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Affordable Homes
Part Five
Continuing on my Mission to Encourage Home Ownership During this Buyer's Market
By Vesta Copestakes

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Once again, I'm going to take you through a series of articles written by people who know a lot more about this subject than I do. I'm here as your Muse - the person tapping you on the shoulder to save money, line up your good credit and find a nice, modest little home to get you out of paying rent and into home owner tax deductions. I'm not encouraging you to make money buying and selling homes. I'm encouraging you to put YOUR OWN ROOF over YOUR OWN HEAD!

I bought my River Cabin in 1990. It was a Seller's Market at the time. People not only sold homes for the asking price - buyer's fought over them and jacked the prices up. Still my home has more than doubled in value over the years - AND it's provided me with a sweet place to raise my daughter. There's nothing like a home owner's tax credit combined with Head of Household and Dependent to keep from paying income taxes, especially if you're economically challenged like me!

So You Want to Buy a Fixer?

By Scott Johnson

Folks often ask me for a list of all the "bargain fixers" available in the lower Russian River area. It usually becomes clear almost immediately that their idea of "fixer" is what we local realty agents refer to as cosmetic fixers: needing interior and/or exterior paint, new flooring, and perhaps some minor repairs. In the Russian River area, probably more than 80% of the houses listed for sale are cosmetic fixers by this definition. Only out-of-area agents would even use the term "fixer" in reference to these properties. There is little "upside potential" in buying cosmetic fixers. In other words, when you're done, they'll sell for no more than what you just spent on them.

In contrast, moderate fixers are generally livable, but need new kitchens, bathrooms, decks, and/or roofs; expect to spend $20-50K to bring them up to contemporary living standards. Such homes in the Russian River area are mostly in the $275K to $400K price range. Most do-it-yourselfers can successfully tackle moderate fixers, farming out any specialized work (such as roofs) to local contractors as needed, but performing the bulk of the work themselves. Commercial banks generally will lend on moderate fixers, although down-payment requirements and loan rates may be higher than for cosmetic fixers and non-fixers.

There is some upside potential in moderate fixers, but in the current Buyer's Market it's probably best to assume you'll need to keep the property for 3 to 5 years before selling it to recoup your investment with a modest gain. Nonetheless, renting your fixed-up home for a few years and reaping the income-tax advantages in the meantime is a good option: the rental inventory is fairly low and demand is high. However, rental rates in the Russian River area are the lowest in Sonoma County, so plan accordingly. For example, it's difficult to rent a 1-bedroom home for more than about $900/month, no matter how great the remodeling job or how fabulous the location.

Major fixers need new foundations, new septic systems, new heating systems, winterization, and/or major rewiring and replumbing-as well as what the moderate fixers need. Expect to spend at least $50K-often over $100K-to make them livable. The ones listed for sale under $200K are mostly unlivable by modern standards (e.g., have broken septic systems, open walls and broken windows, leaking roofs). And these properties generally have violations on record, so you will have to work with the County to resolve them. Homes under $200K that are livable are quite rare, perhaps just 1-2% of the annual sales in the area.

Because major fixers are beyond the capabilities of most do-it-yourselfers to restore, they generally are sold to local building contractors. I say "local" because knowledge of how permits work in Sonoma County is essential for economic success. In many instances major fixers are on the hairy edge of being declared abandoned by the County, at which point they cannot be revitalized and the property becomes worth land-value only. Don't get me wrong: the County wants the existing housing stock to remain and to improve. But if the existing structure isn't viable, they may be less inclined to "bend the rules" to allow revitalization of the house-as they routinely do with viable, but merely out-dated, properties. An experienced, local contractor knows how to navigate the County permit process for maximum gain at minimal cost.

Another reason major fixers are mostly sold to contractors is because of pricing. Listing Agents generally price major fixers by starting with the estimated resale value as improved, then subtracting the estimated cost of the improvements, but excluding most or all labor. So if you purchase a major fixer and have to pay a contractor to restore it, the resulting home probably will be worth no more than your out-of-pocket investment to date. Contractors make money on major fixers thru a combination of sweat equity, discounted building materials, and bartering for services with other contractors. For example, if an electrician buys one major fixer and a plumber-friend buys another, the former will rewire the latter's fixer at cost and the latter will replumb the former's fixer at cost. Both win; only the IRS and the Social Security Administration lose!

A third reason "mere mortals" generally cannot buy major fixers is because of financing. Few commercial banks will lend on uninhabitable dwellings. So either you'll need lots of cash (both for the purchase and the improvements) or the Seller will have to assist you with short-term financing. Not all Seller's want to become mortgage-holders, however, so that's only a viable option for contractors or other Buyers with excellent credit. You'll still need cash for the improvements, moreover, and Seller financing usually only lasts for 18 months to 3 years. So you must complete at least enough of the improvements during that time to make the property bank-financable, then refinance and payoff the Seller.

As a non-contractor, it's possible to successfully invest in major fixers. But you'll need connections (e.g., a friend or relative who's a Sonoma County builder) and patience. If you have the financial resources to purchase a major fixer and pay a contractor for the major repairs, then you can live in the home and undertake the remaining moderate and cosmetic repairs yourself over a few years. Otherwise, do-it-yourselfers probably should stick with moderate fixers.

Copyright © 2007, Mark Scott Johnson
Scott Johnson, Broker Associate
Russian River Realty Co.

AFFORDABLE cont'd on page 14 with Ask the Loan Man - Is Now a Good Time to Buy a House? and Real Estate Review - Pricing your Home to Sell in Today's Market.

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