Have you ever purchased a house, fixed it up, then sold it?

Question

Found a house that is in foreclosure. Its priced a tad high, but think that maybe then can be talked down. It needs a fair amount of work. Has anyone ever purchased a house, fixed it up over a period of time, and then sold it/rented it and made money? How do you go about figuring out if you can make money on the deal? Any help would be greatly appreciated.

Troy Sheets · Answer

I've done exactly this twice. First one was barely livable but was ok for a young bachelor to move in. Sold after two years (no cap gains taxes) and did the same thing. The second one was not livable but I was still able to get a mortgage on it at a $50k purchase price, spent 3 months nights and weekends fixing it up while working 50 hours a week at the regular job, got it livable using credit cards for materials (probably spent $15k in materials), got an equity loan for another $35k after the bulk of the work was done, paid off the credit cards then picked away at the things that I didn't like or needed improvement over the next few years, sold in '07 at the peak of the market for $156k.

If you and the family can stand the mess it's a great way to build equity and usually get more house/live in a better neighborhood than you otherwise could have afforded, especially if you enjoy the construction part as I do. If your partner isn't easygoing regarding living in a construction zone it could cause a lot of extra stress.

I'd do it again if I could, the compromise I made with my wife this time around was a MFH that is basically turn key but needs some cosmetics.

Michael Seeker · Answer

There isn't really a formula you can use if you're going to be living in the house while fixing it up.  I've personally done this and the biggest thing you have to consider is finding a house that is in bad enough condition to get a deal, but good enough condition to be able to not only get a loan but live in it as well.

The 70% rule that @Raymond B. described works great if you are a rehabber and plan on a quick sale...but if you're going to live in the property and do a lot of the work yourself then I wouldn't expect you to be able to find something that fits your needs and also fits that rule.  Usually you will have to have hard money or a commercial construction loan to buy a property that is in bad enough shape to warrant such a steep discount.  Those types of loans are not conducive to owner occupying.  So as I mentioned, you're looking for a balance of bad enough to get a deal, but good enough to get a loan.

Michael Seeker · Answer

After having done both, I wish I would have started out with the 4-plex.  It probably depends on your longer term goals though.  Do you want to focus more on fix & flip deals or are you leaning towards buy and hold?  If fix and flip, then a fixer upper would probably be your best bet.  If buy and hold, the 4-plex would be the way to go.  If a combination, then I'd look for a distressed 3-4 unit that you can fix and live in and rent out.

Travis Daggett · Answer

@Jason P. -

I've done this. One of the mistakes I made in hindsight is rehabbing to the level that I would like for my home versus rent-ready. The difference can be thousands or tens of thousands of dollars.

Make sense?

Jay P. · Answer

Thanks for the advice everyone. I know I want to start, just not too sure where exactly. It's pretty much a toss up between a 4plex, where my rent would be paid, or buying a fixer upper, living in it, and then eventually selling. Both options to me have pros & cons, its just  finding the right property.

Bill Gulley · Answer

From the title, I thought what a novel idea! :)

It's how I started from my first home. I've had few homes that I never did anything to, it's an addiction, a sickness, nothing can be left as it is, there is always something to add. Nothing like living with sheet rock dust for awhile, everyone needs that experience! :)

Troy Sheets · Answer

To echo what @Jon Holdman said, as I mentioned, I lucked out and sold at the peak of the market in '07. If I'd sold after '07 I'd have made at least $20k less, maybe a lot less!!! I still would have turned a profit but it would have been more of a part-time job profit instead of a smart investment type of profit.

Michael Seeker · Answer

@Jason P. - I will also add, that I did this with my first property.  The learning that came from it FAR outweighed any financial gains or losses.  At the end of the day I was probably somewhere between +$5000 and -$5000.  But the skills and knowledge I picked up were invaluable.  I would definitely not be where I'm at with my investing today if I hadn't gone through that process.

Jon Holdman · Answer

@Jason P. to answer your question, yes, lots of people have done this.

Check out The Book on Flipping Houses by our very own @J  Scott

But, this is much harder than it seems.  Your two biggest mistakes will be overestimating the price you will get when you sell and underestimating your rehab budget.  New flippers sometimes think "I'll accept a thin deal just to get going".  That's a really, really good way to lose money.  We call that the tuition for the school of hard knocks.  Instead, as a newbie, you need an especially juicy deal to make up for the mistakes you'll inevitably make.

Jay P. · Answer

Awesome!!! Thanks @Raymond B.

Thats exactly what I was looking for. Have you done this, and has it worked out?

Have you ever purchased a house, fixed it up, then sold it?

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