The Good, The Bad, and The Ugly provides excellent adjectives for the range of fixer-uppers that you might consider. The good would be the house that needs a little touch-up paint here and there and maybe some new carpet and fresh front landscaping. The bad is a total wreck that basically needs to be bulldozed! The ugly needs extensive plastic surgery. Let's discuss each one of these in more detail so that you have a good mental picture of each type.

The Good Fixer-Upper

Your instincts and preconceived notions probably tell you that this is the type of house you should be looking for. It's basically a nice house that just needs a little cosmetic touch-up work here and there to make it shine. In the rehab business, nothing could be further from the truth you will not make money buying the cosmetic fixer-upper! Now, I know that this is contrary to your instincts and contrary to what you've read or been told.

The problem, from a business standpoint, is that you can rarely buy a house that just needs some minor repairs at a price sufficiently below retail market value for you to make a reasonable profit on the time and money invested. For example, let's say the house needs fresh paint inside and out and new carpet-everything else is fine. We'll estimate the cost for these items at $5,000. If the full retail market value for the house is $125,000 in this neighborhood, the homeowner typically will list the house for that amount. The most that he will come off the price is usually the $5,000 needed to make the repairs. He is not a motivated seller, because he knows that someone who is willing to earn a little sweat equity and wants to live in the house will come along and pay between $120,000 and $125,000.

Where is your profit in a deal like this? It makes absolutely no sense to invest $120,000 plus $5,000 in repairs and get $125,000 in return. In fact, you would probably lose money on this deal when you factor in holding and selling costs. This is the type of house that may make sense for a long-term investor looking for good rental property or an owner-occupant who wants to earn a little sweat equity. It is not the type of house that fits the rehab investment criteria. So don't waste your time or your real estate agent's time looking at these properties.

The Bad Fixer-Upper

This house is the one you want to stay away from-it has the wrong things wrong. It has major structural or environmental problems that cannot be economically solved. Examples of structural problems could include the following: serious defects in the concrete slab or concrete block foundation; no permanent foundation (e.g., it is built on wooden timbers); it may be sitting on ground that has subsided or is subject to flooding or mudslides; it might have extensive wood rot or termite damage throughout the house; the sub-floor could be extensively damaged; if a two-story house, it might have no bathrooms on the upper level; its rooms could be too small and impossible to enlarge because one or more walls contain load-bearing support beams; it might be a one-bathroom house in a neighborhood that has all two-bath homes; wiring, heating, and plumbing could be inoperable or need to be completely replaced. Major environmental problems would be things like extensive presence of exposed asbestos insulation (in ceiling, walls, and pipes), leadbased paint that is chipped and peeling and must be removed from the entire structure, heavy chemical contamination of soil, contaminated drinking-water supply, and high-level indoor radon contamination. Keep in mind that the mere presence of asbestos insulation or leadbased paint are not deal killers-it is only in those instances where the exposed areas cannot be easily patched and where the entire structure needs to be "treated" that the cost to fix would likely be prohibitive. The same is true of minor radon contamination that frequently can be corrected at a modest expense.

These major structural and environmental problems are deal killers-Never ever buy a house with these problems. You cannot throw enough money at these houses to ever satisfactorily fix the problems, and some of the problems are not fixable, period. In addition, houses with a history of serious contamination problems will always carry with them the potential for long-term liability. You don't need these headaches. The bulldozer is the only solution and that's not the business you're in.

The Ugly Fixer-Upper

OK, you' re finally ready to meet your future business partner and the object of your quest. The only problem is that this house is indeed, ugly. Get over it though, because this is the house that will make you money. Your job is to turn lemons into lemonade. Let's take a look at the characteristics of the typical, ugly fixer-upper:

Exterior of house.
* Curb appeal is at or near zero.
* There is little, if any, front landscaping.
* Exterior paint is faded and chipped; stucco is cracked; or siding is falling apart.
* Roof shingles are curled up or missing.
* Front door is battered and beaten; screen door is ripped.
* Windows are cracked, broken or boarded up.
* Driveway and walkways are in poor condition.

Interior of house.
* Strong odors are present.
* Rooms are dark, with poor lighting.
* Carpeting and flooring are worn out.
* The ceiling has water stains, holes, or cracks.
* There are holes in the drywall or plaster walls.
* The bathroom has soft, water-damaged flooring.
* There is mold around tiles in shower or tub.
* Kitchen cabinets are falling apart and missing hardware.
* Light fixtures are broken or missing.
* Furnace is not operating properly.

Is this really the house you're looking for? You bet it is! This is exactly the house you're looking for. It's a real mess all right, but it appears that the key structural components are sound (this will later be verified by a professional inspector). The repairs will cost a pile of money but all can be fixed with no long-term liability issues. The challenge will be in negotiating a good price, based on the cost of repairs, desired profit margin, and after-repaired value (retail market value).

Is this the type of house you imagined as your target property? Probably not, but let me assure you that this is exactly the type of house that will make you the big bucks, if you can purchase it at the right price. This is the classic "dirty dog" property. Obviously, there is not going to be a lot of competition for this house (there will probably be some), because most people would never even get out of their car to look inside. The trick in this business is to develop a knack for seeing the possibilities, not just the problems.

What is it about this type of property that makes it attractive? Why is this house better than the cosmetic fixer-upper? The primary difference is not the magnitude of the problems-it is the motivation and flexibility of the seller. The seller is likely to be either an individual who couldn't care less about the house, as evidenced by its current condition, or a bank that took the property back in a foreclosure and wants to get it off the books. In either case, the seller knows the house is in junky condition and realizes that it will only sell at a large discount and well below retail value for the neighborhood. And the seller will eventually come to realize the need for some flexibility in price, financing terms, or both, in order to get the property sold.

If the house is boarded up or just vacant, so much the better. Just imagine what the owner of a boarded-up or vacant property is asking. "Will someone please take this junker off my hands?" Flexibility in financing terms also is an important characteristic of this seller. He knows that traditional, conventional financing is not going to be an option for a buyer of the house in its as-is condition, so he likely will need to provide some owner financing. This set of circumstances and a motivated seller who is receptive to flexible terms will create the opportunity for you to purchase at a bargain price that will make you money.

How do you find these junker properties, in decent neighborhoods, with motivated sellers? You get your real estate agent to do it for you.