More foreclosures mean more fixer uppers

NEW YORK Fri Jun 15, 2012 11:49am EDT

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NEW YORK (Reuters) - A year after purchasing their Richmond, Virginia, fixer-upper for $290,000 in 2010, Sherry and John Petersik rolled up their sleeves and tackled the outdated kitchen.

They dragged the refrigerator and microwave out of the way, set up a dish-washing station at the bathroom sink and plunged into do-it-yourself mode, installing a new countertop, refinishing cabinets and replacing appliances.

"We knew to expect the chaos," says Sherry Petersik, 30. That's because it's the second home the Petersiks have renovated for fun and the promise of profit.

They actually lost money on their first handyman's special, buying a home for $190,000 at the height of the real estate bubble in 2006, pouring $30,000 into it, and then selling it for $195,000.

"But we lost tens of thousands of dollars less than our neighbors did," Petersik says. Plus, they unloaded the house in days.

Now the couple is older and wiser, but still hooked on the dust, noise and profit potential of home renovation. "We got comfortable with that lifestyle of sweat equity," says Sherry.

They have already added window treatments and a cobblestone patio and modernized a fireplace in their new home, and after the kitchen is done, they expect to have spent a total of $10,000. She expects that to give them a nicer house than they could have afforded to buy, and to add $50,000 to the home's value.

The DIY strategy is gaining traction these days as energetic homeowners try to build equity in a still-depressed housing market, with a growing number of foreclosures filling the multiple listing services with run-down homes.

According to RealtyTrac, a foreclosure listing service, 26 percent of homes sold in the first quarter of 2012 were foreclosed properties, an increase of 8 percent from 2011. Short sale properties accounted for 12 percent of national sales for the first quarter of 2012, up from 9 percent last year.

This glut of short sale and foreclosure properties means a great need for renovation, say industry experts like Eric Sussman, a senior lecturer in real estate at the University of California Los Angeles Anderson School of Management. As property values have decreased and families deferred maintenance work, many of the most affordable homes need significant renovations, he said.

Foreclosures can be especially problematic, as many people have been trashing foreclosures and carrying away appliances, says Bruce Graf, a general contractor in Grand Prairie, Texas. "When people are losing their homes it sometimes makes them feel better to destroy things on the way out."

WEIGHING COSTS AND BENEFITS

Last year, homeowners spent $107 billion remodeling owner-occupied units, a 3.5 percent increase from 2010. This year, remodeling spending is expected to grow 12 percent to $120 billion, according to the National Association of Home Builders, a trade association.

A craze with all things DIY has helped make the glut of fixer-upper properties even more alluring, says Liza Hausman, vice president of marketing at Houzz.com, an online remodeling community. The site gets 5 million unique hits per month, up from 2 million in December 2011. "People are buying things that they think they can turn into a dream home," she says.

But many buyers don't realize that it's easy to lose money on fixer uppers, says Sussman, the real estate lecturer. People who buy a foreclosure at auction may not even get solid information about the condition of the house until after they've made their bid.

Weighing the costs and benefits of what to renovate is key, especially for homeowners looking to fix and flip. Replacing the front or garage door, creating an attic bedroom and minor kitchen remodeling give homeowners the most financial gains, according to the Cost versus Value survey from Remodeling Magazine conducted in 2011.

The toughest costs to recoup are building a sun room, installing a back-up power generator and remodeling the home office because they aren't universally valued, according the report.

As a general rule, "renovating the kitchen and bathrooms is always going to help you with retail value," says Adrienne Francis, a real estate agent in Bernardsville, New Jersey, with Keller Williams Realty.

She tells people who want to renovate a home to sell that they should purchase modern appliances and forego any permanent d├ęcor that's too non-traditional. But foremost, keep costs in mind: a wood deck addition ($10,350), kitchen remodel ($57,494), bathroom remodel ($16,652) are the average national prices of mid-range projects, according to Remodeling Magazine's survey.

Estimate the home's eventual selling price before committing to repairs by looking at comparable properties in the area, says Paul Wyman, a real estate agent in Kokomo, Indiana. Some homeowners make the mistake of doing so many renovations that they "price themselves out of the market," he says.

Especially when renovating a primary residence, think about long-term costs, suggests Kate Battle, a graphic designer from Milwaukee, Wisconsin. When Battle and her husband bought their 1960s home two years ago, she called the utility company to get an estimate of the energy bill in order to plan her budget. "Old houses don't have much insulation," says Battle, and the couple eventually paid for more energy-efficient windows.

Battle says she also got help estimating the cost of repairs by talking to contractors and visiting stores like Home Depot and Lowe's. She also suggests that prospective buyers hire a home inspector who will give them information about what kinds of repairs might be needed and how much they would cost.

Websites like costestimator.com and remodelormove.com provide calculators that homeowners can use to guesstimate the price of the projects they are considering.

HIRE HELP OR DIY?

A rule of thumb is that materials cost about 40 percent of most projects, with labor making up the rest, so qualified homeowners can save significantly by swinging their own hammers. Just plan ahead for dust and differing opinions with your spouse, says Sherry Petersik, who recommends that most people leave any structural work to the pros.

While most home buyers tend to finance their remodeling from savings, there are different ways to borrow money to cover a major renovation, says Frank Donnelly, a certified financial planner and president of the Mortgage Bankers Association of Greater Washington.

Some new homeowners can qualify for the Federal Housing Authority's 203(k) or streamlined 203(k) programs, which allow loans with only 3.5 percent down payments and can be bundled with the mortgage. Fannie Mae's Homestyle renovation loan is another popular option and allows financing of up to 50 percent of completed value.

The easiest way to refinance is still through a home equity line of credit, says Donnelly. Discuss financing with your lender even before buying to make sure you qualify for a loan.

"Don't get halfway through funding it yourself and then look for financing" after the project expands, he says, noting a time-honored home renovation rule of thumb: "Cost overruns are almost inevitable."

(Editing by Linda Stern and Dan Grebler)

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