The Magic Touch

Unemotional Attachment

Too often, inexperienced investors will fall in love with a certain fixer-upper, Galen said. They will see a Victorian that needs new floors, has a leaking roof and a cracking foundation. They'll pay too much to get that house, underestimating what repairs will cost, because they picture what it would look like if it were in pristine condition. But getting the house to that condition would cost far too much in time and money. When it's time to put the home on the market, the investor won't be able to set a price high enough to cover the original purchase cost plus the amount of money sunk into renovation.

"If you fall in love with a house and forget it's just a commodity, you can get into real trouble," Galen said. "Don't think about how adorable a house is. That's not what's important here."

Beal, the real estate investor, said people searching for fixer-uppers first establish a fair-market value that a house can fetch after it has been renovated. Once investors arrive at that figure, it is easier to determine if the price they're being asked to pay for a fixer-upper is a good one.

Here's an example, albeit a simplistic one: An investor determines that a fixer-upper once renovated could sell for $100,000. That investor wants to make at least $20,000 profit on the sale. Thus, the total of the purchase price plus all repairs, insurance, closing costs and all the other fees associated with buying, renovating and selling a home can add up to no more than $80,000.

Real estate ads in newspapers and on the Internet will show how much other owners in a neighborhood are asking for their houses. County property records will show actual selling prices, though there can be a substantial time lag before those prices are available through government Web sites. Beal said the best way to compute a home's fair-market value is by forming relationships with the professionals who know such things: real estate agents. They watch the market closely; they also have full access to local multiple listing services, including prices on deals that have closed.

Tim Bird, broker of the Columbia office of ZipRealty, said new investors sometimes make the mistake of turning to the wrong people for information about how much they should pay for a certain home. They get advice from friends or relatives and maybe their co-workers.

That, Bird said, is a big mistake. Investors instead should turn to professionals -- real estate agents, appraisers, home inspectors and contractors -- when deciding whether a fixer-upper is a good buy or not.

Working with those professionals costs money. In the end, it will be money well spent, Bird said.

"The people investors need to focus on using for advice are the people who are qualified to present them with the real costs, the real cost estimates for these kind of projects," Bird said. "The idea is to reduce the likelihood that there will be a major surprise down the road, to find out you can't do what you wanted to do with this particular house. That first pitfall is seeking information from people whom they shouldn't be seeking information from."

When to Walk Away

There are certain structural problems that make homes bad candidates to become profitable fixer-uppers. They require repairs that would cost so much that investors would have to charge more than what is realistic when it comes time to put the house on the market. Real estate pros recommend that investors walk away from such deals.

Structural problems are usually too expensive to fix. That means ignoring houses with cracking foundations and leaky basements. Mechanical problems such as outdated electrical wiring and plumbing might also give investors pause.

"The structural issues, things like the roof and plumbing, . . . are going to be the toughest to resolve and will give you the lowest return on your dollar," Lyons said. "That's why you want to have an inspection clause in your purchase contract. You need to know what you are dealing with."

Getting a home inspection before taking on a fixer-upper is key, real estate pros say.

"People need to understand that remodeling a house is expensive," said Roger Bass, an architect and owner of Bass Architects in McLean. "There are surprises that even we run into so frequently that are hard to discover until you've started your remodeling project."

Bass once worked on an older house in Maryland that had gone through extensive renovations. He and his crew tore up the tile in a bathroom only to discover that during a previous remodeling project, a plumber had completely cut through a number of floor joists. That happened, it appeared, while the plumber had been trying to cut holes through the joists for new pipes. Unfortunately, the plumber made several holes too big.

That leads to another common problem first-time real estate investors make: They think they can handle all the repair work themselves. Too often, they can't, Bass said.

"We've been called in on a number of occasions to take care of things that people had started that didn't turn out well for a number of reasons," he said. "Either they woefully underestimated the time and cost a project required, or they thought they could do it themselves and found out they couldn't. They may have tried to do things too cheaply, cut too many corners and then wound up in trouble. It's more expensive for us to come in and do the work after someone has started it."

Such horror stories may make it seem that investing in a fixer-upper is a fool's game. But many investors, even inexperienced ones, have made solid profits. They entered the business with their eyes wide open, and walked away from properties with too many serious problems or too high a price.

Frazier O'Leary, an Alexandria resident and director of training for the Real Estate Community Networking Group, an investment club in Alexandria, said: "This is a great business to get involved in. I think the biggest mistake people make is that they think about doing it but then never do anything about it. They think they're too inexperienced, or that they don't have enough money. You want to listen to the people who are doing it, not to the people who are too fearful to give it a try."