,000 and lower price range here in the Phoenix real estate market. While the order in which they’re presented varies, the two primary factors rarely do:
1) The would-be buyer wants a property that might need a little work, either so they can build their own sweat equity or later sell the home for a profit.
2) The would-be buyer will be paying with cash and can close quickly.
Let’s take the second part first. If you’re looking under $50,000, you almost have to be paying in cash. Lenders have a floor below which they won’t write a mortgage. And more importantly, there are dozens of investors looking in this price range, all paying cash and all promising a quick close. Cash in this price range doesn’t give you advantage, it only gets you a ticket to the game.
As for the first part, the basic economics tend to get in the way. Many buyers operate under the assumption that when fixed up – either renovated, repaired or updates – a home selling in the $35,000 range will be worth twice that. Except … given the market in the areas where these homes are located (and keeping in mind they’re priced based on the recent sales in the area) a $35,000 home when fixed up isn’t worth much more than that $35,000 and won’t be until positive appreciation begins.
The other major obstacle is the price of repair as a percentage of the overall cost is far too high to create a margin to resell the home. A new air conditioner is going to cost between $4,000 and $5,000, give or take a couple of hundred. That price doesn’t change based on the cost of the house you’re buying that may need one. On a $50,000 house, that air conditioner already has added 10 percent to the money out the door to repair.
That’s just the air conditioner … built-in appliances, kitchen cabinets, plumbing fixtures and/or whatever else may be missing or in need of repair carry similar (relatively) fixed costs – costs that are a significant portion of the sales price.
So what’s the solution for a would-be investor looking for properties to purchase, improve and still sell at a profit? Aim a bit higher price-wise. Look above the $100,000 mark – in this area, the repairs are a smaller percentage of the overall cost and will be less of a drain percentage-wise on the possible profit.
This, as you can imagine, isn’t always the most welcome advice in a market where all folks seem to hear about are the $45,000 homes flying off the shelves. So be it. The reality is there is a very small window here for investors wanting to fix and flip, whether for the altruistic idea of FHA-eligible homes or simply for the profit. It’s far better to crunch the numbers up front, even if only theoretically, before spending too much time chasing a pot of gold that simply doesn’t exist.