Buying a fixer-upper home can be a shortcut to owning a home for first-time buyers or a good way for buyers to afford a home in a better neighborhood or one that offers more space and desired features. Of course, these days, the inventory of homes is low and the prices are high, which means a home that’s move-in ready can be difficult to find when you have a tight budget.
While reality TV shows about fixing and flipping have made purchasing fixer-uppers popular, many who have done so have ended up on the losing end of the deal. Lots had hoped to make money after making them liveable but once they asked the question “What is my home worth?” found they’d spent way too much and wouldn’t be able to recoup those expenses.
With that in mind, you’ll want to learn their hard lessons the easier way, with a thorough understanding of what it takes to buy and increase the value of a fixer-upper.
Unless you’re buying with cash you’ll need to get a renovation loan that allows you to finance both the house and improvements at the same time. You’ll be able to pay off the updates and repairs over a longer period of time and at a lower interest rate than other kinds of financing. That includes a VA renovation loan, a HomeStyle loan guaranteed by Fannie Mae, a CHOICERenovation loan guaranteed by Freddie Mac, and an FHA 203(k) loan through the Federal Housing Administration (FHA).
Figure Out What You Can Do Yourself
While those remodeling shows make DIY projects look easy, if you attempt a challenging remodel without the skills and experience, it could end up costing more in the long run and take a lot more time too. Be sure that you truly have the skills – some things are fairly easy such as painting, but electrical work can be dangerous when not done by a pro.
You’ll want to get a contractor to walk through the house and provide a written estimate on how much everything will cost. If you plan on doing the work yourself, you’ll need to research the cost of all the tools and supplies you need. Keep in mind that whether you go the DIY route or hire an expert, there are almost always roadblocks along the way, which means it’s going to take longer than you initially expect.
Don’t Forget the Permits
The work you have planned might require a permit so you’ll need to inquire with local officials to find out if that’s the case and how much it will cost. If you don’t get it, when reselling the home you’re going to face problems.
Carefully Calculate Your Offer
When you decide to make an offer, calculate it carefully by taking the fair market value of the home (what it would be worth if it were in good condition and remodeled to reflect updated tastes) and subtract all repair and upgrade costs. For example, say a similar home in the same neighborhood, updated and in good condition, sold recently for $300,000. The cost to do the renovations and repairs to get the one you’re considering up to par is about $80,000. That means your offer for the house should be $220,000, max.