Fix it and Flip it – How I Lost Money on Real Estate
I have met many people who have lost money when they sold their homes. In fact, I am one of those people, and it has happened to me more than once.
There are a number of factors that can cause a financial loss when you sell your home, including needing to sell at the wrong time due to an impending divorce or foreclosure, or a downturn in the local housing market. However, it is also common to lose money simply by making too many expensive changes to the house before putting it on the market. This is how I lost money on real estate, before I knew it.
My most resounding failure in the home improvement market was a house I bought in Spokane, Washington. Knowing what I know now, I would have just replaced the carpets and fixtures in the kitchen and bathroom, painted inside and out, and bought new appliances. I would have probably also replaced the old style windows to make the place look nicer and more attractive to the energy conscious buyer. These corrections could easily have been made within the two years he needed to live there to avoid capital gains taxes.
Because I didn’t know what I know now, I did major renovations, including changing the bathroom. I did most of the work myself, but the materials alone cost more than I was able to recover when the house was sold. With the exception of repairs made to the house to make it eligible for an FHA loan and watering the lawn, I doubt any of my major projects have really helped me sell the house or increase its value.
If a house is really solid, with no structural damage or bug problems, the main reason it will sell for less than its value is often cosmetic. This was certainly the case with the house I bought in Spokane. Dirty carpet and a mirror-tiled wall in the living room kept most buyers from going further into the house. I was able to see past the aesthetic issues and see the full potential of the house, but my imagination went a bit too far.
The floor plan was odd and a little awkward, but leaving the bathroom where it was would have been much more financially rational. Why didn’t I do that? Because my emotions and nested instincts took over, pushing aside all thoughts of future gain or loss.
Let’s face it: Most people don’t buy their own homes with the intention of making a profit, although they certainly hope that the home will be a good investment. In fact, the emotional stress caused by the process of buying a house and moving into it can be enough to completely erase any thoughts of moving again a few years later. However, I know of several families who have made a very good living buying houses cheaply, living in them and fixing them up, and then selling them when the IRS allows them to do so without paying additional taxes. Clearly, these people do not make any changes to these houses without careful consideration of the end result.
After my adventure in Spokane, I decided to learn from my mistakes and figure out how to stop losing money on houses. I read books by authors who have experience fixing up and remodeling houses, and then I read them again. When I saw that most remodeling projects almost never recoup their costs when the house is sold, I was a bit surprised, because I had been guilty of almost every mistake on the list at one time or another. I know many people who have also made the same mistakes, even when they started those remodeling projects with the intention of increasing the value of their homes.
When I bought my next house, that list was very much on my mind. For example, my kitchen was in dire need of a major overhaul (or so I thought) and it was too small. I pored over the latest home decor magazines and ideas flooded my head. I thought about knocking down some walls, and even tried to imagine adding something to the house to make the kitchen bigger. New cabinets and new appliances would be needed…
In the end I painted the kitchen cabinets and replaced the sink with a new one I bought at Ikea. I covered the chipped orange Formica counters with patterned cotton fabric and coated them with many coats of water-based Verathane which was meant to protect the hardwood floors. The entire “remodel” cost less than $400, as opposed to the thousands of dollars I would have spent if I had gone ahead with my idle dreams of a “perfect” kitchen. Since the house sold for a very good price within two weeks of being listed, my buyer obviously didn’t care that the kitchen didn’t meet my idea of perfection. Because I kept my costs low, I made a useful profit on the sale.
Would you have been able to sell the house for more money if the kitchen had been remodeled and expanded? Maybe, but not enough to cover the cost of the remodel. Although the National Association of Realtors lists a kitchen remodel as one of the projects that will add the most to a home, they still advise that you expect to recover only 80% of the costs. If your new kitchen is much fancier, larger, and more expensive than any other kitchen in the neighborhood, the benefits will be even smaller. A complete kitchen remodel can cost thousands of dollars, so the 20% you don’t get can be a lot of change.
Does this mean that you shouldn’t make changes to your home that would make you happy? Not at all, especially if you intend to live there for many years. But it’s worth sitting down with your spouse or partner before you start making your remodeling plans, determining exactly how long you’ll be staying in the house, and then thinking through all the financial implications of the remodeling project. Even if you don’t consider yourself a home expert, it might be worth slowing down a bit and finding ways to improve your home without spending money you’ll never see again. As a bonus, your family could avoid the stress and disruption of all that remodeling hassle.