Posted by GL(ON) on April 04, 2002 at 14:43:27:
I don’t believe in putting more into a property than I can get out.
Adding rooms and major work of that kind doesn’t pay as a rule. Speaking
of rules, mine is that if I spend a dollar I want to add $2 to the value
of the property. In other words if it adds $40,000 it has to cost
$20,000 or less. That is if I hire it done. If I do the work it has to
cost $10,000 or less. That is, $4 for each $1 spent. I’m not in business
for my health or to keep real estate salesmen happy.
I would look at the deal like this:
A) Value of house, fixed up = ???
B) I can afford to spend 70% of A
C) My cost = B - fixup cost.
D) I can afford to pay the owner C.
If I pay C then spend money on fixup cost the total of the two,
(purchase price + fixup cost),should equal no more than B which is 70% of FMV.
In your case you have the extra complication of the double lot. How much
does that add to the value? Around here surprisingly little. If a vacant
lot is worth $65,000 a house with a double lot would only cost $10,000
or $20,000 more than the same house on a single lot.
I don’t mind paying the going rate if I have to but I won’t pay more.
In fact I prefer to buy at a discount. If he wants more let him get the
severance. See also rule B above, don’t pay more than 70% of market
value. If you can get $65000 for the lot make sure you don’t have more
than $45500 in it including legal fees, severance, deed, selling cost ,
and carrying costs.
I hope this helps. I have gone into the details to show you how to
figure it out for yourself. Notice that there are 2 different rules, one is not to have more than 70% of FMV tied up in a property, the other is not to spend over half as much on fix up as what it adds to the property. If it won’t pay you to do the fix up, discount the price and sell it as is. Once you understand that, you can apply it
to any property.