When you choose a move-in-ready property, you may move in and get set up. When you invest in a fixer-upper, your job does not end there. It might take months or even years to turn your new house into your ideal dwelling or flip for substantial profit, and the process will cost you a lot of money.
For many people, the hard work is worth it for the ultimate result. To figure out whether a fixer-upper house or condo is right for you, you need to start with a realistic idea of what you’re getting into. Understand the benefits and costs measured in money, time, and hassle. Then figure out whether your skills, schedule, budget, and relationships are up to the task.
The Pros & Cons of Buying a 'Fixer Upper'
You are giving up time and effort to acquire the house you desire on a budget that you can afford. If done correctly, you should end up with a home worth more than the money you invested in it, but this is not always the case.
Buying a property that needs some help may be an excellent strategy to get more bang for your real estate buck. The benefits include:
Lower Purchase Price. Fixer-uppers are less expensive per square foot than move-in-ready houses. That lower price tag means you will save money on your down payment and monthly mortgage payments. It makes it easier to acquire a house or acquire a bigger home than you would otherwise be able to afford.
Lower Taxes. Your yearly property tax payment is calculated by your local property tax rate times the assessed value of your home. Because your property is worth less, it tends to have lower property taxes. Unfortunately, the tax payments increase with the home value after the renovations are complete.
Less Competition. There is much competition for move-in-ready properties in a hot real estate market. You can take advantage of buying a less desired home for access to better neighborhoods. It may be the answer if you cannot afford most houses in your ideal area. On a budget you can manage, you may enjoy access to amenities, including excellent public schools, mass transit, parks, and retail.
Ability to Customize. You may create a house exactly how you want it when renovating it from the bottom up.
Why aren’t more house purchasers interested in fixer-uppers when they provide such excellent value? Well, getting them into shape takes a lot of effort, time, and money. If you acquire one, be ready to face these issues:
Repairs & Renovations Can Be Expensive. The purchase price plus the expense of renovations may exceed the amount you would have spent on a move-in-ready home, depending on how much work is needed.
Surprise Issues Can Put You Over-Budget. You should have an inspection before buying to avoid this problem. On the other hand, older homes frequently have issues that a home inspection cannot detect. As a result, projecting an accurate renovation budget ahead of time is difficult.
Financing Options Are Limited. Renovating a house without a renovation mortgage is difficult. Several renovation loans are available, such as the FHA 203(k) and Fannie Mae Homestyle Renovation Loan. However, these loans usually restrict what improvements you can make and how you do it.
It Takes a Long Time. Moving in and getting settled after purchasing a new property is straightforward. Renovations to make the right house may take months, if not years. You must choose between delaying moving in or living in an area where work is being done.
It’s Stressful. It is a big project to renovate a house. If you are doing the labor yourself, it might consume all your free time.
When Does Buying a 'Fixer Upper' Make Sense?
If you can manage the nonfinancial drawbacks, figuring out when you should purchase a fixer-upper starts with a simple equation. First, tally up the repair costs by thoroughly examining the property’s condition. Establish a firm number here; it should include materials and labor — yours and others.
Determine the market value of your home after remodeling by subtracting the cost directly from its present market value. Then remove at least 5 to 10 percent for any extras you decide to, including unforeseen problems and snags that must be handled and inflation. What’s left should be your offer.
A clause requiring an inspection is necessary for any real estate contract. At the very least, the inspection will let you know if the property is a promising investment; at worst, it will enable you to back out of the transaction.
Making Your Decision
Many real estate experts advise against purchasing a house requiring necessary structural improvements. That’s because the extensive roof and wall repairs, as well as major plumbing and electrical system renovations, are generally “invisible” and seldom raise the value of the property enough to make up for the expense of the renovation.
The greatest fixer-uppers are those that need only minor cosmetic repairs, such as paint touch-ups and drywall patching, which generally cost less than what they provide in market value. Light fixtures, doors, window shutters, and siding may also be replaced.
Major additions, such as a family room or a third bedroom in a community of three-bedroom homes, fall between structural and cosmetic renovations. Such projects frequently cost as much, if not more, than they are worth (the exception is adding a bathroom, which can be worth twice as much as its cost).
A fixer-upper may be a worthwhile investment. However, if you miscalculate renovations, outsource most tasks, and skip an inspection, it might become a giant money pit.
Whether you are an investor or just looking to build your dream home without the mile-high costs of living in beautiful Colorado, a fixer-upper is a massive investment. It will consume a significant amount of your time and money. Plus, after you’ve closed on the house, you cannot just back out if you decide it’s too much for you.
Before committing to a purchase as substantial as this, contact us at Halo Group to build a step-by-step action plan for realizing your selling, buying, or investing real estate goals.