If you’re in the housing market right now, you have to make a major decision about whether you’re willing to buy fixer-uppers. Due to the foreclosure crisis, there are a lot of homes on the market with half-finished projects, or no upgrades. The previous owners either bought more than they could afford or got started and then ran out of money.
How to Get a Feel for Fixers
When you first start going to open houses, include some fixer uppers on your tour list. That way you’ll get an idea of what sorts of fixes are typical and what you’re really prepared to handle. It will also give you a feel for your budget. If fixers are all you can afford, you might need to scale down your other needs or wait to save more or prices to fall. If you can afford a spruced-up house, but are willing to do some work, a cheap price on a fixer could be a good opportunity.
On your tours, note things like run-down kitchens and bathrooms. What’s the dealbreaker for you there? Is it the ancient oven? The cramped shower? We’ve seen some that just needed cosmetic upgrades, but we’ve seen others that weren’t habitable. Where do you draw the line?
If the house is in a serious shambles and this is your first purchase, I would keep looking. Save that one for the investors with the money, resources, and experience to do the job right.
What Are You Willing to Do?
We’ve made two offers so far. One had been fully upgraded and needed no work. We were outbid (the buyers overpaid, we feel.) The other was most of the way there, but would eventually need new appliances and cabinets. The bank foreclosed before considering our offer there, so we’re watching for it.
We also considered making an offer on a fixer, but the location stopped us. The rest I saw as a canvas. The kitchen, bathrooms, and floors needed upgrading, but it was livable in its current condition and had a lot of potential.
Ideally, I’d like to get a low enough price that I could do the kitchen and floors before I moved in. I can wait a few years to upgrade bathrooms. Landscaping is a great summer project.
For the kitchen, are you willing to do a teardown or simply upgrade the current arrangement with new cabinets, counters, and appliances? If you don’t want to do a major renovation, then make sure the current layout will work for you.
What’s Your Budget for the Purchase and Repairs?
During the boom, buyers would use all of their money for the purchase and assume they’d get a home equity loan for upgrades right away. Unfortunately, many couldn’t do that because they’d already bought the house with a 100% loan.
If you’re considering buying a fixer-upper, you need to be able to put 20% down and then have cash left over to do immediate upgrades before move-in. That means you’ll also need sufficient cash to cover a mortgage and rent for a couple of months while the work is done.
In our case, I would look for a price-point that allowed us to put 20% down and left us with $40,000 in cash for an immediate kitchen remodel and flooring upgrade. (If necessary). Those are two of the most common failings we see. Sometimes the floors just need buffing, but others need to be replaced. Then I would see what I think it would cost to upgrade the bathrooms in two years and make sure we could save the cash for that, too. In our area, that means looking for a home that’s about $160,000 less than our upper price limit.
How Much Work Does the House Need?
Some upgrades are common and affordable. Others should probably stop unless you’re a professional. That includes relocating walls, major foundation repairs, and new systems. Many homes need a copper re-pipe, which is common. But a copper re-pipe, new roof, new kitchen, new bathrooms, new floors, new wiring, and foundation repairs is too much for the average homebuyer to do on one house.
Is An Upgraded Home Better?
If you don’t have a cash-cushion, then paying a little more for an already upgraded home is probably the better option. In this case, your purchase price and mortgage will be higher, but you won’t have other costs to deal with. If you don’t have 20% at the highest-price point you’re considering, then this is really your only option.
What’s the Advantage of a Fixer?
There are four advantages of fixer-uppers, at least in my mind.
- They’re cheaper. You can save tens of thousands on the purchase price by buying a fixer. This will reduce your mortgage, monthly payments, and property tax.
- You can put your own stamp on it. An already upgraded home was done to someone else’s taste. If you do the upgrades, you can make it into your dream.
- Immediate equity. If you buy a fixer-upper and then put in $40,000-$50,000 of improvements, you could easily increase the value of the home by $75-100,000.
- If your local market is still declining, a cheaper home offers more protection against losing money when you sell.
Fixer-uppers aren’t for everyone. You need to have a good eye for potential, a willingness to find and work with contractors, and a strong stomach for setbacks. If you’re not that type of person, stick to an upgraded home and try a fixer later in life.