Author Topic: which is more risk? new construction or fixer upper?  (Read 803 times)

clarkfan1979

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which is more risk? new construction or fixer upper?
« on: January 15, 2018, 07:05:19 PM »
I'm getting ready to purchase house #3 and I would like to buy another fixer upper.Many of my family and friends only like to buy new construction or at least houses less than 10 years old. They consider it less risky. I'm not sure exactly why. I agree that new construction is less work, but I don't agree that it's less risk. I think new construction is more risk. 

I like to buy foreclosures and consider them to be less risky. Based on my experience, you get at least a 10% discount for buying a foreclosure, after repairs.

I can't personally think of a situation in which I would have made more money buying new construction. I could see someone buying more properties faster with new construction because you do not need to budget extra time for repairs. However, I'm pretty confident you would make less money on each deal.

The only risk I can see with fixer uppers is running out of money to make all the necessary repairs.

My first two primary homes are now rentals. They are both single family homes

Property #1: 5 bed/2 bath. Purchased in 2007 for 182K. 10K of repairs. Now worth 360K and $2200/month in rent.

Property #2: 3 bed/2 bath. Purchased in 2012 for 95K. 16K of repairs. Now worth 240K and $1700/month in rent. 

Does anyone do really well with new construction? Would you consider it less risky than a fixer upper?

Another Reader

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Re: which is more risk? new construction or fixer upper?
« Reply #1 on: January 15, 2018, 08:27:46 PM »
I bought four new construction homes in growing areas of the Phoenix market when the subdivisions were just starting.  This was back in 1999-2002.  All came with tile roofs, post-tension slab foundations, modern kitchens and baths, and new everything, including appliances and in two cases, window coverings.  Front yard landscaping was provided but I had to do the back yards.  I am just starting to see A/C replacements.  Two or three hot water heaters have gone.  Other than that, it's been paint, carpet and minor repairs.  The growing neighborhoods have become popular and are easier commutes than current new houses.  The schools for three of them are rated 9 and 10 by Great Schools.  The other one has lower ratings, but the charter schools that are popular in Arizona are not included in the ratings.  All are smaller homes, 1200-1300 square feet.  All are 3/2's and rent quickly to good tenants.  Not Bay Area appreciation, but acceptable. 

I also bought four foreclosures and short sales between 2009 and 2012.  They are in a different city with less desirable schools but a solid blue and pink collar base.  Same size houses, built around the same time my new builds were.  The prices were a little more than half of what they were when they were new.  They needed more work because they were not as well cared for.  Appliances, window coverings, paint, carpet, A/C repairs all had to be done.  Landscaping was not kept up and some money was spent there.  Still less than the ongoing maintenance on my well-located houses from the 1970's.  Rents are lower because of the location, but tenants in all these small houses are stable.

All these houses are new or newer.  New, at least for the first 15 years or so, is much less work than houses over 20 years old.  Over 30 years, and you need a substantial capital improvement budget.  Things are going to go wrong.  Location and higher rents can make up for that, but older houses require more work.

I made more money on the foreclosures, because of the overall market at the time I bought.  However, discounts for foreclosures in today's market are minimal.  I would not take on the hassles and unknown problems of a foreclosure in the current market because I would be paying close to market value for a house in good condition.  If you can find foreclosures with substantial discounts in your market, it might make sense.