Making Money In This Market

Making Money In This Market by Bill Roberts

Making money in this market by increasing the "use" or utility of a given property is a good strategy in today's market. There are many under-utilized properties out there from vacant lots to houses with functional obsolescence.

This is different from "rehabbing" because rehabbers generally just want to make the property look better, but they don't actually increase the use or utility.

Use Change

The principle that we are talking about here is HIGHEST AND BEST USE. To determine highest and best use takes a little bit of common sense combined with vision and imagination.

In a neighborhood of three bedroom, two bath homes a two bedroom one bath home is NOT at its highest and best use.

Add Value

A rehabber might want to paint and install new carpet, but that isn't going to improve this home's utility. But if you ADD a bedroom and a bathroom in addition to whatever cosmetic makeovers you do, you will be adding actual value to the property.

Value per square foot is fairly consistent within an area. A 1000 square foot house might be worth $250,000 while a 1500 square foot house is worth $375,000. In this instance the houses are worth $250 per square foot.

Now the opportunity lies in bringing the smaller house into conformity with the neighborhood. Adding 500 square feet to the house at a cost of $80 to $100 per square foot can yield a benefit of an increase in value of $250 per square foot. In the simplest terms, you have just "created" $75,000 to $85,000 additional value if everything else remains the same (in economics we call this "assuming ceteris paribus"). Naturally, everything doesn't remain the same, but the concept still works. You may also have to "rehab" the rest of the house. Your return on investment will not be the same for the additional square footage as for the rehab, but you might not be able to sell the house if you don't do the rehab also.

Buy Right

You need to make sure you buy the house right. You don't need to "steal" it, but you sure don't want to over pay as well. You can make a good return on your time, effort, and investment by picking a good candidate for use change while at the same time paying full market value for the property in its current use.

More Infill Opportunities

Another example of a candidate for use change is a house on a large lot where the lot could be split to yield another house lot. Generally, the large lot will sell at a premium over smaller lots, but not for the full value of a vacant buildable lot.

As a general rule a vacant buildable lot is worth about 20% of the value of a house in the same area, so a lot in an area of $500,000 houses is worth approximately $100,000. If the house with the large lot is priced $25,000 more than houses on normal sized lots, this might be a candidate for a lot split.

As an example, our candidate for a lot split is a two thousand square foot house in a neighborhood of other two thousand square foot houses. They have an apparent value of $500,000 or $250 per square foot. The seller wants $525,000 for his house on the big lot.

We buy the house for the asking price (subject to local zoning and land use approval of the lot split).

So we make $150,000 for our efforts on this particular use change. However, we could opt to make a little less by selling the new lot to a builder for $100,000, but we might end up just trading dollars when we "dispose" of the original house. Sometimes, it is a matter of doing it all or doing nothing.

Still more opportunities exist for use change. Maybe the house is in an area where some apartments exist. Building a couple units on the back or side of our house might be a suitable use change for the neighborhood.

MLS Searches

These opportunities can be located with simple MLS searches utilizing "keywords" such as:

• Small house
• Large lot
• Two APNs
• Splittable
• Large yard
• Fruit trees
• Room for horses
• Estate

In addition to the normal searches for 1 or 2 bedroom houses in an area of mostly 3 and 4 bedroom houses.

There are lots of unimaginative rehabbers looking for fixers, but if you want to actually do use changes you will find a lot less competition. Good luck.

Getting Started

If you are interested in participating in use change but you are a little hesitant to jump right in you may want to find an investment group which specializes in this process.

Contact Bill Roberts (619) 244.4610 for more information about the opportunities in use change.