Buying a fixer-upper house has challenges and rewards. Learn about the most critical issues when considering a fixer-upper. Learn the pro's and cons, what you should look for legally when buying a fixer upper, and is buying one really worth it?
As home prices surge across the country, move-in ready homes are pricing a lot of would-be buyers out. Buying a fixer-upper may seem like a great way to save money. But if you do not know what you are getting into, it could actually cost you more in the long run. Here are the most important factors to consider when determining whether a fixer-upper house is right for you.
What are the pros and cons of buying a fixer-upper?
The main advantage of buying a fixer-upper is the ability to purchase a house for less than comparable, move-in ready properties. It also can pay off down the road if you eventually sell your home after renovating it. This is what attracts house-flippers and real estate investors to fixer-uppers.
If you are in the market for a home that will be your primary residence, a house in need of renovations also gives you the opportunity to customize it to your liking. If you want a restaurant-quality kitchen, for example, you could save money by purchasing a home with a kitchen that is clearly in need of an update.
The main disadvantage of buying a fixer-upper is the time, cost, and potential stress involved in renovating it. In some cases, what initially seems like a bargain could become an endless money pit. This can be especially true if you do not adequately assess the cost of renovations, or if you overestimate your ability to do the work yourself.
If this will be your primary residence, consider whether you will need to live elsewhere temporarily while the work is being done, what impact the renovations will have on the home’s value, and your ability to pay for those renovations. If this will be an investment property, however, then your main concern may be the projected return on your investment and when you can expect to realize that return.
Whether you are looking for a primary residence or investment property, you will be at an advantage if you can perform a substantial amount of the work yourself, since labor will be your largest expense for tasks performed by contractors. Be honest with yourself. Learning how to buy a fixer-upper is one thing. Having the knowledge, skills, time, and energy to do the necessary renovations is another.
Is buying a fixer-upper worth it?
No matter how cheap a fixer-upper may seem at first glance, it is not always worth buying. First and foremost, you need to run the numbers (which often requires a thorough inspection from a trusted professional) while keeping in mind factors such as:
The potential for cost overages.
Unexpected complications that require additional work.
Fluctuations in material and labor costs and availability.
Delays in permits, and work completion.
Housing market declines.
Once you have an estimate for the true cost of the house (the initial purchase price plus the cost of renovations, leaving room for unforeseen costs), subtract that from the home’s projected post-renovation market value. This is your projected profit, or your potential savings if you plan to live in the home. You may want to evaluate several homes before making a decision.
You cannot control external market forces, so you will want to consider a range of how much you expect to profit, especially if this is an investment property. If this will be your primary residence, you may be less concerned about the time it will take to see a return on your investment.
Whether a fixer-upper is worth it also depends on the kind of work needed. Generally, cosmetic repairs like fresh paint, new windows, and new flooring may give you the most bang for your buck, and may be among the easiest to do, or subcontract out, yourself. While adding a new bathroom or expanding and updating an existing one can pay off, adding a room typically costs the same or even more than what it will add to the home’s value. It may be worth it to you personally, but an add-on may not make sense for many investment properties.
Homes with major structural problems are often not worth the investment, even if they are priced to sell and in a competitive market. These structural problems may include additional plumbing, electrical, foundation, and roof-related issues that are a bigger deal than they may seem at the outset. If you can fix these problems yourself, then they may be less of a deal-breaker. Homes in need of major structural repairs often sell to contractors and house-flippers who have the skills and right network of subcontractors to get the job done at a fraction of the cost.
Can my contractor give me a renovation estimate before I buy a fixer-upper?
Yes, it is a great idea to get an estimate or two on renovations before you buy a fixer-upper. You may be surprised about the fluctuations in the cost of materials, as well as the differences in estimates from contractors. Remember that the lower estimate is not always the right one.
When shopping for contractors, consider the following:
Start with local contractors that have positive reviews.
Check references and talk to each contractor personally.
Be firm about your renovation budget and plans.
Look for contractors who understand your needs and concerns (like if your family will be living there during the renovations).
Have them explain the possibility of unforeseen costs and discuss scenarios that may delay the project or add to the cost.
Be wary of any bids that seem too low to be true.
Once you have selected the right contractor, discuss your budget in detail, show them your plans, and have them walk through the house with you. They may tell you the cost will be more than your budget, so be prepared to pare down your renovation plans as needed or avoid the house purchase altogether. Some contractors may not be able to give you an accurate estimate without opening up walls to assess the true condition of a home, but you may be able to request estimates for worst-case scenario situations. If you are considering putting an offer on the home, you may even be able to negotiate with the seller to allow your contractor to do a more thorough inspection.
If you decide to move forward and purchase the fixer-upper house, you will then need to formalize the Remodeling Contract, Home Improvement Contract, or Construction Contract. While the terminology may vary, these contracts all stipulate the terms of the arrangement, including costs, permits, timelines, liabilities and contingency plans for unexpected events.
What should I watch out for, legally, when buying a fixer-upper?
The key to limiting your legal risk when buying a fixer-upper is to do your due diligence by keeping in mind that unexpected problems can arise. Here are a few legal considerations you may want to consider before you put your money into a fixer-upper:
Permits. Some renovations do not require permits, but many do. The permitting process can take a while, and there is no guarantee that you will be granted a permit. Local contractors often have experience you can rely on to understand what will or will not be allowed.
Code compliance. Even if the house you purchase is not up to code, you may need to adhere to local building codes if you hope to rent or sell your home at some point after renovating it. Be sure your estimate is based on code-compliant work.
Safety codes. You may not realize it until you have torn down old walls, but dangerous levels of mold, lead leaching into the plumbing, ungrounded electrical outlets and other such concerns that are not compliant with safety codes could expose you to liability unless you adequately address them before renting or selling your home.
Inspection reports. Be sure to pay for a thorough inspection of the home to understand what you are getting yourself into to help avoid problems down the road.
Figuring out how to buy a fixer-upper has a relatively steep learning curve, but it can be rewarding for the right buyer and property.