Rising house prices are a good thing for a homeowner. It means rising home equity and a stronger balance sheet. It’s an entirely different matter however for a prospective homebuyer. It means that you will pay substantially more for a house than buyers did just a couple of years ago. One of the ways to get around this problem is to buy a house that’s a fixer-upper – a house that will need a lot of repair work.
Houses that are in need of significant repair will generally sell for a good bit less than what a “turnkey” house will (turn the key and move in). But a fixer-upper can also lead to unforeseen complications.
How can you buy a fixer-upper and avoid some of those complications?
You must buy well below market
If you’re going to buy a fixer upper it’s extremely important that you buy the home for well below market value. That doesn’t mean purchasing the house for 5% or 10% less than what surrounding houses are going for, but a discount that is consistent with the level of repairs that will be required.
There should be a reasonable discount applied for each and every repair job that needs to be performed. You may be able get away with a 10% discount if the problems are mostly cosmetic. That would include repainting the home, pruning back neglected landscaping and fixing a few broken windowpanes or doorknobs.
Major repairs, such as replacing the roof or heating system, should increase the discount substantially. You should never make an offer on a fixer-upper until you have a good idea as to what repair work needs to be done, and a provision in your contract that will allow you to negotiate the price based on those repairs.
Get a very detailed home inspection
Even if you are very good at repair work yourself, you should still get a home inspection. It never hurts to have a second pair of eyes looking at a property, especially if it has obviously been neglected.
The inspection needs to be extremely detailed. A property that has one or more major deficiencies probably has others that are less obvious. You’ll need an inspection report that discloses those repairs, including a reasonable estimate of the cost to remedy them.
Not only will the inspection be an important negotiating tool on price, but it may also reveal information that will make you decide that you need to walk away from the house entirely. Some problems are either too expensive to correct, or even impossible.
Can you do most of the repairs yourself?
The whole purpose in buying a fixer-upper is to be able to buy a property for less money that will cost to repair. It’s unlikely you will be able to do this if you have to pay outside contractors to perform the work. You should be able to do much of the repair work yourself, particularly the minor work.
The more you can do yourself, the bigger your savings will be. Your expenses will mostly be limited to the cost of materials, and that will give you a huge advantage in the overall cost of acquisition on the property.
You’ll need a lot of cash after the purchase
It’s not unusual for homebuyers to “close broke”. You will not be able to do that if you’re buying a fixer upper. Even if you are doing most the repair work yourself, you will still have the cost of materials to pay. That plus any outside contractors you need to bring in will require money.
You’ll have to have enough available after closing that you will be able to complete the repairs. And some extra in case this happens…
Will the house be livable after the purchase?
This is an important question when you’re buying a fixer upper. There are of course different degrees of fixer-upper property. Some have heavy cosmetic issues, but they are totally livable. Others may have structural or safety issues that will need to be remedied prior to moving in.
If there are problems that need to be fixed before you or a tenant move in, you’ll either have to have extra cash to either pay for your own living expenses or to carry the property without a tenant for as long as it takes to make the repairs.
Severe problems can remedy themselves in some cases. If there is an issue that affects safety or livability, either a mortgage lender may require that it be corrected prior to closing, or the municipality may refuse to issue a certificate of occupancy. Either situation could force the property seller to fix the problem prior to closing. That may result in a higher selling price, but it will remove the occupancy problem from the start.
A fixer-upper can save you a lot of money on the purchase price. But can also be a proverbial hornets nest of problems. The key is finding a balance between the two. And if you can, it will be a win on all fronts.
Have you ever bought a fixer-upper yourself? What kind of obstacles did you experience?