As a real estate agent for the past five years, I’ve heard many of my clients tell me how badly they want to find a real deal. Take, for instance, my client Linda, who recently left me an urgent message about a house in Auburn, WA, for sale for only $125,000.
Given that homes in this Seattle suburb were going for three times that much, this had to be the bargain of the century, right?
Why ‘cheap’ houses often end up being anything but
A few hours later, I met Linda and her husband at the house. The yard was overgrown, so someone had hacked a path through the blackberry bushes and brush to the entrance. I unlocked the door, and it creaked open. Brave real estate agent that I am, I let my clients go in first.
It’s normally good etiquette when touring a home to take your shoes off at the front door. That wasn’t an option here. The floors were years past their due date for being replaced, and covered with crumbles from the disintegrating walls and ceiling. The house had obviously not been lived in for some time, and the electricity was turned off. From what we could see in the dark, the floor plan was cramped and outdated.
I’d seen bigger kitchens in an RV.
Yet my clients were not deterred by this shell of a house, or the so-so neighborhood. They were still excited by the $125,000 price tag.
I warned them that the house could end up selling for more than that. As we walked around outside, more people came to look at the house, so we knew we had competition.
As it turned out, the house sold for $315,000—over twice the list price, and in my opinion, far too much.
And even then, Linda and her husband were still determined to find a bargain, so I showed them several more houses and lots, all in the bottom price range of the current market. Problem is, homes in this bottom price range typically had three things wrong with them: They were so rundown they weren’t habitable, they weren’t in a great neighborhood, yet they inspired competition, so that typically, they ended up selling for twice the listing price.
In the end, I never found Linda and her husband that bargain house they were hoping for.
The downsides of distressed properties
Linda is hardly alone in her desire for a deal. My husband and I have done our own share of deal hunting—and, once, even bought a 100-year-old house in Peru, IN, for $36,000.
Granted, this was back in 1985, but the house was in sorry shape. One corner of the house had to be jacked up because it was sinking. The electrical systems were so old, my husband—a construction professional—said we were lucky the wiring hadn’t burned the place down.
Yet we were young and energetic, so we rolled up our sleeves and made changes—even many that weren’t strictly necessary, such as moving the garage to create a backyard. We also hated the dark, small kitchen, so we enlarged it onto the once-decrepit sun porch.
All told, we spent three years and about $20,000 fixing up the house. When we sold it for $55,000, we didn’t even make a profit!
And that’s hardly the only bargain basement fixer-upper we’ve entertained tackling, either. We’ve seen houses that have been ravaged by fire, or where the wiring has been ripped out of walls, or where people have started remodeling but have given up halfway through. We once even bought a house with serious roof and water damage that apparently had been used as a marijuana grow house. It was a steal at $175,000, but it took us three years and over $120,000 to fix up and sell, not counting our considerable labor.
What to know before you buy a house at a bargain price
It is tempting when you see distressed properties at low, low prices, but my husband swears he will never buy a fixer-upper ever again. And I have to say I agree.
The biggest problem with a house at a rock-bottom price is that all you are about to invest in time and money could probably be better spent elsewhere. If you spend months or years (and tens of thousands of dollars) working on a dumpy 1952 house in an iffy neighborhood, what do you have when you’re done? Probably an over-improved but still slightly dumpy 1952 house in an iffy neighborhood. If, instead, you’d spent that time and money on a higher-quality home in a well cared for neighborhood, you’d have far more potential upside for your investment.
Another factor to consider is how you intend to make a profit on your real estate investment. Is it by improving and reselling the house? Or is most of your profit actually going to be from a general market uptrend?
For example, although we eventually made a profit fixing up and selling our former marijuana grow house, we probably cleared more of a net profit because the real estate market improved during the three years we owned it, rather than because of the improvements we made. It would have been a whole lot easier simply to buy a house in good condition and hold it for the same period of time, then just kick back and watch as the market went up.
All this doesn’t mean you shouldn’t shop for a good deal. It’s just that when you see one, estimate how much it will cost you to fix any deficiencies (and just assume that it always costs more than you think). Don’t forget the substantial costs of purchasing, financing, and selling property. If the numbers work out and you think you can make a profit, you might be looking at a good investment.
But if, on the other hand, the numbers don’t add up, perhaps that low, low price still isn’t low enough.