By Dave Robles
To some people the term fixer upper evokes such feelings of dread that they steer clear of any property that needs even the smallest of fixes to become their dream home. To others, however, the term makes them see the possibilities, use their imagination to see what the property could be if just given the attention it deserves, and gets their creative juices flowing in order to create magic out of mayhem. Buying a fixer upper can be a great opportunity to get into the neighborhood you desire, get that dream house for cheaper than you thought possible or invest in a home that you will later sell for a tidy profit. It all sounds easy and looks that way on paper, but of course, like with everything there are pros and cons to buying that potential diamond in the rough.
Before signing on the dotted line: there are many things you should consider, not the least of which is simple math: how much will this project cost me? You start with assessing the property itself and its condition. Experts say you should always do a walk through with a licenced contractor whom you trust and who can tell you what will need to be done in addition to giving you advice on the things that you have your heart set on doing.
Do your homework about exactly how much materials and labor will cost: Check out the lumber yards and the big box stores to see the pricing on items that you will need in addition to calling around to contractors to get estimates on the required work. It is also a great idea to do your homework about the market. Price comparable homes in the neighborhood and be realistic about how much you can sell your new and improved fixer upper for once the project is finished. You don't want to improve something so much that you have renovated your way out of the market. It is always better to get the worst house in the best neighborhood rather than the best house in a bad one.
Lastly, before you sign for that fixer upper always get a home inspection. Professional inspections will let you know what is going on with the property, including things you may not initially be able to see like the foundation or the plumbing.
What improvements will give you the biggest bang for your buck? Obviously the cosmetic changes like getting rid of that old wallpaper and re-doing the floors are the best types of fixer upper because they are easy, relatively cheap to do and they're not usually that time consuming either, but they won't give you that much on your return. Lucrative improvement are the ones that include updating kitchens and bathrooms—what prospective buyers look at the most in a home—and outfitting the place with new fixtures, doors, siding, roofing or adding to the outside curb appeal of the property by landscaping and painting. If you are looking at a larger scale project such as adding a whole new bathroom or expanding the footprint of the house by adding new bedrooms or a living room, that's where the choices can get tricky in terms of your investment. Again, knowing the comparable homes in the area will help you here; if all the other homes in the area boast four bedrooms and your fixer upper has but two you may want to expand in that area. Be careful though, you likely won't get as much back as you put in with these types of rooms. Statistics back up the fact that adding a second or even third bathroom (again, depending on the comparables) will get you twice back what you put in when it comes time to sell. Prospective buyers love the fact that the kitchen and bathrooms are in good shape when they go to look at potential homes to buy. They know these are the two rooms in the house that cost the most to renovate and if they are already done, that is an added bonus for their decision on whether to purchase or not. When you are renovating you also have to be careful not to overdo it either. You should always seek to keep the value of the fixer upper– after renovations– to no more than 10-15% above the median sale price of other homes in the area. If it is priced too high once completed and won't sell then you won't get the profit or the sale you so desire and more than likely will end up losing money on the project.
Financing your project: Another important thing to consider when thinking of taking on a fixer upper is being able to get the money available to do the renovations. Small things may be able to be done using credit card debt, but larger projects may require home equity lines of credit or renovation loans. The most popular is the renovation loan tied to the first mortgage which allows you to borrow money against the home's value after the work is completed and the interest is tax deductible up to $1 million. Again, knowing you can be approved for whichever loan you want to take out before you buy is paramount.
Things of course can go wrong: This is true in all aspects of life and unfortunately holds true for buying a fixer upper as well. We have all seen the home renovation shows on television, and nine times out of ten, they are faced with some unforeseen problem that they have to deal with immediately. It makes for dramatic television but can certainly happen to your renovation as well, so it's always a good idea to budget for more money than you think you will actually need.
Flipping a house: If you are buying a home to fix and sell immediately, known as flipping a house the formula for success is to purchase the home for 60% of its "fixed up value – A home that is worth $800,000 fixed up should be purchased for between $480,000 and $520,000. A total tear down may require you to purchase it for less and a fixer that requires only light cosmetic work may be purchased for a higher percentage rate, but the 60% rule holds true for the majority of flips. If you planning to fix up the home and hold on to it for a longer period of time and are not looking for immediate profit, you can pay more for the home and still enjoy future profits.
If you play it smart, do your homework and really know what you are getting yourself into, buying a fixer upper can be a satisfying and amazing experience taking that shabby place and turning it into the home of your (or someone else's) dreams.