Trying to decide on whether or not to buy a fixer-upper house? Shows on HGTV such as The Property Brothers make it look easy to buy a fixer upper and change it into the home of your dreams. Other shows such as Flip or Flop highlight how easy it is to turn flipping houses into a revenue stream.
However, we have all heard the horror stories about the money pit.
Buying a fixer upper can definitely be a double-edged sword. So how do you decide on whether or not to take the plunge and purchase a fixer upper to turn into your dream home or as a new business endeavor? Do your homework before you buy!
Let’s start with a very important quality you should look for in any home you buy – location. No matter how perfect the renovation, if your home is in an undesirable area, buyers won’t knock down your door when it’s time to sell. The wrong location also makes it easy to over improve for the area.
You will also need to realize that fixer uppers fall into two categories: total wreck and ugly house.
An ugly house is not architecturally appealing. If the décor hasn’t been updated since Elvis was alive, don’t get so shook up that you walk out on a great deal! Look at it this way: lime green shag carpet and avocado appliances are the color of money! An eyesore that can be ripped out and replaced offers an easy way to add equity to your home. If the paint is chipping, the yard is unkempt, the carpet is soiled and the inside smells bad; you might have found a good deal. These items are easily remedied and may not put you in the poor house.
But there are other flaws that cost a bundle. Some of these problems may easily slide under your radar initially. Which is why it’s important to go slow and look at everything carefully before proceeding with the purchase of a fixer upper. Problems with the foundation, structure, roofing, siding, sewage, septic, heating, air conditioning and the electrical can be expensive to fix.
You also need to be honest with yourself on what you can fix yourself. Those shows make remodeling look like a snap; however, it doesn’t always go so easy in the real world. If you don’t have experience at certain jobs, consider the fact that you may have to hire a professional if you get in over your head.
You will also need to decide if you have the time, patience and desire to perform the work or coordinate with professionals. Either way, expect the fixer upper to disrupt your life. Say to yourself, “It will take more time than I think. It will be more of a headache than I think.”
If you decide to go forward, make sure to price the cost of repairs and remodeling before putting in an offer. Get your contractor into the house to do a walk-through, so he can give you a written cost estimate on the repairs. If you’re doing the work yourself, price the supplies. Either way, tack on 10% to 20% to cover unforeseen problems that often arise with a fixer-upper house.
Double check your finances so you don’t end up in a bind. Be sure you have enough money for a down payment, closing costs and repairs. If you’re planning to fund the repairs with a home equity or home improvement loan, get yourself pre-approved for both loans before you make an offer. Make the deal contingent on getting both the purchase money loan and the renovation money loan. You can even consider the Federal Housing Administration’s Section 203(k) program, which is designed to help home owners who are purchasing or refinancing a home that needs rehabilitation. The program wraps the purchase/refinance and rehabilitation costs into a single mortgage.
After determining all costs involved calculate your fair purchase offer. Take the fair market value of the property (what it would be worth if it were in good condition and remodeled) and subtract the upgrade and repair costs.
Whenever you purchase a house, you should always get an inspection. This is especially true when buying a fixer upper. A home inspector can uncover hidden issues. You may know you want to replace those 1970s kitchen cabinets, but the home inspector has a meter that will detect if the outlets are working.
Most home inspection contingencies let you go back to the sellers and ask them to do the repairs, give you cash at closing to pay for the repairs, or lower the purchase price of the home. The seller can also opt to simply back out of the deal, as can the buyer, if the inspection turns up something major you don’t want to tackle.
Just remember inspections don’t always turn up everything that may be wrong with the house. Some issues just can’t be determined until you start tearing into walls, floors, or ceilings. The more major repairs you plan on doing, the more you should have set aside to tackle those surprises.
The most important part of buying a fixer upper is purchasing it at the right price. If you pay too much initially, you may never get your money back out of the home after the renovations are completed.
Purchasing a home is probably one of the biggest decisions you’ll ever make. Buying a fixer upper can make the decision even harder; but if you do your homework, your fixer upper can be a dream instead of a nightmare.
By Bonnie Marlow, Realtor, Cisco Realty