Why Buying Ugly Houses Rocks

Posted by JD Esajian

Why is buying ugly houses such an attractive business model for real estate investors?

Investing in Real Estate

Why invest in real estate? Put simply; buying, renting, and selling real estate can put more money in your pocket in an hour, than most people make in a year. For some, this means simply gaining more income. For others, it is essential for bridging the gap between their paychecks and where they want to be financially. Then there are those that aspire to building mountains or wealth, or that have piles of cash they want to protect and grow.

What’s Wrong with Pretty Houses?

It’s an obvious, and fair question. Why would anyone prefer to buy an ugly house versus a brand new home? There are actually many significant reasons to choose existing over new homes:

• The high top of the market, or higher prices of new properties
• Hidden construction flaws which can render a new property worthless
• The emotional investing trap
• Lacking mature communities and established rental markets

New homes and condos aren’t always bad, and they look fabulous, but they are often overvalued. Sometimes problems can be underestimated as well. If you are looking for a profitable investment, going new may not be the best option. The allure of glamorous new properties can blind investors to making sound investment decisions based upon the numbers – especially when it comes time to sell.

The Appeal of Buying Ugly Houses

So what advantages do uglier houses offer real estate investors?

In a single word; value. It’s been known for years that the ugliest home in the neighborhood can often offer the most value. It might not look attractive on the outside, but the numbers can be far more appealing.

The uglier the house, the better the deal, at least sometimes. There are three main factors that make this true:

1. Appraisal Calculations: We all know home appraisals can be quirky. And this is one of the times where this really shows up. Property condition is a very small factor in the appraised value of a home. Few really understand this. Location, square feet of living area, and number of bedrooms really carry the weight here. Whether the lawn is mowed, the exterior needs to be painted, or whether the flooring is old stained carpet or gold plated tile really makes no difference. The appeal these factors have can make a difference to the ability to sell to the general public. And to how fast a property will sell, and how much the offers are that it will attract. So distressed properties offer discounts.

2. Ugly = Discounts: Properties that appear to be neglected and in distress are often showing symptoms of deeper distress. This may be a foreclosure situation, or something else. This often means the seller can be more highly motivated to cut a deal and sell fast. That builds in even deeper discounts. This isn’t about taking advantage of someone else in bad situation. Helping them get out of the debt and into a better living situation can be a huge help. And it takes money to fix up and hold a property. Plus the risks involved. There is value in that which earns a discount.

3. Ease of Adding Value: On the flip side of this; the above factors combine to make it easy to make money on these properties. Many ‘ugly’ homes simply suffer from cosmetic challenges. This makes it easy to add value and dollars with a little cosmetic makeover. This might simply be landscaping and exterior paint. In other cases it might mean updating windows, interior paint, new flooring, and updating layouts and bathrooms. Some may benefit from more dramatic rehabbing.

The Exceptions

Not every ugly house is a deal. Not all are offered or sold at discounts. The numbers don’t work on all of them, and there can often be bigger challenges and issues than many newer real estate investors expect.

When it comes to rehabbing a home; always expect it to cost more than you expect. And budget for that. All it takes it to open a wall and discover that you need to replace the entire electrical system or plumbing and the costs can shoot up dramatically. If you aren’t financially prepared you could be the next distressed seller of the property. Some really ugly homes (and even pretty ones) can have structural issues. This can include roofs, foundations, pest infestations and more. Most real estate investors run from these issues due to the high cash costs to fix them. Others find that this means they offer the most value. But there can be issues which can exceed the purchase price of the property. May be it has been condemned, or illegal use issues have racked up hundreds of thousands in code violations. If you are buying an ugly home for $6,000 and the land alone is worth $100,000, then tearing it down shouldn’t be an issue. The same works if the numbers are in the millions. But if you were planning to rent out the home, or can’t afford the tens of thousands it costs to tear down a home, and the time it takes, this could be a deal killer. Maybe you should consider wholesaling, or ‘prehabbing’ instead.

You also need to know the neighborhood. What do the surrounding houses look like? What are crime rates like? What are rents, really? What about discounts being offered on other homes? For example; are there lots of foreclosures? Are some homes being sold at 50% off to key workers, etc.?