Buyers interested in purchasing a fixer-upper have a unique advantage. With a fix-upper, you can buy a home at a lower purchase price in a neighborhood you might otherwise be priced out of—or increase a property’s value, possibly leading to significant returns on investment. However, some risks may be involved with this type of home purchase. In this article, we’ll help you decide if you should buy that fixer-upper, examine a fixer-upper’s true cost, and discuss common pitfalls.
Assessing the True Cost of a Fixer-Upper
You can determine whether a fixer-upper is a good investment by calculating the risk associated with the project. Follow the steps below to determine a fixer-upper’s true cost:
- Add up how much you’ll have to spend to renovate the property based on a thorough assessment of its condition. Remember to include materials and labor costs for the repairs and improvements you’d like to make.
- Subtract that number from the home’s estimated market value after you’ve completed the renovation. You can base the market value on other property values in the neighborhood.
- Deduct an additional 10%–20% for unforeseen issues and potential cost overruns.
Hidden Costs To Consider
You won’t necessarily know if a home has the potential for hidden expenses when you buy it. Some examples of potential costs you may encounter with a fixer-upper include:
- Necessary upgrades to meet your municipality’s building codes
- Outdated electrical or plumbing systems requiring complete overhauls
- Pest infestations or mold problems
- Structural issues that you may not see
- Temporary housing costs if you’re unable to live at the house during renovations
Key Factors To Evaluate Before Purchasing
Although you don’t always know what sort of hidden costs you could come across with your fixer-upper, there are a few things you can determine prior to purchase. Before you commit to buying a fixer-upper, consider the factors below:
Location and Neighborhood Potential
Part of your assessment should include the home’s location and its neighborhood’s possibility. If you’ve found a place in a desirable or up-and-coming neighborhood, you’ll experience a better long-term value and higher resale potential. You can figure out if a house is in a good neighborhood by considering:
- Future development plans for the area
- Neighborhood safety and crime rates
- Proximity to amenities and public transportation
- School district quality
Structural Integrity vs. Cosmetic Issues
When evaluating a fixer-upper, distinguish between cosmetic issues and major structural problems. Cosmetic improvements, such as needing a paint job or new flooring, can add to a home’s potential without being too expensive. However, major structural issues, such as foundation problems or a roof replacement, may mean the home’s renovations will cost you too much to be worth it.
“If people are unforgiving upfront about assessing the costs of renovation, the value of the property and the neighborhood, and how much money they have, they can come out ahead and buy more house than they otherwise could ever afford,” says Bradley Inman, CEO of HomeGain.com, a real estate sales and information website.
Resale Value Projections
If you’re looking for a return on investment (ROI) and plan to sell the house after renovations, you’ll need to compare similar properties in the area. This will help you figure out if your improvements are too over-the-top for the neighborhood. Generally, renovations that give you a return on your investment shouldn’t raise the home’s value more than 10% to 15% above the median sale price of other houses in the area.
Financial Considerations for Fixer-Upper Buyers
You can invest your savings into a home renovation, but there might also be financing options available. You can speak with your financial consultant to learn more, but we’ve listed several financing options below:
- Cash-out refinance: If you already own a home, this option allows you to tap into your existing equity.
- FHA 203(k) loans: These government-backed loans combine the purchase price and renovation costs into a single mortgage.
- Home equity lines of credit: If you have equity in another property, this can be a flexible option.
- Renovation loans: These loans allow you to borrow based on the home’s post-renovation value.
Remember that many fixer-uppers have unexpected expenses, so you might want to set aside about 10%–20% of your total budget for unforeseen issues.
DIY vs. Professional Home Renovations
Some homeowners can fix up a home by themselves, but taking the do-it-yourself (DIY) approach can significantly impact your budget, timeline, and the quality of the final result. Determining whether or not you’ll need to hire someone to help you depends on your DIY experience level and budget. Here’s a quick breakdown to help you figure out when to hire a pro or DIY the project:
Skills You Need for DIY Renovations
DIY renovations might save you money, but you must have the proper skillset. Assess your experience and skills to figure out if you should take a project on yourself. Some tasks that handy homeowners might tackle include:
- Basic carpentry work
- Landscaping
- Painting and wallpapering
- Tile installation
When To Call in the Professionals
Some jobs require specialized knowledge and tools, and mistakes can be costly or dangerous. Certain renovations may also need permits and inspections. Those projects that are better left to the professionals include:
- Electrical systems
- HVAC systems
- Plumbing
- Roofing
- Structural changes
Common Pitfalls To Avoid in Fixer-Upper Projects
Homeowners who buy fixer-uppers may fall into common traps. By being aware of these pitfalls, you’ll be better prepared to address them or avoid them. They include:
Overestimating Your Abilities
Your DIY project can quickly become a nightmare if you don’t have the right experience to complete the work. Be honest about what you can handle, and don’t hesitate to call in professionals. If you attempt to take on complex tasks beyond your expertise, it could lead to costly mistakes and delays.
Underestimating Time and Costs
Renovations often take longer and cost more than initially planned. Be prepared for delays and budget overruns, and build flexibility into your timeline and finances.
Ignoring Potential Legal and Regulatory Issues
It can be easy for a homeowner to overlook legal and regulatory issues. First-time buyers might not research permit requirements. You could have to pay fines or experience forced removal of completed work if you don’t, so make sure your plans follow local regulations. Remember to check with local authorities to learn whether you need the following permits for a project:
- Building permits for structural changes
- Electrical and plumbing permits
- Zoning permits for changes in property use
Forgetting To Check Local Zoning Laws
Zoning laws can impact what you’re allowed to do with your property. Before purchasing a fixer-upper, research local zoning regulations to ensure your planned renovations are permitted. This is particularly important if you’re considering major changes like adding an addition or converting a single-family home into a multi-unit property.
Timeline Expectations for Fixer-Upper Projects
Creating a timeline will help you understand the scope of your project and provide you with realistic expectations. You might encounter unexpected problems that extend your schedule, so coming up with a timeline can give you an idea of what’s ahead. Below is a list of what is considered a short-term renovation versus a long-term overhaul:
Short-Term Renovations
You will most likely complete minor renovations in a few weeks to a couple of months. These cosmetic improvements might include:
- Minor landscaping
- Painting and wallpapering
- Replacing flooring
- Updating fixtures and hardware
Long-Term Overhauls
If you need to make structural changes or complete overhauls, your project can take several months to a year or more. These updates might include:
- Adding or removing walls
- Foundation repairs
- Kitchen and bathroom remodels
- Roof replacement
Our Conclusion
Buying a fixer-upper can be a rewarding experience, offering the opportunity to create your dream home or make a profitable investment. However, you should approach these projects with a clear understanding of the challenges and potential pitfalls. Make sure you have created a budget with realistic expectations. We recommend you hire a professional to help you if you need to make structural or foundation changes, electrical or plumbing updates, or other major renovations.
