So you think you’ve found the single-family house that’s just right for you. It’s in a great location, with the perfect floor plan. The catch? Your dream home needs a lot of work (what people call “sweat equity”). Would you be better off instead of buying new construction or a move-in-ready resale? Read on for some tips to help you decide if a fixer-upper is right for you.
What is a Fixer-Upper Home?
A fixer-upper is a home that requires renovations, repair, redesign, or reconstruction. The home is already built but it needs work. The “work” can range anywhere from almost an entire reconstruction (which would be for an unliveable home) or just minor updates and designs. The work you put into the home is referred to as “sweat equity” because the equity you build into the home is from your hard-earned work and not your wallet (i.e., if you paid for a new home).
3 Important Considerations to be Aware
1. There are more fixer-upper buyers than there are fixer-upper homes
The truth is there are many, many more buyers looking to buy an older home than there are in existence. This inevitably drives the price of these homes up, thereby removing the value you may receive from purchasing such a home.
2. You won’t make a “killing” in profits
Many years ago, around the real estate crash of 2008, a homebuyer could make a fortune by simply buying low, fixing it up, then selling high. These days though, it’s not so easy. After you take into consideration the increased cost of inputs (lumber, appliances, paints, etc) and your time, the profits you get from your “sweat equity” will likely not be worth it. Creating a budget for your home improvements is the first step to ensuring you see value from the home but keep in mind, most people blow through their budget very quickly (and by accident).
3. Many homebuyers underestimated the time and cost
The truth is, the job of fixing up a home is much easier said than done. You’ve probably heard this many times by now and shrug it off each time but please take it from us: the project will go over budget and over time. It will be neither easy nor cheap to fix up the home. It is was, then the home would have likely sold for much more, thereby squishing any profit to be made.
That being said, there are still many positive reasons to purchase a fixer-upper home. Don’t let use persuade you, we just want to ensure you know what you’re getting into.
Pros and Cons of Buying a Fixer-Upper
Here are some factors to consider before taking on a home that needs major work:
- You can put your own individual style on your fixer-upper. You get to pick out the colors, flooring, fixtures, and all the other features you’d love in your house without paying the generally higher cost of a new construction home.
- A fixer-upper can be bought for a below market value price. It’s a good way to get into a great neighborhood you might not have been able to afford with a move-in-ready or new construction home.
- You get to decide what areas of the house to spend money on.
- The lower sale price results in a lower property tax bill for you.
- The house may end up being worth more than you paid, potentially giving you a nice profit when you sell.
- The house won’t be move-in ready. You could be waiting months or even a year before you can move in. If you live there during renovations, you may have to cope with life in a construction zone for quite a while.
- You’ll need to come up with extra cash, from your savings or by taking out loans, to pay for renovations on top of your cost to buy the house.
- Your costs and the timeline may be unpredictable. It’s easy to go over budget or hit snags that delay the whole project. For instance, you remove some drywall and find a serious mold that requires immediate repairs.
- Lots of stress may come along with a renovation. Fixing up a house can be a big disruption in your life, especially if things don’t go as planned.
Evaluating Costs for Home Renovation
Before you decide to make a strong offer on a house, take a look at these tips for gathering the information you need:
First, hire a home inspector
Hiring a professional home inspector will advise you on what shape the house is in and can help to estimate the costs to make the changes you’d want. Does the house need minor renovations, such as new flooring or replacement of doors? Or major projects like replacing the HVAC system and remodeling the ancient kitchen? Are there expensive structural problems that could make buying the house a bad idea? Knowing the full condition of the fixer-upper will help you decide if it’s worth your investment. You will also want to conduct a personal home inspection before even considering hiring a professional — this will allow you to save time and money since if the house doesn’t even pass your inspection, you won’t need to hire a professional.
Do your research before making the offer
Get prices for renovations you intend to make. Ideally, have your contractor lined up, so they can walk through the house with you and give you a written estimate before you make an offer.
Look carefully at your finances, determine your budget for home improvement, and research any loans you may need. Make sure you’re not getting in over your head–becoming house poor will make your dream home not so dreamy after all. Remember to factor in the costs of living somewhere else during the renovation, if you can’t live in the house.
Decide what, if any, work you can do yourself
Maybe you can do some painting and minor repairs, while you hire professionals to do electrical work and other major projects. Whatever tasks you can take on yourself will help your bottom line.
Consider the cost in the time you’ll need to spend supervising the renovations
Even if you’re not doing much of the actual work, you’ll need to keep an eye on things and make sure the job is being done to your satisfaction. Avoiding miscommunication can prevent expensive mistakes! We provide a handful of tips and tricks to renovate your house on a budget but there are some jobs that you simply can’t do yourself. Make sure to make a list of what’s a priority now and what can wait for later.
Learn all you can about the neighborhood
Walk around the block to see how well-maintained the houses are. Get comps for nearby homes and learn what upgrades they have that your house doesn’t, such as a new kitchen or hardwood floors. This will help you set your offer price and avoid improvements that are too pricey for that neighborhood, which could hurt the value of your investment.
How to Find the Best Home Contractors
Make a plan first!
Write down detailed descriptions of changes you want, and a list of questions to ask when you interview contractors. Are there different price options for certain projects? What’s included in the contract? Make sure the contractor details everything that will be done, including material and labor costs, and deadlines.
Ask for referrals from your family, friends, neighbors who have had work done, or even your local hardware store. You should interview three or more contractors, asking all the questions you’ve prepared, and get a written estimate from each.
Check out contractors carefully
Look up prospects with the Better Business Bureau. Ask for references. Get their credentials, such as membership in trade associations that require them to follow ethical guidelines. Make sure they’re licensed, bonded, and insured. And watch out for scams; don’t hire anyone who calls or visits you unsolicited.
Turn to your smartphone for help, too
Apps such as Home Advisor and Angie’s List can recommend contractors, answer questions, provide quotes, and link you up with skilled, safety-conscious experts for all types of home projects.
Buying a house, of course, is the most important purchase decision most of us will ever make. Whether you end up choosing that fixer-upper or going the move-in-ready route, do your homework to make sure you get good value for the money spent on your dream home!