Finding a Real Estate Bargain—Fixer-Uppers

W ith home prices surging in the thriving Silicon Valley real estate market, buyers are constantly on the hunt for—and turning to us for advice on—the ever-elusive bargain. At DeLeon Realty, our team of in-house designers, contractors, handymen, and a construction consultant all collaborate on our listings because we have found that the majority of buyers look for a picture-perfect, move-in-ready home. With this in mind, we generally advise our sellers to invest in upgrades that will give their homes that fresh and newly refinished feeling, like painting, refinishing floors, landscaping, and even minor remodeling or re-facing of kitchens and bathrooms. Often the investment is minimal, yet we typically see at least a three-fold return on their investment in terms of final sales price. After the home preparation process is over, many sellers have the same response, “Why didn’t we do this work sooner? We would have been able to enjoy the outcome while living here!”

Here is the good news for you bargain-hunting buyers. Prior to bringing their homes on the market, not all sellers are willing to invest in upgrades; many agents don’t even recommend the changes, relying instead on the idea that the market is so hot, anything will sell. Although a small handful of these unloved homes will sell, they will sell for less than top dollar due to their flawed aesthetic appeal. Often these properties have excellent “bones”— good locations, sound structures, fine floorplans—but the kitchen or bathrooms may be dated, or perhaps a “vanilla” interior could be perked up by some elegant crown molding and baseboards. Easy fixes like these allow savvy buyers to put their stamp on the home, while simultaneously increasing the value considerably. With investments of as little as $50K-$100K, we regularly see an increase in resale value of a home by several hundred thousand dollars.

One would think that, with this kind of equity potential, these “fixer-upper” homes would be highly coveted. However, we see quite the opposite. With most buyers focused on turn-key homes, and with most developers seeking tear-downs or lot value, these in-between homes are overlooked by the majority of buyers. Of course, buyers have to look at these “project” homes with caution (and good counsel), but for many buyers, this can be a way to climb the property ladder with relative ease. For example, say a couple invests in a fixer property and plans to live in the home while slowly making improvements over two years or more. This couple will build equity in the home with the work they do and, after living there for two years, the home should qualify under Internal Revenue Code Section 121 as their primary residence, which enables a married couple to exclude up to $500K of capital gains from taxes. The gain could then be added to the down payment on a more expensive fixer, with an even greater return on investment, and on you go, up the ladder to your dream home!