Major additions, such as adding a family room or a bedroom are usually not profitable. For example, adding a bedroom to a two-bedroom home that is in a three-bedroom community rarely adds more market value than the cost to add the room. The same is true with an over-improvement. For example, adding two bedrooms to the same house to create a four-bedroom home will usually cost much more than the value added. However, adding a second bathroom to a one-bathroom house is usually worth twice its cost in increased market value.

Consider structurally sound homes in good neighborhoods requiring cosmetic repairs only. Some of the worst examples of mistakes made by buyers of fixer-uppers are first-time buyers who bite off way more than they can chew. Examples of this are houses that have structural problems that take an exceptionally long time to repair, or are located in an undesirable neighborhood. These can be a horrible drain on finances, time and peace of mind.

A much better strategy for the inexperienced is to purchase a home in a desirable neighborhood that is in need of cosmetic attention--new paint, carpeting, appliances, landscaping and the like. These repairs can either be handled by the homeowner or are easily contracted out, saving time, effort and money. Yes, money can be made on homes needing major renovations, even if they
are in less popular neighborhoods, but these are jobs for professionals, not homeowners (and definitely not for first-time homeowners!)

Know the market value. You must know the market values for houses in the neighborhood in which you are interested and that are in good condition. Calculate how much equity or profit may be available (or even IF there will be any) in the deal. Begin by computing the realistic value of the home when all repairs are made. From that point subtract any selling expenses you will incur (commissions and the like) as well as the full cost of repairs and, most importantly, the amount of desired profit or equity.

Example: