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Why DIYers Shouldn’t Buy Fixer Houses
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By: Bruce Bartlett
Bruce Bartlett with FlipGreat.
Today’s presentation, “Why Do-It-Yourselfers should never ever buy a Fixer House.” Pretty straight forward!
So as always why listen to me, I was one of the founding managing partners of Sequoia Real Estate Partners. We aggregated together a lot of private money when outbought fixer homes and apartment buildings, fixed them all up and sold them, a complete success. Every single investor got a complete return of all their capital along with all of their profits. So, batting a thousand at Sequoia and then on my own account is the same thing.
Everything single project I have ever done, has been profitable so complete return of capital and profits. I was featured in the Wall Street Journal, featured in the Los Angeles Business Journal and have been on Fox Business for over probably for six or seven years in a row. I have been asked to speak on a panel or two with the nation’s largest conference on Single-Family Home Investment, so I know little bit about this.
Why Should Do-It-Yourselfers Never Buy A Fixer House. Really simple.
- Your life.
- The reality of the situation.
- In regards to the money, you’re going to get less house, you’re going to get a worse neighbourhood probably and you’re going to make or save far less money getting a fixer than a house that’s ready to move in ready. We are going to call it “Turnkey”.
- In regards to your life, you risk losing your spouse and your family, you risk losing your job if you’re currently employed.
- The reality is it’s x10 harder to do than it looks on TV and all the TV shows and the Big-Box Stores are lying too.
So, let’s move on. First of all, let’s define what a fixer house is? A fixer house is not something that just needs carpet and paint, that is not a Fixer. Anybody can do that. That is no big deal.
Fixer houses, when we buy them, typically, they have problems in any of these areas that you see on this screen, roof, electrical, plumbing, foundation, wood floors, cabinets, countertops, lighting, faucets, floor tile etc. They need plans and permits. They have mold and asbestos. They need new HVAC systems or repair. They need entirely new kitchen design and bath design. They need to be energy-efficient, that’s the code here in California. That’s not because we think it’s a smart thing to do, although it is. They need new windows and doors. There are also code issues there in both regards to energy efficiency and also fiery access and egress. Insulation, again code. Landscaping and hardscaping.
I could go on and on and on. These are not small jobs. I know a lot of you watch TV shows. You think it’s easy, but it’s not.
So, let’s run through first of all before we get in, let’s just go to the basics much because people, “why does somebody buy a fixer.” They buy a fixer because they think they are going to save money or they are going to make money. And you know what, nothing could be further from the truth. You are not going to save money or make money. You are going to wind off in a worse situation, and I am going to show you why, right now.
This is the basic math. So, let’s assume you’ve saved $300,000 to buy a house. Notice I didn’t say deposit, I just said buy a house. You are going to have two options in this scenario.
One is you can buy the Fixer. The Fixer needs $150,000 worth of work which is really not that much on a Fixer. For retail buyers, houses that need 200,000, 250,000 or $300,000 worth of work are not unusual but just keep things small and easy. We are going to say, it needs $150,000. You could buy that. So, option-1 or option-2, you can buy a house, Turnkey, ready to go. Bring your toothbrush or maybe your furniture and you’re good.
So, let’s look at option-1.
Your down-payment, because it needs it. You got $300,000, but it needs $150,000 worth of work. So, you only have $150,000 that you can put towards your down payment. At down payment, we are going to assume 25%. So, you have got $150,000 for your down payment. The bank is going to loan you the rest that is 3 x 150,000 which is $450,000. So, your purchase price is $600,000. You’re then going to do a $150,000 worth of repairs that is probably going to take you about a year and then your total home value is going to be the 600+ the 150 that $750,000, pretty straightforward.
Now, some of you are going to say, “wait a minute, wait a minute, why is going to worth more? I did $150,000 worth of repairs and renovation; shouldn’t it be worth $300,000 more. No… Because you’re not a professional and you’re paying retail for everything and you paid retail for the house. You may have heard the phrase “the most important thing in real estate is what you have paid for it.” So, you paid retail for the house, you’re paying retail for all the repairs, you’re not making any money on this stuff.
Right in front of you, right now is the cost versus value report for 2020. This is the sheet for Los Angeles. It has many of the largest renovations and if you want to review one of these yourself, you can contact me or you can just Google and look for it. You can find it. You put in your email information and it’s downloadable. They have this for every single year, but 2021 hasn’t come out yet. What you have here is a lot of projects that people typically do in their home. You see the cost of the job and then you see the resale value.
So, you see, for every dollar you spent, how much you got back, and if you take a close look at cost recouped, it has both Los Angeles Pacific and the national averages, with the exception in Los Angeles of replacing a garage door, every single project has a negative return on investment.
Let me give an example here, let’s go major kitchen remodel cost $77,000. The cost recouped is 75.2%. That means you lost 25% of the $77,000. You only got 75% of it back. And if you’re looking at the national averages, there’s not a single one. It goes over 100, which means they all lose money.
This is how many cents on the dollar you’re getting back, so no, your renovations are not creating value. If this is your seventh or eighth house and you are buying these as investments and you’re doing these as investments, maybe you get in a position where this stuff starts to make you money, but on this one you’re doing right now, it is not going to happen.
So, let’s go back to the math. You’ve got your $150,000 down payment, you’ve got your $450,000 loan, you bought a $600,000 house, you did $150,000. We are going to be very, very nice here. Even though that third-party report shows you that the $150,000 that is spent is probably only worth $100,000 in value, we are going to assume for the case of arguments worth a full 150. So, you’ve got a house that is worth $750,000 but wait a minute, what about all that time you spent fixing it up? All that time you have spent fixing it up, you could’ve been doing something else.
Time is highly, highly valuable. Let’s look at that for a second. Let’s assume for a moment that you are a professional builder or you grew up working for your dad who is a general contractor and you have learned the entire business and you’re not a Do-It-Yourselfer. Mean, you’re a trained pro. Well, we are assuming a bunch of $150,000. I will just let you know, if you contact any major construction company that does homes, anywhere in the country and you ask them what their burn rate is, it’s $1000 a day. So, if the budget is $150,000 that means it takes 150,000 ÷ 1000, that is a 150 day to complete that project. If you are spending 30,000, it is 30 days typically in that project, pretty simple.
So, if you have 150 days and you are working five days a week, that means it is going to take 30 weeks to do okay. So, 30 ÷ 52 that’s 58% of a year. Again, some people earn more, some people earn less, I am just using round numbers. If you are in the $100,000 a year, that is $58,000 in lost wages because you’re going to have been on the job site doing this, not at 10 o’clock at night. You’re going to have to be there when the crews are there, when other people are working at 2 o’clock in the afternoon, 10 in the morning. These crews typically get there at around 7 or 8 in the morning or typically out at 3 or 4 in the afternoon. This is not something you can do on weekends, not when the budget is $150,000.
Now wait a minute, you’re not a professional builder. So, everything is going to be twice as hard for you to do. So, if we assume you’re not a professional homebuilder, now we are going to take a look at the time and money lost from your, Do-It-Yourself Project. So now instead of the burn rate being $1000 a day, because you do everything slower because you don’t know how to do the permit, you don’t know how to do the planning, you have to go find yourself an architect, no I don’t like that architect then you need to get a new architect. We did that but I didn’t like it, so we are redoing it. This is the reality of the situation. Tile didn’t come in right, the tile came in and it’s wrong, the tub is the wrong size, etc. etc.
We are now going to assume that the burn rate instead of $1000 a day is $500 a day, which means instead of taking 30 weeks to do, your project takes 60 weeks to do which means that’s 115% of a year. So, if you make $100,000 a year, it costs you $115,000 in lost wages to Do-It-Yourself on your house.
So, let’s add that into it. So, all the numbers you already know, home cost is $750,000, value is $750,000. The time lost cost is $115,000. So, the total cost of the home when you consider, what you actually paid for the house and the renovations plus your lost wages is $865,000. You paid $865,000 for a house that is only worth $750,000. That does not sound like a really good deal to me.
Now we are going to assume it took you about a year to do. So, there’s some appreciation in the house. We are going to assume in this case 5%. At the end of one year, the house is worth $787,500 which means your gain or loss at the end of the year, because of your lost wages, you have lost $77,500. You have a house that is worth $787,500 and you have lost $77,500.
Now situation #2, Turnkey House. Because nothing needs to get fixed up, the entire $300,000 is going into down payment, 25% down. You then get $900,000 from the bank. You have a $1.2 million house. Value of the repair is zero because you are not going to do any. Total value of the 1.2 million.
Now go through the whole thing all over again except for there is no time that is lost for repairs. So, you have got a $1.2 million house. Again, we assume 5% appreciation, so at the end of the year, you have got a house that is worth $1,260,000, which means you have earned $60,000. So, let’s look at these two options side-by-side.
- Option #1, the Fixer. After one year, you have a house worth $787,000 and you have financially lost $77,500.
- Option #2. You don’t have to do anything. You now have a house that’s worth $1,260,000 and you have made $60,000.
Think about that for a second, think about what those neighborhoods are in your community. Think of the $787,000 house versus 1.26 million-dollar house. Where are those homes located, what are the schools like and who are neighborhoods? Are they the same? No, probably not. Let’s look at it this way.
These are all the same numbers as what you see in the center as the differentiators. In this case it’s $473,000 in the value of the house and then the difference between the gain or loss of $137,500 in your bank account. Those are big numbers for most people; big numbers.
So, just from a financial standpoint, buying the fixer makes no sense whatsoever. Please never do it.
That’s the money, you’re going to get less house, you’re going to get a worse neighborhood and you are going to make or save depending how you look at it, far less money by buying the Fixer. You are going to make more money, be in a better neighborhood, get more house, bigger house, better neighborhood by buying something Turnkey with that same amount of money.
Now, circle your life. Actually, I view this as far more important than the money we just talked about, although those numbers are quite large. If you’re going to do this yourself, are you going to do it while you’re living in the house or you’re going to live somewhere else and do work. You’re going to live somewhere else and do the work, now you have got rent or mortgage on this property over here on top of those numbers we just went over. No, don’t get me wrong, if you’re going to do this and you’re not going to listen to me, you’re hell bent on doing this, I am going to say, “live over there” because if you live in this house and you trying to do all of this at the same time, you’re taking a very large risk of completely alienating your spouse. It is one of the highest reasons for divorce in the State of California, I’m told by a very good psychologist I know. It brings up all the hot button issues in a relationship in regards to money and just almost everything that could be a source of conflict in a relationship, can happen during this process. I highly-highly-highly urge you not, if you love your spouse, if you love your significant other, don’t try and live through this process.
Paint and carpet, no big deal. A full fixer remodel, don’t go there. There are things in life that are far more important than money. The other thing is, let’s assume you’re not single and you’re not unemployed because if you’re single and unemployed, you have some money in the bank, you want to fix up a house, no big deal. We are going to assume for a moment that you’re employed because remember we are saying you are making $100,000 a year. This is going to be such a time sucking black hole. It is absolutely impossible not to affect your career; it will and it will in a negative fashion. So, you have to really think about that.
Do you want to risk your job, your career, your moving up the ladder and whatever it is you do for this Do-It-Yourself, for having a worse Do-It-Yourself Home. It makes no sense. Please don’t do it.
Now, we are going to talk about the realities of the situation. Sure, lots of you have seen shows on TV. I’m sitting here in a unique position of being someone who has sold reality TV shows because I used to work in the entertainment industry and I’ve been recruited to be on reality TV shows when I moved into this industry. So, I can tell you from experience, all the reality TV shows, at least all the ones I have seen so far, they always say, don’t say all, they are complete crap. There’s no reality in Reality TV. They’re not telling you the truth. Nobody really has 35 people working on a house at the same time. Nobody has the number one fabricator of stone and marble working overnight to get their custom countertops. That doesn’t happen.
Guess what, none of the flippers I know, they are always, “hey look, there is somebody in her Jimmy Choo shoes and a sledgehammer. We don’t pick up sledgehammers any more. Okay, that was 25 years ago. We pickup laptops and spreadsheets, that’s what we do to make money. At least, the good ones do.
So, I just want to really emphasize. This industry is 10 x more difficult than they make it out to believe. They are selling you advertising. That is what they are doing. They are not selling you reality, they are selling you advertising. That’s what HGTV does. They are not telling you the truth, they are giving you this fantasy that people buy into and they love to watch and that’s okay if you leave it there, but also in connection with all of these shows, is Lowe’s or Home Depot or ACE Hardware or they are trying to sell you all the stuff to Do-It-Yourself.
Again, paint and carpet, totally fine. You want to start putting new electrical panels, you want to start handling mold or broken foundation or replacing a roof or replacing all the windows in your house. This is not DIY time. This is something that needs to be left to the professionals and your life will be far better, far happier and far wealthier in all respects, if you let the pros handle it.
So that’s what we do here at FlipGreat. If you’ve got an old Fixer House that you are going to sell but you don’t want to sell it here, or you rather sell it here, just call us. It is our money, it our time, we will fix it all up for you. No money out of pocket for you at all. You sell the house for-far more. We get the work done really quickly in like 30 days or less, and when you sell it, all the profit that we generate, we will split with you so you are going to spend nothing, do nothing and you’re going to get maybe 100, 150, 200K or more.
That is simply because we are really good at what we do and typically as you’ll see in this slide here, this is where the industry usually works. You got Homer Simpson’s, he is going to sell a house to the Flippers and the Flippers are going to fix it up and sell to the Flanders family. Always transactions take about 8% of the value of the home and just light a match to it by paying it out to Realtors and Escrow and Titles and County of Los Angeles, and when you don’t have to sell it to a Flipper, because we come in and fix it up first, it is an extra 8% to share.
Los Angeles houses are expensive, if it is a million-dollar house, it’s an extra $80,000 but it’s not wasted. Plus, generally speaking in our renovations for about a single dollar we spend in renovations, we increase the value of the house about four bucks because we know what to do, we know how to do it. We pay prices far-far lower than you and we are just better at it and faster at.
On top of it, we spend $50,000 on the houses worth $20,000 more. So that is a $150,000 profit. You get $80,000 so we saved by you not selling the Flipper the house. Also, there is $230,000 to split and you didn’t spend anything, you didn’t do anything.
So, just like the slide says, Homer does nothing, Homer spends nothing and Homer gets an extra $115,000 pretty much free money.
So, this is that same house here. This was the kitchen when we started. It is not bad, it is not horrible, but this was in a house in 2017, I believe. It wasn’t turned into this. Really beautiful kitchen actually. We do all the work, we paid for everything 30 days or less, and use any realtor you want. It is not a family member conflict of interest anything like that. We want the highest price possible when we sell because when you make a dollar, we make a dollar. Our interests are aligned. Make more money when you sell because it is fixed up.
It is a project right there in Rancho Palos Verdes. We split the increased value we created with you. Sell faster. No hassles.
And referrals. Let’s say you don’t have a Fixer House but the guy across the street or down the block does or someone at work does, your sister does or whatever, you refer us to them, they use us. At the close of escrow, you’re going to get $5000 out of our end of the deal. So, it doesn’t affect your friend at all. You are just helping them out. They are going to spend nothing, do nothing and get a whole bunch of more money and you’re going to get $5000 bucks.
So that’s about it. If you have any questions, contact me online and have the answer. If you would like a presentation done on a subject that you’re curious about, feel free to send me that too. I hope this was helpful.
Please, friends don’t let friends buy, don’t let DIYers buy Fixer Houses.
Thanks everybody out there. Good luck, be safe.