Buying fixer-uppers has been a common investment technique for many years. These days, with millions of foreclosed homes available at bargain basement prices, fixer-uppers can be an excellent choice for buyers who are shopping for a home to live in, as well as for real estate investors.

Fixer-uppers are properties in need of repairs. They may be liveable in their present condition, or they may need quite a bit of work before they can be occupied, but in either case, there are some very important considerations when choosing the right property to help insure that you can achieve your personal objectives.

1. The Location

It used to be pretty rare to find a fixer-upper in a nice neighborhood, but the housing crisis has changed that. Today, fixer-upper properties are readily available in many of the nicer neighborhoods, especially in those states that have been hit hardest by high rates of foreclosure.

Don’t be impatient. Look around your chosen area carefully before making a final choice. It’s very important to be familiar with the local market. Choosing the right location will result in better property appreciation, and more demand when you are ready to sell, or better tenants and higher rental rates.

Avoid locations that have too many vacant properties, locations that have too many other investors in the area, or are places that you would not want to live yourself. Investor over-crowding tends to increase your competition and will therefore reduce your profits.

2. Know The True Market Value.

A property is not always a good deal just because it is a fixer-upper. Don’t let anyone sway your judgement about a property simply because it’s a fixer-upper. Just because a home has been foreclosed on does not automatically mean it is a good deal. Good deals are made through knowing what the true market value is, then negotiating a price that is as far below the true market value as possible.

3. Find A Fixer-Upper Project That You Can Handle.

Whether you are planning to live in the property, fix it up to sell or fix it up to use as a rental property, the most common mistake is that of taking on a project that is beyond your ability to handle.

I’ve done dozens of fixer-upper projects, including managing them for other investors. The biggest problem I’ve seen consistently is investors who take on projects that are bigger than they can handle. This leads to cost over-runs, projects that take too much time, and even running out of money and another foreclosure. I’ve seen numerous projects that were never finished after the buyer got over budget and ran out of money.

It’s easy to rationalize a project before you start, and inexperienced investors often believe that they can renovate an entire house in 4 weeks, working only on weekends in their spare time. That is a common mistake.

One biggie I suggest is to avoid any fixer-upper that needs walls moved in order to be functional. Moving walls and things like staircases can create unexpected problems unless you are planning to use a contractor who has adequate experience and a crew that can get the work done correctly. I’ve seen projects that began well and got totally out of hand and over budget after the investor decided to make extensive changes to the original floor plan.

If you choose a fixer-upper property in a desirable location, keep your rehab budget and necessary work within your ability to control, and you have a good renovation plan that you can stick with, you should find yourself owning a great property at a below market price. That means you’ll have some positive equity or a positive cash flow right from the start. And after all, that’s the main reason why you should consider buying a fixer-upper.

Donna Robinson is a 16 year veteran of the real estate industry. Her experience spans all phases of residential real estate, including licensed agent and rehabbing fixer-uppers. She is an active real estate investor who also provides coaching and consulting services to other investors. To discover how you may benefit from her expertise, contact her at coaching@reihelp.com and request a free PDF copy of her latest book on residential real estate.

The Good

Mortgage rates heading into the year remain at the lowest levels on many institutions books since being recorded, such as Freddie Mac’s weekly Primary Mortgage Market Survey and the Mortgage Bankers Associations weekly mortgage rates survey. The average 30 year fixed mortgage rate is hovering just below the 4 percent mark, which gives home buyers the purchasing power they need to attain an affordable mortgage.

Additionally, the Federal Open Market Committee has continuously announced their plans to keep the Federal Funds Rate at 0 percent to ¼ percent indefinitely until 2013. The Federal Funds Rate is the rate at which banks lend to one another and does not directly impact mortgage rates but does hint towards the direction all rates are headed so we should not see any significant increases to mortgage rates in the coming year.

The portrayal of the general media is that obtaining a loan to purchase a home is tough and not many potential home buyers qualify for a new home loan. This general assumption is very misleading and is hurting home sales and ultimately our economy.

In order to qualify for a new home loan through the Federal Housing Administration (FHA) you simply need a 620 credit score and a minimum of 3.5 percent of the home’s purchase price as a down payment. Obviously there is a bit more to obtaining a new home loan, but if you meet the qualifications above you are in a good position to purchase a home and should talk with a local mortgage company approved by the FHA for additional qualification guidelines.

The Bad

Home values across much of the nation took another big hit in 2011, an estimated $700 billion in losses. Accompanied by the lowest mortgage rates in history we now have a housing market that is more affordable than before the housing boom began making 2012 a prime home buying season for investors.

I predict that we will continue to see falling home values throughout most of 2012, but at a far slower pace than in recent years, and may even see stabilizing values, and in some areas increasing home values as the year wears on.

The Ugly

The biggest concern for the 2012 housing market will be the back log of foreclosures that banks have on their books. Foreclosures and short sales currently make up about one third of the entire U.S. housing market and are expected to increase in 2012.

This back log of foreclosures will continue to keep home values down, especially in some of the hardest hit communities across that nation. However, with homes as affordable as they are you can expect investors to snatch up and rehab one, two or even more foreclosures at a time for pennies on the dollar.

The rehab business has been in high demand and will likely continue throughout 2012 as many potential home buyers are ready to leave the in laws basements and the small over priced apartments for a more affordable home that they can truly call their own.

My prediction for the 2012 housing market, take It or leave it, is that home values throughout much of the nation are going to hit bottom by year’s end, home sales will increase on a year over year basis and home investors will be the big winners in 2012.

This article was written by Jeremy Redlinger, a Mortgage Loan Originator #627335 licensed in the state of Minnesota. As a mortgage professional of 10 years I strive to help home buyers find the home financing they deserve when purchasing a new home. For local information about the Minneapolis Housing Market and mortgage products please visit my website at www.newhomemortgagemn.com.