By Sandy Lindsey
Contributing Writer
There are many reasons to buy a fixer-upper, starting with a lower price point. This may allow a buyer the opportunity to move into a neighborhood that wouldn’t otherwise be affordable. It also allows a homeowner to turn sweat equity into home equity as the house value increases.
Additionally, it’s an opportunity to customize the home to your personal taste rather than living with someone else’s idea of a “dream kitchen.” And there is also typically less market competition for fixer-uppers. On the downside, renovation costs will require time and hard work, may spiral and break the budget, can be stressful, and may need special financing if a house is in particularly poor condition.
Performing a thorough inspection of the property and making an honest assessment of your DIY skills is just the start of the process, but if it’s done right, renovating a fixer-upper can ultimately be highly rewarding.
Important Protection
Before signing any home purchase contract, make sure it has a home inspection contingency that allows the buyer to walk away if significant defects are discovered and get the full deposit back. A comprehensive inspection is essential to reveal any hidden defects that potential buyers should know about.
Check Every Inch
Many fixer-uppers are older homes in otherwise good condition that need kitchen and bathroom updates to bring them into this century. But even these may be hiding more serious issues, such as foundation cracks, uneven walls (signs of structural issues), and sinking walkways, driveways, or sidewalks (which may indicate a broken sewer line).
No matter how great the home looks, it needs a comprehensive professional inspection by an inspector experienced in older homes. In fact, it’s best to budget for inspecting two or three different houses so that you aren’t forced to settle on the first home you inspect. After all, any budget inspection money that you don’t end up using can be added to the project budget.
A comprehensive inspection should include the electrical, plumbing, and HVAC systems; windows and doors; roof condition; attic; gutter drainage; basement and foundation integrity; exterior walls and siding; chimneys; yard drainage; and the septic system, if applicable, which may require a separate inspector.
Also, inspect any detached garages, fences, and decks. It’s also a good idea to have the sewer line inspected with a camera.
That said, as the purchaser, it’s important to use your own senses to look for hairline cracks or stains, hear any creaking, or smell anything musty. Get the inspector’s thoughts on whatever you detect. Renovating can be highly rewarding, but only when it’s approached with clear expectations and careful planning.
The Results
The completed report will have red or orange and blue or yellow flagged items. Red or orange indicates a major defect or safety hazard, typically electrical, plumbing, or foundation issues, or other safety concerns. These are serious enough that they could make the home uninsurable until fixed, and they may be dealbreakers in your decision of whether to buy.
In all cases, these items need to be addressed by the seller before sale or, if being sold “as is,” prioritized by the buyer after purchase.
Blue or yellow items are typically age-related or cosmetic items, such as a stained ceiling from a prior roof leak, cracked tiles, or a window that doesn’t open properly. They may also include maintenance tasks, such as cracked caulking, loose door hardware, or an HVAC filter in need of replacement.
Make a spreadsheet to tally what all these repairs will cost. If it’s too much, this is the time to walk away and consider the inspection cost as money well spent. Tallying prospective repair costs in advance helps buyers decide whether to move forward with the sale or find another investment.
Hard Questions
Let’s say your project house appears to be within the remodeling budget, including a 15-20% cushion against unexpected discoveries. Now’s the time to be honest about your DIY skill level and expectations.
Start by asking what your motivation is. If it’s for a “fun” upgrade experience like those seen on television, that elation could quickly fade, and it may be better to put the combined purchase and renovation funds into a more finished residence.
If you’re ready to make a serious renovation commitment, take a long, hard look at your DIY skillset, and budget for hiring a pro, just in case, on any questionable items. Any unused funds can be added to other improvements or a well-deserved vacation afterward.
Don’t simply trust online national job cost estimates, either. It may be worth a few bucks to pay a local contractor to go over the house and estimate costs pre-purchase. Also, keep in mind that if you hire plumbers or electricians and do much of the other work yourself, you’re going to have to manage the project — that includes getting any required permits, scheduling inspections, and other tasks.
You can save yourself the trouble by hiring a general contractor, which, depending on the project size, will add 10-20% to the overall cost. Successful projects begin with an honest assessment of financial limits and DIY skills.
Building Excitement
Looking at a small fixer-upper, with an eye to adding on? Check with local zoning to make sure there aren’t any surprise restrictions. Also, be sure not to over-improve for the area. Keep it in line or just slightly above the neighborhood standard, particularly if you’re planning to sell in a few years.
Unless you’re a cash buyer, don’t sign anything until confirming it can be financed, or make the contract subject to financing approval.
Is It Livable?
Living on-site during renovations does more than remove the stress of paying a monthly rent and mortgage or two mortgage payments. It also allows for conventional financing, which has higher lending limits, lower interest rates, and flexible terms up to 30 years with renovation costs rolled in.
If it’s a large project that prevents you from living in the home, it may qualify to be financed with a standard Fannie Mae or Federal Housing Administration 203(k) purchase loan with a 3.5% down payment. These loans may allow postponing the first six months’ payments to avoid having two house payments.
Less extensive renovations that will take less than six months may be better suited with a Limited 203(k) that will provide $5,000 to $35,000. These do not need engineering or architectural drawings and require fewer inspections. All 203(k)s are for primary residences only, not flippers.
