By David Nielson | Boomerang Capital
We have discussed before that in our industry ‘fix and flip’ has truly evolved into value-added. Which leads to the question: value-add but for whom? The answer is really for “everyone.”
First, let’s look at the buyers of the homes, in other words, the real estate investors. In most cases, before the home received the attention it was in derelict shape. Certainly, there is a spectrum of dereliction with some in very bad shape and crumbling to pieces while others simply need minor repairs or cosmetic updates. However, in all cases the house needs something, otherwise, there would be no attraction to an investor to invest their time, effort, and money. And what comes out the other side of that process is a home in move-in condition, rather than one with a bunch of problems both known and unknown (yes, occasionally a project comes with some unwelcome ‘surprises’).
One might even look at the purchase price from just a few months ago and protest that these purchasers have ‘paid up’ for their new home but such a claim only considers the purchase price while ignoring the value of those investments of time and money.
Interestingly, our investors (those who borrow from us to buy a home and then add value to it) get these homes ready cheaper and faster than a ‘retail’ purchaser could. In other words, if that home buyer had purchased the home themselves six months ago at the cheaper price and then figured out what needed to be done to complete the project on their own, they’d almost certainly not only paid more but also very likely still be sitting in a half-finished home cursing the day they came up with this ‘great idea’ to save a few bucks. Undoubtedly, those that buy value-added homes reap the benefits.
Second, let’s also consider the broader communities. Fixing up homes adds value to the entire community. This is sometimes referred to as “the rising tide” and may be affected by things outside your immediate area, like a large employer moving in or some commercial development nearby. That development (or redevelopment) benefits everyone and your property becomes not only more valuable but will also rise alongside the others.
This same thing happens similarly with a single home that needs repair or updating. Frequently that one outlier, the dilapidated house, drags everything on the street down and is the only thing people see so fixing it provides an immediate uplift to the entire community. Just like getting rid of the zit on your nose will make your whole face look better – immediately.
From time to time, value-added gets confused with ‘gentrification.’ Value-add is different. Gentrification generally refers to areas that are rental markets and current renters get pushed out by (re)developers that then raise rents leaving people living there priced out. Most neighborhoods we work in have owners in the other homes as well, so they only benefit from the increase in equity that comes from having a nicer neighborhood, for all. Overall, these community improvements, increase the value of the community as a whole one house at a time.