Fixer or Turnkey at Joshua Tree

A buyer shopping short-term rentals in Joshua Tree, Landers and Wonder Valley sees two kinds of listing. One house is untouched and priced low. The other has been renovated, and the price reflects that work.

The arithmetic

Purchase price plus remodel is the project cost, and that cost has to stay under what the finished house is worth. Market value comes from sold comparable sales. A rental’s income record is context for underwriting and never the price basis, because income is speculative and the buyer carries that risk. A financed project has to perform to the pro forma, which is one column at the stated assumptions rather than a set of scenarios.

The untouched house

The untouched house is the more straightforward of the two. The buyer can influence an improvement in overall quality, chooses finishes and executes on a vision for that property.

The buyer won’t know with 100% certainty what finished value will be and the market can change during the renovation. The buyer must also account for time, effort and of course, the carrying costs, which include taxes, insurance, utilities and mortgage.

Even with contractor estimates new information comes up and the price can increase. Removing a wall, for example, may reveal the underlying framing is in need of repair. A buffer on top of the original estimates is a prudent move. Permits and inspections add time the buyer does not control. In my experience working these communities, contractor availability is its own constraint in a remote desert market, so lining up those resources ahead of time is key.

The budget can pass the point where project cost exceeds market value, and that is the failure mode of this path.

Renovation financing

Some loans pay for the purchase and the work together. HUD limits the FHA 203(k) to owner-occupants, so an investor cannot use one. Fannie Mae’s HomeStyle Renovation loan allows a one-unit investment property, per Fannie Mae’s seller guide. That loan pays the contractor in draws as the work passes inspection, under the same guide. Short-term lending closes faster and costs more, in my experience. I am a REALTOR and not a lender, and the lender states the terms.

The finished house

The renovated house is closer to ready, at least on its face, and it can take bookings sooner. Of course, the buyer is paying for what the seller chose in finishes and overall aesthetic. The seller thinks, particularly in recent renovations, that his choices are part of what sets the value and wants to be compensated for that. If a buyer doesn’t so much agree and then proceeds to change things significantly, he’s paying for improvements he’s going to toss. So tread carefully on these purchases.

New finishes cover whatever sits behind them, and a renovation done quickly for resale can be cosmetic. The surface can hide deferred maintenance, and the work can be pleasant without being built to last. An inspector and the permit record help the buyer gain insight, but those things aren’t always enough. Sometimes a deeper look, with a general contractor or a specialty contractor, is warranted.

I sell real estate, and I am not a contractor or an attorney.