Buying a fixer upper not for the faint hearted

Buying a rundown property, fixing it up and then selling it for a profit, is a tried and tested route to wealth creation, but it's not for the uninitiated.

There's no doubt that real estate has the potential to create wealth, but people need to understand that this particular form of real estate trading is not a "get rich quick" undertaking, says Mike Bester, CEO of Realty 1 International Property Group.

"For someone to be successful in such a venture they will need to have an in-depth understanding of market values and trends, as well as a fair amount of time and money at their disposal."

In Bester's opinion there are two critical aspects that need to be considered when buying a "fixer-upper". The first is location, while price follows closely behind. "The importance of location cannot be over-emphasised because of the impact it will have when the time comes to re-sell. Properties in good locations invariably sell more quickly and for better prices than those on the wrong side of the tracks."

At the same time, Bester warns against over-paying, saying that the overall success of the undertaking will depend on being able to sell for an amount that will cover all costs and still realise a healthy profit. "Ideally, this type of property should be bought for less than the market value in order to allow for the costs associated with buying, selling, financing and renovating."

He also believes that anyone who doesn't have a thorough understanding of market trends and pricing should seek the advice of a real estate professional before embarking on a project of this nature. "They will be able to give you expert advice on current and anticipated price trends, market demand and how to avoid over-capitalising," he says.

Concerning the financing of the renovations, Bester recommends taking on a structured finance package rather than using short-term finance or an overdraft facility, which would be very costly. To qualify for this type of loan, the bank's valuer has to find sufficient value in the property and the bank will require written quotations pertaining to the work that needs to be done. Once the loan has been granted, the money will be allocated in the form of progress payments rather than an upfront amount, notes Bester.

Drawing up a budget - and sticking to it - will be critical to the success of the project, he says further, adding that the inclusion of a buffer of between 10 and 20 percent of the anticipated costs could be used in the event of unbudgeted surprises.

From a hands-on perspective, first-timers need to ensure they understood issues such as material and labour costs as well as the skills required to complete the work properly. "You need to decide if you're going to do the hard work yourself or hire people to do it for you. If you're going it alone, you'll need to possess skills that extend beyond mere painting. If, however, you're going to employ people, make sure that you have the ability to manage hired help."

Finally, while Bester highlights the inevitable frustrations and time delays as part and parcel of renovating, those who do their homework properly, and have foresight and courage, stand to make good money out of the exercise.
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