Buying a fixer upper is a great way to quickly add equity into your home shortly after purchasing it. Rather than paying for the best house on the block that’s already been upgraded as much as it can be, buying a home in need of some serious TLC will provide you with the opportunity to add this extra value to it yourself while benefitting from added equity.
But before you scout out a fixer-upper to buy, keep the following considerations in mind to ensure you don’t wind up with a money pit.
1. Bring a Contractor Along For a Showing
While you will have the chance to bring a home inspector to scope out any major issues with the home after an offer has been accepted and the deal enters escrow (as long as you include a home inspection contingency – more on this later), bringing a contractor with you during a showing can help point out important factors about the property.
For instance, it would be helpful for you to know where any load-bearing walls may be in case you have plans on knocking any walls down to open up the space. It would also be helpful to know what the local by-laws may be about adding another bathroom, building an addition, or finishing an attic to convert it into livable space. A professional and experienced contractor will be able to fill you in on the type of work you may or may not be able to do with the property.
2. Have it Inspected By a Professional
If you’ve decided to buy the home and your offer has been accepted, now’s your opportunity to have a more in-depth look at the property to see if there are any underlying issues that could end up costing you a lot more than you had originally anticipated. Your home inspector will take a closer look at components such as the foundation, windows, duct work, electrical panels and wiring, plumbing pipes, HVAC system, roof, and so forth.
Certain issues can be easily and quickly fixed without putting a huge dent in your pocket, such as replacing kitchen cabinets or flooring. But other issues can take forever to rectify and cost a massive amount to fix, such as repairing a leaky rook or fixing a faulty foundation. An experienced home inspector will be able to uncover – to a certain degree – major issues that would classify the home as a bona-fide money pit.
You’ll get a written report after the inspection which will outline all these issues, and the inspector will highlight problems that require your attention. If there’s something you don’t like on the report, you have the right to renegotiate with the seller, or simply walk away from the deal altogether.
3. Calculate a Rough Estimate of Renovation Costs
If you brought a contractor along with you during a showing and had it inspected by a licensed home inspector, then you’ll have a pretty good idea about what types of things need to be done to bring the home up to par and their associated costs. Along with the advice of these professionals, you’ll also want to do a little research of your own.
Call specific trades to obtain estimates on jobs that need to get done, then add up the potential costs to see if they fall within your workable budget. Draft up a document outlining all renovations, which will help you to come up with a reasonable offer price on the property (that’s within market value range). Don’t forget to add a 10% cushion for any extra unexpected costs that can – and probably will – creep up throughout the renovations.
4. Look Into Getting a Specialized Renovation Loan
Properties that require extensive renovations may qualify for specialized mortgages. A 203(K) home loan, for instance, is backed by the Federal Housing Administration (FHA), and lets you incorporate renovation costs into your mortgage. The amount that you borrow includes both the purchase price of the home and the estimated renovation costs so you don’t have to come up with that cash upfront when paying contractors to get the work done.
In addition, you may be able to obtain a lower interest rate that often comes with these home loan programs. Also, the credit requirements are sometimes more relaxed as well. The downside to these types of renovation mortgages, however, is that there’s only so much that you can borrow – between $271,000 and $729,750, depending on the market price of properties in your neighorhood.
Have a chat with your mortgage broker to see if this option is best for you.
The Bottom Line
When it comes to buying a fixer upper, take your time and have patience. You don’t want to land the first one you see without having done your due diligence. Before you plunk down a huge chunk of change on a fixer-upper, make sure you enlist the services of a professional real estate agent who has experience handling these types of properties. An expert who has your best interests in mind will make sure you steer clear of bad deals that will leave you with a lot more on your plate than you bargained for.