Making lemonade from property lemons: How to pick the properties ripe for renovation

To the inexperienced buyer, finding a quality property at an affordable price is pretty hard to do.

Whether you are a home buyer or investor, this is very hard to do, especially in Australia’s major capital city markets.

Buyers without experience face difficulty drawing a distinction between a crappy property that is full of potential and a property that should be avoided completely.

I’ve always been intrigued by the phrase ‘buying a lemon’. Perhaps I take the opportunist view a little too much though, because this lemon phrase is very similar to ‘what do you do when life throws you lemons? You make lemonade, of course!’.

In the reality of a property context though, this is rarely true. With property it is more accurate to say that some properties are lemons, sure, but only a few of those lemons are actually ripe and ready for harvesting. Other property lemons, though, have fallen off the tree long ago; turned brown, decayed, and are utterly useless.

So, we have ‘ripe’ property lemons and ‘rotten’ property lemons.

In my experience, I would distinguish between ripe and rotten by asking oneself: ‘What are the property’s problems that I can change (cost-efficiently, of course), versus those problems that either cannot be changed or are too costly to do so?’

By no means is this a definitive list; but here are some ideas of ripe lemon (possibly worth buying) ‘problems’ compared to rotten lemon ones (deal-breakers that translate to ‘walk away now’).

• Rotten Lemon Problems:

Location:

First of all comes the biggest problem one cannot change in a property; its location and the other properties surrounding it. If the property is too far away from fundamental ‘renter must-have’ proximity features (transport, work node access, shops, schools etc) than this is something you cannot change, no matter how beautiful the property itself is.

Aspect/outlook:

We cannot change the way the sun rises and sets every day, for instance (though I would like to meet anyone who could!). To some future tenants and buyers aspect is very important. Ensuring enough sunlight is given to living and communal areas is important.

Serious structural problems:

During your due diligence, building, pest and/or strata reports will identify any serious structural issues. For house buyers this will be the house itself. For unit buyers, the strata report will highlight upcoming major capital works and maintainence scheduled in coming years.

Any serious structural problems identified are almost always hugely expensive to fix. When these are identified, the property is a true rotten lemon. Whether it's an investment or a home, you’ll be up for a lump sum of cash to repair it that you may not have so readily handy once the loan itself finalises.

So what about the things you can change? And cost efficiently, too? 

Click through to the next page to find out.

• Ripe Lemon Problems:

Outdated and ugly properties:

Drab, old, and outdated look (internally for units and both internally/externally for houses). Expert property ‘flippers’ Nathan Birch and Cherie Barber have built entire wealth strategies around this very specialty.

Ripped up ugly carpets can expose beautiful floorboards; cheap fresh paint can add exponential value and appeal, and so on. Inexpensive light (cosmetic) renovation can help bring what looks like a ‘dud’ property up to scratch.

The problem is, selling agents are keenly aware that buyers know how to spot these properties and accordingly the discounting offered may not offset that cosmetic renovation outlay required.

Ugly, cluttered yards:

Poorly presented properties frequently feature cluttered rear yards, sometimes overgrown, or with poorly placed/planted trees and overgrown garden beds. Buyers need to look beyond this to realise this property may not be a lemon and could offer scope for future improvement.

Not enough bedrooms:

More of a house opportunity than a unit one; but consider the problem of too few bedrooms. If the property is especially discounted and the major reason is, say, it is a two bedroom house in an area where three bedrooms is the expectation, there may be scope to cost efficiently reset some internal walls to create a third bedroom.

In older houses this is usually done by consolidating large laundry rooms into kitchen cupboard laundries (when a kitchen is also being renovated) and re-purposing that laundry space.

Awkward layouts:

If it is an older house it may feature an awkward layout that impractical to today’s families/inhabitant types. However, this is another example of ‘ugly duckling’ perceptions; particularly if, at first inspection, the rooms are being incorrectly presented.

How many times have property photos showed dining rooms being used as studies/offices, and so on?

If priced accordingly, there may be an opportunity to consider a poorly laid out property if there is scope to easily move some rooms around later on to suit a better layout.