Questions for Flippers

[Sarah Jones]

If i buy a house and want to cashout refi one year later, what kind of things can I rehab to make it worth 100k more?

- laminate flooring?
- new roof?
- remodel bathroom?

my rehab doesn't cost $100k to do only about $10k so do i keep receipt and show them? If i show them receipt they will say 10k more how can I show them that this house is worth 100k more? It's a 400k house.. what things can I rehab to make it worth more.. without adding new bedroom..

[Jon Holdman]

Sarah Jones, here's a more realistic way to ask your question - what can I do to maximize the value of a property.

First, you have to figure out what gives properties their value in the area where you're considering buying. That means looking at houses in the area - inside and out. Go to open houses. Pull listings and drive by. Peek in the windows if they're vacant. Better still, work with an agent, schedule showings, and go look. Make notes. Take pictures. Watch the properties as they sell and see how much they bring. After you look at enough houses - 100 is considered a good number, you will understand values in that area and what contributes to that value.

Now, when find two similar houses that have sold for different prices and you've seen theses houses, you can review what different about them. If you're lucky, you'll be able to narrow it down to just a few things. For example, one had high end granite slab countertops and the other had cheap granite tile. One had a nice, big remodeled bath and the other's bath was redone, but it was the old 5x7 with a plain tub against the wall. Otherwise, they were similar. Now you can assign a value to those two changes. With enough examples you can put some estimates of the value of different improvements. Its one of those "two equations in two unknowns" type problems from high school math.

An experienced agent, knowledgable in the area, can also give you some ideas.

Now, separate the things that are fixable from the things that aren't. Christopher Russell mentions near the beach. Thats a factor in the value, maybe a huge factor. Its also one you cannot change. So, if you're considering a house away from the beach, you can only use other houses in comparable locations as the comparison. What you're left with is a list of improvements and the value of those improvements.

Now, start figuring out what it costs to make those changes. Trouble is, there are a lot of improvements that cost just as much to make as the value they bring. So, its rarely worth investing your time and money in those. What you want to identify are the ones that return more money than you put in. None of us can tell you those specific improvements because they vary from area to area.

One thing to consider is that in those "remodeling surveys" almost all the projects listed yield less value than the cost. That's because if I'm a homeowner and I have a functional but not-so-nice bath, and I spend a bunch of money to build a fabulous bath, the change is only the niceness of the new one vs. the old. OTOH, if I buy a junker house that's bath has been gutted, and I put in a a bath that's comparable to others in the area, I've added a lot of value. Most people won't buy a house with a wrecked bath, so the discount is more than the value of the bath.

Now, a final note. If the nicest houses in an area sell for, say, $250K, there is almost nothing you can do to push the value over that. Even if you build a house that's twice as big as the others and has the finest finishes, you won't get nearly the value you might get if you put that big house in a $500K neighborhood. So, if you find $50K of improvements that would yield $100K in added value, but you're paying $200K, you're stuck. You may be able to spend $25K and do half those improvements and add $50K in value. But the second $25K will yield very little added value.