MoneySense Magazine, May 2007
Diamonds in the rough: How to find the perfect fixer-upper
Dirt and clutter can be your best friends when it comes to finding a bargain property.
This article was first published in the May 2007 issue of MoneySense.
When Bill and Carole Dobson went looking for a home, they knew exactly what they wanted â€” a run-down house with a depressing exterior and a drab, dingy interior.
They found it. The front lawn of one property they visited was a blank rectangle, with sparse grass but not a single shrub or tree to break up its unappetizing appearance. From there, things rapidly got worse. The backyard was littered with dog poop and looked onto a seedy back alley. The interior of the two-storey, 158-sq-m house was full of worn carpets, dark paint and faded wallpaper.
But it was a solid house in a leafy neighborhood of Calgary with good schools. The Dobsons knew they could fix many of its problems with a bit of sweat, a few new doors and a lot of paint. So they ignored the $300,000 asking price and made a low-ball offer of $230,000 for what they figured was a perfect diamond in the rough. Their bid was accepted the next day. “The house had been on the market for six months,” says Carole Dobson. “The kitchen and bathroom were old and dreary. In fact, the whole house was in a sad state. But we put about $50,000 worth of improvements into it â€” doing almost all the work ourselves, a little at a time â€” and we figure we’ve made hundreds of thousands of dollars in just three-and-a-half years.”
Interested in finding a similar diamond in the rough? Then it’s important to know what you’re getting yourself into. Simply buying any old property can easily cost you a fortune in renovations. But if you learn how to spot an undiscovered bargain, you can turn up surprising deals even in a hot real estate market.
“More than 90% of buyers judge a book by its cover,” says Lydia Ingles, a sales rep with Century 21 Heritage Group in Newmarket, Ont. “They drive by and if they don’t like what they see at first glance, they don’t even go inside. But that’s not the way to find a great fixer-upper. You have to be able to walk into an awful-looking house and visualize what it could be like with new paint and wallpaper and a few key renovations.”
Here’s how to do just that:
Remember that close counts
The classic tip for real estate buyers is to buy the worst house on a good street, and that’s still the best strategy. Doing so almost guarantees you won’t overpay for a home. You can boost your property’s value simply by doing small renovations that bring your house up to the level of its neighbors.
Problem is, you may not be able to find an affordable house on a good street if the market is hot. In that case, you have to be prepared to look further afield. Drive around the neighborhoods that border affluent, upscale areas. Many of these marginal neighborhoods are marginal for a good reason â€” it could be that a large public housing project, a smelly factory, or some other immovable and permanent feature is dragging down property values. But in a surprising number of cases, the problem isn’t that bad. A neighborhood may be lower-priced simply because it was originally a blue-collar enclave with smaller homes than nearby areas. That doesn’t mean it can’t be gentrified. Especially if there are early signs that other renovators are moving into the neighborhood, you should take a closer look.
Carole Dobson, who has bought, fixed up and sold three homes in the last 15 years â€” all for hefty profits â€” insists on proximity to good neighborhoods when she buys. She also seeks leafy areas that have a bit of natural beauty since those advantages can’t be easily bought or duplicated. “Two of the most expensive neighborhoods in the city are kitty corner from my home,” she says. “And I have great mountain views.” Both factors help to explain why her home’s value has taken off over the past three years.
Think like the next buyer
We’ve all been told to put other people first. That advice is especially true when it comes to finding a diamond in the rough. To be truly blessed, forget about your own needs. Think instead of others â€” specifically those future home buyers that you hope will one day hand you a big fat cheque for your house.
Think of parents, for example. Few things are more effective at selling a house than great schools. So even if you don’t have school-age kids yourself, make a point of inquiring into the quality of local education. Similarly, you should think of potential landlords. A basement apartment can make an expensive home affordable to a wide range of buyers, so even if you don’t want to take in tenants yourself, you may want to buy a house with such an apartment already in place. Finally, in large cities, it pays to think like a commuter â€” a home that is close to downtown office towers can possess value simply because it reduces travel time for buyers who work close by.
When searching for a bargain, your best friends are dirt and clutter. Mess turns off buyers and can reduce the price you have to pay. “There was dust, garbage and debris everywhere when I first looked in my current house,” says Dobson. “But I could see a beautiful floor layout. The rooms were large and spacious. And even though there was no landscaping, it had a fairly large front and backyard with a driveway and small garage. There was great value there.”
Like Dobson, you have to look beyond the obvious to find a deal. First rule: get out of the car and take a look no matter how bad a place may appear from the curb. Second rule: be systematic in evaluating a home. Because clutter can deceive you into thinking rooms are smaller than they really are, carry a tape measure to check room sizes. Pack a digital camera so you can snap photos to remind yourself of key points.
If a house is broken into a warren of small rooms or seems awkwardly laid out, tap the walls to figure out which ones are weightbearing. A solid sound indicates a structural wall â€” one that bears weight. Changing a structural wall can cost thousands of dollars and sabotage your renovation budget.
On the other hand, a hollow sound usually indicates a non-weight-bearing wall that can be removed with relative ease for a couple of hundred dollars and a few hours of your own labor. If all that stands between you and a beautiful new floor plan are a few non-weight-bearing walls, you may have found a diamond in the rough.
“The first house my wife and I bought was in a neighborhood just next to a more upscale one, but we got it cheap because it did not have a very good layout,” says Stephen Hodge, a sales rep with Century 21 All-Pro Realty (1993) Ltd., in Port Hope, Ont. “There was a big bathroom between the small kitchen and small family room. So we moved the bathroom to a corner and made it much smaller. It was just a very minor change but we got a nice big kitchen and much larger family room out of it.” When the couple listed the home for sale in 2005, they received four offers on the first day and sold their residence for what Hodge says was a “ludicrous amount” â€” $410,000, or $140,000 more than they had bought it for three years earlier.
Know your own limitations
Some homes that look like diamonds in the rough aren’t, because the cost of updating them would be enormous. A leaky basement or a big crack in a structural wall should send you running unless you’re prepared to spend $20,000 or more on repairs. Floors that are severely uneven should also sound alarms. They could be a $15,000-plus disaster if they indicate a shifting foundation. And how about those signs of water damage to the beams in the attic? They should cross the home off your list unless you’re prepared to spend $10,000 to replace the roof and beams.
In general, anything you have to hire a pro to do is likely to blow up your budget. Completely redoing an old kitchen, for example, is a quick way to blast through $15,000 or more. An old bathroom will cost $10,000 or more to bring up to date if you’re putting in new plumbing and fixtures.
Beware of renovations
Be cautious of homes that have already gone through major renovations. You have no assurance that the jobs were done properly. And even if they were, you’ll probably wind up paying top dollar for the property.
Instead, focus on homes that don’t need major work but can be dramatically improved with cosmetic touches. A true diamond in the rough needs only fresh paint, new doors and tasteful landscaping to make its exterior look substantially better. When it comes to kitchens or bathrooms, the ideal diamond in the rough needs only new tiling, a new countertop, new cupboard handles and a tasteful paint job, not structural work.
Dobson has a checklist of items that she looks for when searching for a great fixer-upper. Spacious rooms are good; so is a large backyard in need of landscaping and a dilapidated garage that can be fixed up easily. Also great are old doors, doorknobs and windows (they can be easily updated for not much money), chipped front patios and railings (again, easily fixed) as well as windows on the back wall of the main floor that can easily be converted to patio doors. “Simply converting from a window to a patio door can provide a lot more light and transform a dark, dingy main floor into a bright, welcoming space,” says Dobson.
Never underestimate what a few buckets of paint and bit of elbow grease can accomplish. “When we looked at our diamond in the rough for the first time, the house was dated and full of dark paint and busy wallpaper, but I could see potential,” says Jackie Mintz of Newmarket, Ont., who bought her two-storey, four-bedroo 1980s home a year ago. She removed dark and dated wainscotting from both her family room and her bathroom. Then she gave both rooms a fresh coat of paint, and a new toilet and vanity for the bathroom. Cost? $650. “The bathroom seems so much bigger and brighter,” says Mintz. “It’s amazing the difference that paint and a little bit of work have made.”
In similar fashion, Dobson gave her Calgary home a quick lift by simply replacing the old doors in the house with more modern ones. “The doors were all coming off their hinges and made the whole house look dreary. We bought white doors with glass panels and installed them ourselves. That helped give the house more style and light.” And all for $2,500.
Look for freebies
Always lift up carpets to see what the flooring is like underneath. Hardwood floors beneath old, stained carpeting are the equivalent of a $15,000 gift if you calculate what they would cost to install new. Oak bannisters, too, can often be found hiding underneath chipping paint. “If you have an oak bannister and railing on a painted stairwell, simply stripping the paint off and staining the oak underneath can change the entire look of an entryway,” says Scott Carr, a real estate salesman in North Bay, Ont. “There’s real wood under there and that’s worth money.”
Become a tree hugger
You should keep an eye out for homes that have attractive trees. Real estate agents say that mature trees can add $10,000 or more to the value of your house. In fact, it was the four 100-year-old pine and maple trees in the backyard that sold Mintz on her home. “They needed a bit of cleaning up so we trimmed them back a bit,” says Mintz. “Now they give the backyard a great cottage feel.” The moral? Look for homes with trees â€” and if your house doesn’t have one, plant a sapling tomorrow.
Practice flower power
The ideal diamond in the rough is a house that packs no curb appeal, often because it lacks an inviting front lawn. You can instantly add value by planting a few hundred dollars worth of flowers and shrubs or adding rocks, paving stones and other decorative elements. “When we bought our house, the front lawn was a disaster â€” no flower beds, no winding path,” says Mintz. “My husband and I took our trailer, loaded up $40 worth of river rock, brought them home and laid them ourselves. We then power-sprayed the whole front patio, got some new white numbers and front entrance door, and painted the garage door and front shutters. When you look at it now, it looks like a completely different house.”
As serial renovators can attest, it’s easier than you may think to find a diamond in the rough. Carole Dobson has accepted a job offer in Toronto and is already hunting for her next fixer-upper. “I don’t have to move until fall,” she says, “but I’ve already started learning a bit about the neighborhoods in Toronto and where some of the more attractively priced homes near my new work can be found.” As for her home back in Calgary? “It’s listed for $599,000,” says Dobson. “That’s more than double what I bought it for three and a half years ago.”
Love among the listings
Here’s where to start looking for the fixer-upper of your dreams.
The best way to get a real estate bargain is to look where others aren’t. Stephen Hodge, a sales rep with Century 21 All-Pro Realty (1993) Ltd. in Port Hope, Ont., recommends that you ask your agent to point out listings in certain key categories.
Vacant properties, for instance, are often empty because the seller has bought another house and moved. Given the cost of paying two mortgages, the seller is often eager to make a deal. And because empty homes can appear sterile and cold, they scare off many other potential buyers.
Homes being sold by retirees are another fruitful area for bargain hunters. “The homes are often dated on the inside,” says Hodge. “And retirees may not be as motivated to get top dollar because they’re not moving up.”
Matthew Sylvain, a Toronto journalist, and his wife Lisa D’Innocenzo, 33, agree. “The house we bought just outside the downtown core had been owned for 12 years by a widow,” says Sylvain, 35. “It needed work and was pretty dated but sold for tens of thousands of dollars less than others in the neighborhood because the owner hadn’t given it the five-star treatment.”
Homes that have been used as long-term rentals can also be great finds. They’re often older homes in established neighborhoods, but often have surface damage like holes in the walls, says Hodge. “But that’s good news for you because it means the house can easily be cleaned up and fixed.”
Finally, ask your agent if he or she knows of any properties that are difficult to show, whether because a tenant won’t co-operate or because the showing hours are limited. Many real estate agents and home buyers won’t bother with these places. As a result, you’re not going to be bidding against a lot of other potential buyers. That presents an opportunity to negotiate a great deal.
MoneySense Magazine, May 2007