Finding a property can be a real challenge, particularly if you're looking in a market that's low on inventory. When the listing inventory is low, and buyer demand is high, you can find yourself competing even for a run-down fixer-upper.

The combination of a low asking price and perceived potential is a big draw. You need to guard against paying too much in this situation.

Years ago, a developer bought a property that was sold to settle the estate of the deceased owner. The house was in a wonderful location and had a spectacular view, but it needed a lot of work. The developer ended up in competition with another buyer and paid way over the asking price.

He put the property back on the market a year later after he'd completed the renovations. During that time, the market changed from a seller's to a buyer's market. The developer had trouble selling the property. After calculating the money invested and the cost of carrying the property, the developer actually lost money.

Market conditions have a big effect on how much money you'll make on a fixer project. The ideal time to buy is at the end of a down cycle in the market, when there are few buyers and a lot of listings. This is when you might actually find a good deal. If the market turns upward while you're renovating the property, you'll realize appreciation in addition to the added value you create through renovations.

Financing a fixer-upper can be a challenge. If the deferred maintenance is obvious, a lender might not be willing to lend unless some of the problems are corrected before the loan is funded.

HOUSE HUNTING TIP: Major fixers are best left to buyers who have experience in contracting and renovation. However, cosmetic fixers can offer great opportunities for buyers who are interested in increasing their net worth through renovation. A cosmetic fixer is a listing that lacks appeal, but that's structurally sound.

In order to maximize the return on your investment, make sure that the improvements you make to the property are in sync with current buyer preferences in your area. Your real estate agent may be able to provide you with this information. You may want to consult with a local designer to find out which finishes and colors are popular.

Before diving into a rehab project, become an expert on your local real estate market. You need to know local values in order to keep from over-improving for the neighborhood.

Here's a fix-up strategy that works well for some buyers. Buy a cosmetic fixer and occupy it. Buyers who occupy the property get a better interest rate on their mortgage than they would if they didn't occupy the property. This will save you money.

Fix up the property and sell it if the market is good when you finish the project. If it's not, enjoy living in the property and sell when the market is right. The current tax law allows homeowners $250,000 of tax -free gain when they sell ($500,000 for married couples who file jointly).

THE CLOSING: Tax-wise, you can repeat this strategy once every two years if you can find good projects and can stand living in a construction zone.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers", and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

Copyright 2003 Dian Hymer

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