Tips for Buying a Fixer-Upper
Buying a fixer-upper allows many people to buy a home they wouldn’t be able to afford otherwise. It can also allow buyers to purchase a home in their ideal — and possibly a more expensive — neighborhood. They can then take their time saving up for repairs and customizing their new home, rather than having to spend money they don’t have upfront.
Although there are many perks to owning a fixer-upper — most of which center around savings — it doesn’t come without its own headaches. The home may be cheaper, but you may not know all the repairs you'll have to make until you move in. Or, you may not realize the extensiveness of the repairs you're expecting until you have the time to track down contractors for estimates.
Here’s what you can expect in your search for a fixer-upper, tips on negotiating for the best price so you’ll still have money left over for repairs, and how to juggle those repairs and upgrades.
Find the right house
Unless you plan to stay in your home for the rest of your life, it's important to find a fixer-upper that's actually worth fixing. It just doesn’t make sense to spend tens of thousands of dollars to renovate the first fixer-upper you find — especially if the home is in an undesirable neighborhood. In this case, you’ll never get back the money you put in when you decide to sell down the road.
Ideally, you find a distressed home in need of mostly cosmetic repairs in a great neighborhood. Look for the cheapest home on the block that you can envision as your dream home with a new kitchen or siding or even tearing out some walls.
Set a flexible budget
You will want to have an idea of needed repairs and the expense of each before you even put an offer on a fixer-upper. In most neighborhoods, there is a maximum price any home would sell for even with a huge remodel. You want to make sure you won't put more money into the house than the maximum amount the house is worth.
For major repairs such as a bad roof, foundation problems, water damage, mold, or termites, it’s a good idea to get an actual quote prior to buying the home. Unless you’re an expert, you may be surprised by the extent of repairs and the accompanying price tag. Even the cost of a new driveway could make you cringe. Depending on the extent of repairs, after doing your budget on a mortgage worksheet, you may even find that a move-in ready home would actually cost you less.
After you have a reasonable budget, add ample padding — most experts recommend planning to spend 10% to 20% more than you anticipate. Inevitably, unexpected costs will come up.
Then, prioritize based on the necessity of the repair. For example, a foundation issue would be your top priority, as it needs to be fixed ASAP to avoid further damage to the home. Active termites and leaks would also be top priority. Cosmetic repairs such as a new paint job should end up near the bottom, and you can save for those repairs as you go.
Negotiate
In the current seller's market, odds are, you'll have to negotiate when making an offer and won’t be offered any seller’s concessions. The seller will probably have multiple offers, even for a fixer-upper. Although you can sweeten your offer by giving more money for the home, there are other ways to convince the seller to choose your offer over others.
You could offer to buy the home as-is — meaning you don’t expect the seller to make any repairs prior to closing. This, however, doesn’t mean you waive your right to a home inspection, which you absolutely should get, especially on a fixer-upper.
You may also offer a closing quicker than the usual 30 to 60 days, show the seller your pre-approval letter from your lender, or put more money down. All these tactics show the seller that you’re serious about the buying the home and not likely to back out at the last minute.
Buyers and sellers usually split closing costs. You could offer to pay some or all of the seller's closing costs. Even with a fixer-upper house, you might be faced with a bidding war. Make sure your offer stands out.
Find the right loan
Mortgage rates are currently at historical lows, but most home loans simply cover the price of the home, with no extra allotment for repairs or improvements. However, some cover both. These include the FHA 203(k) (3.5% down payment) and the HomeStyle (5% down payment) loans.
Try to work out how to finance a home before your search — as it will give you an idea of how much you can spend both on the home itself and on any future repairs.
Decide if you will DIY or use a contractor
You can save loads of cash by doing it yourself — or DIY — but think twice if it's a major renovation and you don’t have any experience. This is especially true of the “bones” of the home, including foundation, electrical, and plumbing issues. You may be able to take on the more cosmetic aspects yourself, but most people are better off hiring a contractor for the rest — it will ultimately save you money in the long-run and you’ll know it’s done right.
If you decide to hire contractors, choose the most reliable ones possible who will actually get the work done. Contractors are notorious for leaving jobs unfinished, and a few bad apples gives the bunch a bad name. Thoroughly vet any contractors you plan to use, make sure they get high reviews, and compare them with others.
Bottom line: Take your time
It may be tempting to dive in without doing your research or fully vetting the fixer-upper you may have your eye on. But, it’s important to take a moment to consider the bigger picture, review your budget, and make sure the home fits both.
You're buying a fixer-upper for a reason. Why not take your time and create the house of your dreams? But make sure the house of your dreams doesn't turn into a nightmare and end up costing you more than you can afford.
