Buying a home is a big goal for many people. Homeownership, though, is very expensive and comes with many costs. Coming up with a downpayment, alone, can seem like a daunting task. If you have a dream neighborhood that has an excellent school district, you may find it can be costly. Buying a fixer-upper can be a great way to get into that neighborhood. However, there are some things to consider when buying a fixer-upper.
Pros and Cons of Buying a Fixer Upper
Buying a fixer-upper comes with its pros. For one, it allows you the freedom to be creative. You basically can design and build the house you want. You can also choose which parts of the home you are willing to spend more of your budget on. For example, you may forego putting in built-ins in the bedrooms to have a nicer kitchen. Renovating a fixer-upper can mean increasing the value of your home by much more than what you paid for. Fixer-uppers are great for flipping. Most fixer-uppers are 8% less than market value homes. Your property taxes will be lower because the sale price impacts the amount you pay in taxes.
There are also some cons that come with a fixer-upper. In most situations, you cannot move into the home right away. Renovation projects are expensive. You will never know the exact cost of the renovation until it is completed. Fixer-uppers are risky because anything can go wrong. Structural changes require a building permit which is usually about $1,000. It may take months or more to finish the renovation project.
The Importance of a Home Inspection
When considering if you want to purchase a fixer-upper, you first want to do a home inspection. The inspector will help you decide if it is worth purchasing the home because the inspector will let you know what renovations you need to do.
If you need to do structural repairs like the walls and the roof, the fixer-upper may not be worth buying. These issues can be very expensive and quite complex. They are also not noticeable to future buyers should you decide to sell the property in the future. Basically, this means the value of the home will not go up by much. If you still are willing to purchase the fixer-upper, you may be able to have the inspector make a report of major issues of the property and an estimation for making the necessary repairs. You can then use that report to ask the seller to lower the purchase price of the house.
Get a Cost Estimation of the Renovation
The cost of the renovation is going to determine if the fixer-upper is worth buying. The home inspector can help you get an estimate. The home inspector will let you know what renovations are necessary. You can then get a quote for the renovation.
An over quote is better than an under quote as renovations are usually more expensive than the initial quote. You then want to subtract your quote from the home’s market value after repairs. Use the values of the neighboring homes to find out how much the house will be worth. Then, subtract between 5% and 10% for any unforeseeable complications. This should be your offer amount.
Find Out What the Necessary Permits Are
The location of your potential home determines the permits needed for the renovation. Renovating without permits could make it difficult for you to sell the house should you decide to do so in the future. Figure out how much the permits are going to cost and put that money aside so you can get the permits. Make sure you have this money before taking on the renovation.
It’s Only Worth It If You Do It Yourself
Buying a turnkey house may seem like an unattainable dream for many people. However, if you have some carpentry skills, can put up drywall, paint, install flooring, and replace windows, buying a fixer-upper is a great option. You are buying the house below market value, and you are able to put more value into the home with only the cost of equipment and materials.
Most people are attracted to a fixer-upper because it means they get to work on the house themselves. Figure out what part of the renovation you can do yourself. If you can do most of it yourself, you can save a lot in labor. You only need to spend money on equipment and parts. Then, you can hire someone to do the parts of the renovation you can’t do.
If you can’t do a large portion of the work yourself, buying a fixer-upper might not be the best idea. Paying a contractor to do most of the work will mean that the cost of the renovation will be more expensive than it is actually worth. Even if you sell the house, it will be hard to reap the amount of money you put into the house.
Have Time and Stamina
Working on a fixer-upper requires a lot of time. If you are a busy person, a turnkey house may be a better option. If you delay repairs that need to be addressed in a timely manner, you may end up losing money and lowering the house’s value.
Taking on a huge project, like a renovation, requires motivation and stamina. It is important that you have what it takes to complete the renovation before taking on a fixer-upper. Buying the house and then getting burned out in the middle of the project will be a terrible feeling and situation.
Figure Out the Financing
The process for buying a fixer-upper is more complicated than a traditional home. Not only do you need money for the down payment and closing, but you also have to pay for the renovation and any complications that come up during the renovation.
Even if you don’t have the money upfront to pay for the renovation, you can borrow the money. There are a number of loan options available. One option that sticks out is the 203(k) loan. Its purpose to cover home improvement projects and reconstruction. The 203(k) loan has two options. One option is the streamlined 203(k) loan. With this loan, you can’t do any structural changes. The cost of the repairs should not be more than $35,000. The streamlined version is more popular because more lenders offer it.
The other option is the full 203(k) loan. With this loan, you can do structural changes to the house. You can even demolish the house and build a new one. However, if you do this, you have to keep a part of the old foundation. You can spend as much money as you want on the renovation as long as it is lower than the maximum loan amount of the FHA.
When creating the real estate contract, it is important to have an inspection clause in there. The best-case scenario is it is a good investment. The worst-case scenario is you can back out of the deal if the fixer-upper turns out to be a dud.
You may find that the issues with the house are not going to be all good or all bad. The house inspector may find some major issues in the home. You can, however, use that as leverage to negotiate with the seller to lower the price or take on some of the repairs.
Most housing experts will tell that if the house has more than a few structural issues, it is better to pass on the house. Overhauling the plumbing and electrical system, upgrading the foundation, and replacing the roof are considered invisible. The value of the home will not increase enough to cover the renovation.
Making Sure You Can Afford to Be a Homeowner
Owning a home can be very expensive. You have to make your mortgage payments, pay property taxes, set aside money for maintenance, and pay for utilities. If all of your income is going towards these expenses, you are in a bad situation. If buying a fixer-upper is going to put you in this situation, it is better to wait for your financial situation to improve so you can take on the financial burden.
Before making a purchase, figure out your debt-to-income ratio. You can do this by dividing the debt payments that you pay monthly by your monthly gross income. You want this number to be 36% or lower. If it is lower than 36% you can buy the fixer-upper house.
Home Improvements that are Worth It
The best fixer-upper is one that only really needs cosmetic improvements. These improvements can include adding paint and fixing drywall. Not only are these improvements are going to cost less than structural issues, but you will also return more in market value. Updating the kitchen and bathroom are great improvement projects because they will pay off well in the end.
If the fixer-upper is a two-bedroom house in a neighborhood that has houses that are predominantly three-bedroom houses, you may feel you need to add another bedroom to compete with the other homes in the neighborhood. The return of adding a room can be less or equal to market value. The return of adding a bathroom, however, can be double the cost.
You can address structural issues by combining them with structural repairs. For example, if the roof needs to be replaced, you can put in a skylight. If there is dry rot in one of the walls, you can put it in a window.
The Dangers of Over-Improving
Buying a fixer-upper and fixing it up can be a great way to increase wealth. However, there are some risks that come with over-improving a property. In order to attain maximum resale value, your renovation project should only increase the value of the home by 10% or 15% of the median sale price in the neighborhood.
The Wrap Up
Buying the right fixer-upper can save you thousands of dollars. Of course, you have to take the necessary steps to protect yourself and your finances. Get a home inspection and have a home inspection clause in the real estate contract. Make sure you have the time and skills to do most of the renovation yourself. Figure out how much the house will cost with the renovation. Figure out how you are going to pay for the house and the renovation. Avoid over-improving on the property. Doing these things can save you from a headache in the long run.