By: G. M. Filisko
When you buy a fixer-upper house, you can save a ton of money, or get yourself in a financial fix.
1. Decide what you can do yourself
TV remodeling shows make home improvement work look like a snap. In the real world, attempting a difficult remodeling job that you don’t know how to do will take longer than you think and can lead to less-than-professional results that won’t increase the value of your fixer-upper house.
- Do you really have the skills to do it? Some tasks, like stripping wallpaper and painting, are relatively easy. Others, like electrical work, can be dangerous when done by amateurs.
- Do you really have the time and desire to do it? Can you take time off work to renovate your fixer-upper house? If not, will you be stressed out by living in a work zone for months while you complete projects on the weekends?
2. Price the cost of repairs and remodeling before you make an offer
- Get your contractor into the house to do a walk-through, so he can give you a written cost estimate on the tasks he’s going to do.
- If you’re doing the work yourself, price the supplies.
- Either way, tack on 10% to 20% to cover unforeseen problems that often arise with a fixer-upper house.
Some fixer-uppers are eternal money pits. Make sure you know what you’re getting into before you buy by consulting reputable home inspectors.
3. Check permit costs
- Ask local officials if the work you’re going to do requires a permit and how much that permit costs. Doing work without a permit may save money, but it’ll cause problems when you resell your home.
- Decide if you want to get the permits yourself or have the contractor arrange for them. Getting permits can be time-consuming and frustrating. Inspectors may force you to do additional work, or change the way you want to do a project, before they give you the permit.
- Factor the time and aggravation of permits into your plans.
4. Doublecheck pricing on structural work
If your fixer-upper home needs major structural work, hire a structural engineer for $500 to $700 to inspect the home before you put in an offer so you can be confident you’ve uncovered and conservatively budgeted for the full extent of the problems.
Get written estimates for repairs before you commit to buying a home with structural issues.
Don’t purchase a home that needs major structural work unless:
- You’re getting it at a steep discount
- You’re sure you’ve uncovered the extent of the problem
- You know the problem can be fixed
- You have a binding written estimate for the repairs
5. Check the cost of financing
Are the changes/upgrades you want to make cosmetic in nature? If the home is in great shape but you want to make enhancing changes or upgrades to the home, you can purchase the home with a normal loan and then fund the improvements yourself after closing.
- You can use your savings or investments for the improvements.
- If you have enough equity, you can get a Home Equity Line of Credit (HELOC). Typically, you will need to have put at least 20 percent down on the home originally, and the HELOC will allow you to tap into 10 percent of the current value of the home. For example, if you purchase the home for $100,000 and put $20,000 down, the HELOC would allow you to tap into 10 percent, or $10,000. Or, you might consider putting only five percent down and using the funds remaining in your savings account to pay for the upgrades. It is important to remember that the HELOC is not going to lend money based on the future value of your home after the improvements – they will only lend on the current value.
If the changes/upgrades you want to make to the home are vital to the safety and structure of the home (e.g., there are obvious repairs that are needed such as missing flooring, holes in the drywall, missing cabinets, missing plumbing, etc.), you cannot get financing for the home with a regular loan.
- Depending on the purchase price and your financial situation, if you pay cash for the home and then make the repairs and improvements, you can then do a cash-out refinance to recoup up to 75 percent of the current value of the home.
- If paying cash is not an option, consider the Federal Housing Administration’s Section 203(k) program, which is designed to help home owners who are purchasing or refinancing a home that needs rehabilitation. The program wraps the purchase/refinance and rehabilitation costs into a single mortgage. To qualify for the loan, the total purchase price plus the cost of improvements must fall within the FHA mortgage limits for your area. There are higher interest rates and additional closing costs when utilizing this type of financing. Additionally, this program is NOT designed for self-help. You will need a licensed contractor to do the work. Your lender will work with the contractor to validate his/her qualifications and set up a draw schedule so the contractor can be paid at certain milestones during the rehabilitation. NO work begins until after you have closed on the loan and own the property.
6. Calculate your fair purchase offer
Take the fair market value of the property (what it would be worth if it were in good condition and remodeled to current tastes) and subtract the upgrade and repair costs.
For example: Your target fixer-upper house has a 1960s kitchen, metallic wallpaper, shag carpet, and high levels of radon in the basement.
Your comparison house, in the same subdivision, sold last month for $200,000. That house had a newer kitchen, no wallpaper, was recently recarpeted, and has a radon mitigation system in its basement.
The cost to remodel the kitchen, remove the wallpaper, carpet the house, and put in a radon mitigation system is $40,000. Your bid for the house should be $160,000.
Ask your real estate agent if it’s a good idea to share your cost estimates with the sellers, to prove your offer is fair.
7. Include inspection contingencies in your offer
Don’t rely on your friends or your contractor to eyeball your fixer-upper house. Hire pros to do common inspections like:
- Home inspection. This is key in a fixer-upper assessment. The home inspector will uncover hidden issues in need of replacement or repair. You may know you want to replace those 1970s kitchen cabinets, but the home inspector has a meter that will detect the water leak behind them.
- Radon, mold, lead-based paint
- Septic and well
Most home inspection contingencies let you go back to the sellers and ask them to do the repairs, or give you cash at closing to pay for the repairs. The seller can also opt to simply back out of the deal, as can you, if the inspection turns up something you don’t want to deal with.
If that happens, this isn’t the right fixer-upper house for you. Go back to the top of this list and start again.
G.M. Filisko is an attorney and award-winning writer whose parents bought and renovated a fixer-upper when she was a teen. A regular contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.
Visit HouseLogic.com for more articles like this. Reprinted from HouseLogic.com with permission of the NATIONAL ASSOCIATION OF REALTORS®.