The True Cost of Buying a Fixer Upper

What it really means to take on a rehab

Buying a “fixer upper” home is a growing trend, thanks in large part to popular shows (like the aptly-named HGTV hit Fixer Upper) that showcase fairytale transformations where families end up in luxurious dream homes for a fraction of the price.

When done right, a fixer upper can be a great investment.

“If people are unforgiving upfront about assessing the costs of renovation, the value of property and the neighborhood, and how much money they have, they can come out ahead and buy more house than they otherwise could afford,” says Bradley Inman, CEO of HomeGain.com.

Before diving into a major renovation of your own, it’s important to understand the risks involved in taking on a big home improvement project. Whether you are hiring a contractor or planning a massive DIY project, here are a few things to consider before diving in

Choose Projects Wisely

The easiest projects to make money on are those that only require simple, cosmetic improvements like drywall, refinishing, and paint touchups. Adding window shutters, siding, attractive doors, and updated lighting can add significant value to a home, while costing little to install. With the exception of bathrooms, major additions or improvements can end up costing more than the value they add to your house.

Most real estate experts don’t recommend buying homes that need extensive structural work. Major repairs that require electrical work or foundation upgrades can be costly, and because they’re necessary but not easily seen, they don’t tend to increase the value of the house.

The goal is to keep the value of the house at no more than 10-15% above the median sale price for your area, otherwise it won’t sell. Don’t go overboard with improvements, or you could end up with a home that outprices the market.

Can You Really Fix It Up?

Renovations are cheapest when you can do at least some of the work yourself.

“A fixer-upper is for people who are willing to be do-it-yourselfers, because that can save them a lot of money, and they can keep the increase in home value for themselves,” says real estate agent Fernando Semiao.

If you can paint, install trim, replace windows, strip wallpaper, install cabinets and take care of minor projects you can save yourself a lot of money. Don’t be fooled by the quick, seemingly easy work of Chip and Joanna Gaines on Fixer Upper—home improvement is not as easy as reality TV would have us believe. Know that projects will often be more complicated than you think, take longer than you think, and in some cases, not look as professional as you might have envisioned.

Determine a Fair Price

Talk to an agent in your local market to find out what an average home will sell for, or do research on listing sites like Zillow to get a general idea.If you’re planning to buy a fixer upper, first run through this calculation: find out the value of the home if it didn’t need fixing up, subtract the cost of the work, then decide if it’s worth it to buy and determine your offer price. If a home sells for $200,000, but needs $75,000 of work, a $125,000 offer would make sense. To determine the renovation costs, have a contractor walk through the home with you to give you a written estimate of the scope of work. As a general rule of thumb, budget an additional 25% for permits, incidentals and unforeseen expenses If the cost of improvements are going to exceed the value of the home, it’s probably a good idea to look for a different project.

Note: the Federal Housing Administration does have special loans for those buying a home that needs improvement. Your rehabilitation costs will be bundled with your mortgage. The total property value has to fall into a specific mortgage limit for your area, among other requirements.

Require a Home Inspection

When making your offer, make sure the contract includes an inspection clause. These give you room to back out of the deal if inspectors find issues that are too serious for you to fix. You can also use the findings to help negotiate with the seller for a lower price. Hire a professional inspector to look for things like water leaks, mold, lead-based paint, pests and other potential problems that are not easily seen. Make sure to also bring your contractor to look at areas that might be out of the home inspector’s experience.

Involve an Attorney

The most important consideration when taking on a fixer upper is to make sure that your attorney is involved from start to finish. From reviewing the real estate and construction contracts, to negotiating additional improvements after the inspection, it’s vital that all components of the process are carefully thought out to reduce your liability. The attorneys at Anselmo Lindberg & Associates are experts when it comes to real estate law and are on hand to make sure that your fixer upper runs smoothly.

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