Buying A Fixer-Upper House: Pros And Cons
Buying a house is no easy feat if you’re on a tight budget. It’s no surprise many frugal house shoppers opt for a fixer-upper over something more move-in ready.
A fixer-upper house comes with its own set of advantages and drawbacks. Familiarize yourself with them before buying a fixer-upper in need of serious TLC.
What Is A Fixer-Upper?
A fixer-upper is a house available at a lower purchase price because it requires major maintenance work. While you can likely still live in a fixer-upper, you’ll need to spend a lot of time and money on structural and/or cosmetic improvements. You may benefit from a fixer-upper if you’d like more house for your money or are interested in flipping it to make a profit.
Should You Buy A Fixer-Upper?
Buying a fixer-upper house depends on your unique situation. A fixer-upper house may be a good option for one house shopper and a bad idea for another. Consider your budget, needs, preferences and lifestyle when you ask yourself this question.
Here are some pros and cons of fixer-upper houses to bear in mind.
A lower purchase price: Although you’ll need to spend more on renovating it, a fixer-upper house will come with a lower list price and down payment requirement.
Less competition: Generally speaking, there is less competition for fixer-upper homes, so you’re more likely to land the home you’d like at a great price.
Chance to customize your home: Once you buy a fixer-upper house, you have the freedom to do whatever you’d like to it. Don’t like the kitchen? Remodel it. Wish there was a deck? Build one.
Quality control: When it comes to renovations, you’re in charge. You can choose the materials, colors, contractors and everything else.
Expensive renovations: Depending on the renovations, you may end up barely breaking even – or spending more money on a fixer-upper.
Difficult budgeting: While you can run the numbers and estimate how much your renovations will cost you, it’s almost impossible to come to an accurate figure. There will always be surprise costs that pop up.
Unexpected issues: Even if you get an inspection, there are almost always unexpected issues, especially if the house is older.
Long-term construction: Unless you live somewhere else while you’re renovating your fixer-upper, you’ll have to live in a construction zone for months or even years.
If you’re thinking about buying a fixer-upper home, you might want to keep the following tips in mind.
1. Get A Home Inspection
While a home inspection will cost you a couple hundred bucks, it’s nonnegotiable if you want to buy a fixer-upper. A qualified home inspector will perform a thorough investigation of your home and provide you with a report that outlines all the repairs it will need.
Without one, you may have no idea that the home needs new plumbing, the septic tank needs to be replaced or the foundation is cracked. A home inspection helps you avoid unpleasant surprises as well as budget for and prioritize projects.
A home inspection is a necessary part of any home purchase, but especially with a fixer-upper.
2. Estimate Renovation Costs
When you buy a fixer-upper house, you want to make sure you can comfortably afford to turn it into the space you desire. Create a list of every project you’ll want to complete and price out the materials and labor cost (if it requires a contractor).
Do some online research and get quotes from contractors. Although you won’t be able to come to an exact cost for everything, you’ll be able to figure out a ballpark that allows you to budget accordingly and decide whether the investment is worthwhile.
3. Determine If A Permit Is Required
There are some renovations that may require permits. Of course, the location of your home will dictate which renovations you need permits for, but in most town and cities, permits are necessary for:
Sheds and garages
Plumbing and electrical work
You can visit your municipal government office online or in-person to apply for a permit. Depending on how complex your project is, you may need to provide detailed plans.
4. Identify What You Can Renovate Yourself
There’s no denying that DIY renovations will save you a ton of cash as contractors can be pricey, especially if you use them for every project. If you’re handy (or have some friends or family members who are), figure out which projects you can renovate yourself.
While you may not be able to tackle the electrical and plumbing on your own, you may be able to paint and apply a backsplash without a contractor’s help.
5. Explore Fixer-Upper Loan Options
There are two great financing options that can help you pay for the cost of your home as well as the renovations. With the Federal Housing Administration (FHA) 203(k) rehabilitation loan or Fannie Mae HomeStyle Renovation Mortgage, you’ll be able to purchase your home and put a reserve in escrow to fund renovations.
6. Make A Smart Offer
The last thing you want with a fixer-upper is to overpay. The whole point of buying a house that needs work is getting a good deal on it. Make an offer that strikes a balance between a good deal and the cost of necessary repairs.
With any offer, you should include contingencies. Contingencies are exceptions that allow you to back out of a purchase if something comes up. A couple common contingencies are inspection and appraisal contingencies. If an inspection discovers a major problem or the home appraises lower than what you offered, you can back out.
You should also be able to negotiate a selling price. If the home you’re interested in has several flaws, you may have more bargaining leverage. Work with an agent to make a smart offer and handle any counteroffers. Don’t be afraid to walk away if the seller isn’t willing to negotiate.
Is A Fixer-Upper A Good Investment?
A fixer-upper may be a good investment. But it can also be a huge money pit if you estimate renovations incorrectly, contract out for most projects, and skip an inspection.
To ensure a fixer-upper house is well worth the money, look at comparable homes (known in real estate as comps) in the neighborhood. Then add your estimated cost of renovations to the purchase price. If you’re making money on the home, it’s probably a good investment.
For example: If you find that three-bedroom, two-bathroom homes in the neighborhood cost $400,000 on average and the fixer-upper you’re interested in needs $150,000 in work, you’ll want the price to be around – ideally below – $250,000.
At first glance, a fixer-upper may seem like a great deal you can’t pass up. Once you realize how much you need to spend on repairs and renovations, however, you may have a different opinion. Before you move forward with a fixer-upper, do the heavy lifting and make sure it’s a worthwhile investment.
Written by: Andrew Dehan for RocketMortgage.com