What to Know About Buying a Fixer-Upper
In recent years, real estate investors and those who are thinking about buying a home have included a fixer-upper house in their investment toolbox, thanks in part to reality shows such as “Fixer-Upper” and “Flip or Flop.” Quite often, buying a foreclosure will be at the top of most purchaser’s shortlist, as these are the kind of properties that often need work and may come at a bargain.
A recent Clever Real Estate poll found that 67% of millennials — those born between 1981 and 1996 — would buy a house in need of significant repairs. The same study found that the two most significant obstacles to first-time homebuyers of any age are the high prices of homes and the amount of down payment required. The lower cost of a typical fixer-upper helps overcome both obstacles.
Those who watch remodeling shows often assume they, too, can find a bargain residential property that others overlook due to a few cosmetic warts and wear around the edges. The house, after revitalization with a little know-how and elbow grease, will be the dream home for residents or new buyers.
With all this interest in fixer-uppers, older neighborhoods in cities across the country, especially those with good schools and other amenities, are deluged with want ads and posters of buyers willing to buy houses in any condition.
How can a newcomer hope to compete with the professionals when buying a fixer-upper?
Tips on Acquiring the Right Fixer-Upper
When purchasing a fixer-upper to renovate and then sell, rent, or live in, implementing the following four tips will ensure you successfully reach your goal of finding, buying, financing, and remodeling the perfect fixer-upper.
1. Identify the Right Property
Before searching for a house to buy, settle on your objectives. Are you looking for a house to renovate and flip a home to remodel and keep as an income investment, or a place where you intend to reside for several years? There are several considerations when buying a fixer-upper home.
Location is the single most influential determinant of a home’s value. The most common advice for those who intend to remodel then quickly sell a house has always been to “buy the least expensive house in the most expensive neighborhood.”
Others prefer houses in transitional neighborhoods, usually in urban cities undergoing a transformation. Prices are low with the probability of high returns if you are willing to assume the higher risk that the neighborhood will continue to improve.
Buying a house that you plan to keep uses another set of criteria: amenities (schools, parks, access to public transportation), proximity to a work location, community organizations, family size, and available capital.
Finding the right property once you know your objective is a matter of online searches, walking around, and the right contacts. Patience is a virtue, as is the addition of a professional real estate agent, who might even offer you a buyer rebate, to simplify your search while saving you time and money.
2. Acquire the Property at the Right Price
Knowing how much you can afford to pay for a home and the probable remodeling costs is mandatory before you attempt to acquire a house.
Calculating these amounts typically requires the aid of an experienced mortgage lender and remodeling contractor. The former, with the knowledge of your potential down payment, income, and credit history, can estimate the maximum mortgage that might be available.
The latter, after a thorough inspection of your potential purchase, can estimate the cost of repairs and remodeling. The maximum price that should be offered for the property is the difference between your down payment and mortgage amount, less remodeling, and closing costs.
Those who lack negotiation experience will generally benefit from having an agent to represent them. Many agree to rebate a portion of their fees, generating more funds for remodeling. Overpaying for the house reduces the funds available for fix-up, which can lead to financial disaster.
A common problem of first-time fixer-uppers is the assumption that they can do most of the work personally. If they are unable to do the work due to time or capability, they must turn to a professional, sometimes spending money they do not have or losing money on unfinished work.
3. Arrange the Right Financing
Although most home loans are limited to the price paid for the house, loans that include the purchase price and repairs costs are available:
- FHA’s Limited 203(k) Mortgage: This program permits homebuyers to set aside up to $35,000 of their mortgage for property repairs or improvements identified by a home inspector or an FHA appraiser.
- FDIC’s Homestyle Renovation Mortgage: The HSR Mortgage provides a convenient way for borrowers to make renovations, repairs, or improvements totaling up to 75 percent of the as-completed appraised value of the property with a first mortgage. A single person can finance up to four properties, including personal and second homes and investment houses.
- Lenders’ Renovation Loans: Companies like Prime Lending offer a variety of renovation loans that can be rolled into a single first mortgage.
4. Remodel to Meet Your Final Objective (Sell, Rent, Reside)
Time is money in the real estate world. Investors who intend to sell a house after remodeling need to be especially careful to limit remodeling projects that directly add value to the house and can be completed in a reasonable period.
Few remodeling projects by themselves return sufficient value to cover the costs of the addition, increasing the importance of a purchase price well below market value. According to a 2020 report by remodeling, the ten projects most likely to increase a house’s value relative to their costs are:
- Manufactured stone veneer: Cost of $9,357 with a return on investment (ROI) of 95.6%
- Garage door replacement: Cost of $3,695 with an ROI of 94.5%
- Minor kitchen remodel: Cost of $23,452 with an ROI of 77.6%
- Siding replacement in fiber-cement: Cost of $17,008 with an ROI of 77.6%
- Siding replacement in vinyl: Cost of $14,359 with an ROI of 74.7%
- Window replacement in vinyl: Cost of $17,641 with an ROI of 72.3%
- Wood deck addition: Cost of $14,360 with an ROI of 72.1%
- Window replacement in wood: Cost of $21,495 with an ROI of 68.9%
- Steel entry door replacement: Cost of $1,881 with an ROI 68.8%
- Composite deck addition: Cost of $19,856 with an ROI of 66.8%
An amenity often overlooked when calculating remodeling expenses is landscaping. Real estate agents agree that increasing curb appeal can add 1%-10% in sales price over homes with dull, unimaginative flora.
The American Society of Landscape Architects suggests spending 5%-10% of the home’s value on the landscape, “a sure ticket to quick resale.” A regular lawn care service with an average annual cost of $268 increases a home’s value by $1,211, a 352% return on investment.
Buyers who plan to live in their fixer-upper can afford to be more choosy on the timing and selection of added amenities because they likely will enjoy the addition for years (a benefit that is difficult to quantify) and can postpone projects to facilitate financing.
Final Word on Buying a Fixer-Upper
Buyers who are successful in fixer-upper properties are generally disciplined, methodical, and understand that every penny saved is an addition to their profit.
They seek to purchase houses that need the least renovation at the lowest price, optimize their funding to minimize costs, limit renovations, and use trusted professional contractors to complete the work at the lowest negotiated costs. They are careful not to overestimate their abilities or skill but participate in remodeling tasks when they can successfully execute the work and save money.
Buying a fixer-upper is not an easy or automatic path to real estate riches. There are pros and cons that should be considered before you begin. At the same time, buying a home that needs a little TLC can be rewarding emotionally, physically, and financially. After all, everyone loves a bargain.
About the author: The above article on buying a fixer-upper was written by Luke Babich. Luke is the CSO of Clever Real Estate, an online platform that connects home buyers and sellers with top-rated agents. He’s also a real estate investor in St. Louis, MO who owns over 22 units at the age of 25 with his co-founder, Ben Mizes.