Something Old or Something New: Buying a Fixer-Upper
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Turn on any home improvement channel and you’re sure to notice a trend: home repairs and renovations are very in right now. In fact, home improvements and repairs have become a $300 billion industry in the U.S. This is evidenced by those popular renovation shows, which frequently feature people buying a fixer-upper, a home selling for a low price because it’s in need of improvement.
Before the financial crisis of 2008, it looked like fixer-uppers were on the outs. The plethora of new developments was making it hard for buyers to recover their investments upon resale. However, after the housing bubble burst, the number of available foreclosures put fixer-uppers on the upswing again. Buying a fixer-upper can be a great investment opportunity. Thanks to HGTV, many people want to try their hand at flipping a home, and a lot of celebrities have been doing it for years. The allure of molding a property into a dream home and lower price tags than turnkey properties are also appealing to potential homeowners.
But the average home buyer might want to pause for second before signing the papers, popping the champagne, and firing up the power tools. There are some things about purchasing a home in need of some TLC that someone purchasing a newly built house would not necessarily need to consider. For example, calculating how to price a fixer-upper differs significantly from determining the price of a turnkey home. And it can be difficult to recognize when to avoid a fixer-upper altogether.
Buyers considering a fixer-upper should hire a contractor to do a walk-through. You’ll need someone to assess what aspects of the house will need the most work. You will also want to research material costs for fixing those aspects on your own. Not only will this help you know that your contractor is giving you a fair estimate, but it can also help with negotiating the price with the seller later on.
After the initial walk-through, take some time to consider the type of work the project will require. Does your diamond in the rough need a whole new roof, or will an upgrade to the surfaces and fixtures suffice? Consider the cost of these repairs versus what they can do for the resale value. Not every fixer-upper will be worth the work you have to put into it, financially speaking.
Another important piece of the how-much-will-this-cost puzzle is to think about who exactly will be doing the fixing up. Most of the reality TV shows make taking the DIY path look super fun. And, it’s true, doing the lion’s share of the work yourself will help to keep the monetary costs low, but buyers should consider their calendars carefully. How much time is there to realistically devote to home repair? Considering how much labor will cost, in money and time, and then building that into the estimate is essential.
Once you’ve decided this goose is definitely going to lay you a golden egg, the next step is calculating your offer. Figuring out how much you should offer for a fixer-upper follows a fairly simple formula: take the total estimated cost of all necessary repairs and subtract it from the home’s potential market value after these renovations are completed. From there, experts suggest deducting an additional 5 to 10 percent to cover any extra upgrades, and to account for inflation and Murphy’s Law – any and all unforeseen accidents that could, and probably will, happen during construction.
Lining up the money for renovation after covering a down payment and closing costs can be a challenge for most homeowners. Add to that the stress of the fact that no one can see the future, and it becomes even smarter to plan for disaster while you budget. The more wiggle room buyers give themselves, the better. Otherwise a dream home can turn into a money pit in the blink of an eye.
There are, of course, options for financing the costs of purchase and repairs. A renovation loan can be applied for through either a home equity line of credit or a mortgage. Making the deal contingent on securing both purchase and renovation loans protects buyers against having to close without knowing whether or not there will be money for repairs after the fact.
Even after having the walk-through, it’s essential to include an inspection clause in your offer. This is another type of contingency clause specifying the need for an inspection in order for the contract to become binding. Anything the inspector notes could give you leverage to persuade the seller to make some of the repairs before the sale or, at the very least, offer a lower price. If the inspector finds something your contractor missed, this clause provides you with a final opportunity to walk away.
If the buyer’s intention is to flip the property, there are plenty of other important financial factors to keep in mind. For example, not all renovations are created equal. Some projects won’t actually net buyers the kind of ROI they’re dreaming of.
According to U.S. News & World Report, spending thousands of dollars on anything a buyer won’t be able to see may not be worth the investment. Christopher Rither bought and renovated an old plantation house in Hawaii, spending $25,000 on new plumbing and electrical work as well as interior updates, and was surprised when the house spent several years on the market. The lesson: don’t buy a house that needs serious but invisible work done, like foundation repair, just because it’s a steal. Ultimately, sticking to the sexier projects – state-of-the-art kitchens and bonus basement rooms – is what will help earn back your money in the long run.
Fixer-upper owners also have to be cautious not to build themselves out of the neighborhood their house is in. Remaining aware of the state of the surrounding houses can go a long way toward a home’s resale potential. If the finished house is “too nice” after all the hard work is done and money is spent, it might take a while to find a buyer willing to make an offer that’s close to the asking price, and buyers run the risk of not recouping their costs. To avoid this folly, buyers can try looking for the least-expensive house in the nicest neighborhood. Zillow calls this the principle of progression, “a fancy way of saying that nicer, more expensive homes have a positive effect on the perceived value of their smaller, less expensive neighbors.” It’s easier to rise to a higher denominator than it is to curb your curb appeal after the fact.
After all that math and money talk, there is still the human component of a fixer-upper to consider. Buyers should ask themselves a few questions before committing to the life of a fixer-upper owner. For instance, do they even like old homes? If the answer is yes, then why? Buyers interested in the particular quirks of older homes – moldings and architectural details, hidden closets, and old doorknobs – but who still want modern amenities will most likely be in their element renovating a fixer-upper. But if a buyer is interested in up-to-date everything, then buying a new turnkey home would probably save them a lot of time, not to mention money.
It’s very important for buyers to ask themselves if they’re actually interested in taking on a project like this. Sure, it looks like fun on TV, but the reality of those reality shows can be harsh. The requisite hours of demanding physical labor never actually pass with the lightning speed of a jump cut. Are they truly excited about the possibility of rolling up their sleeves and getting their hands dirty, even if they’re just going to fix up the bathroom? Which leads to the next important question.
How well do they truly deal with disruption? Once the papers are signed, the proud owners of a fixer-upper will be living in a construction site for the foreseeable future, and that comes with a number of stressful factors. The safety of small children while living with construction is also an important consideration, and romantic relationships can be strained as well. One study found that 12 percent of couples considered separation or divorce while remodeling. Even without a family, the stress of living in a deconstructed home can get to anyone. From dust and debris to the daily parade of strangers and noise, it might be worth it to some to shell out a bit more for a finished home in which they can settle immediately – it’s all about what works for you.
Making the decision to buy a fixer-upper is a lot more complicated than the peppy show hosts make it seem. It takes a lot of financial consideration and planning, as well as soul searching.. But with the right buyer and the right house in the right neighborhood, a fixer-upper could be the best decision to make.
Read more: Pros and Cons of Fixer Upper Houses
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