When you buy a fixer-upper house, you can save a ton of money, or get yourself in a real financial pickle.
Follow these steps to know how much you can afford, how much to offer, and whether a fixer-upper is right for you.
1. Decide what you can do yourself.
HGTV 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 the home. Be honest when assessing your skill set – stripping wallpaper and painting? OK. Electrical work? Eek. Something else to consider is whether or not you really have the time and desire to do it. Can you take time off work to renovate? If not, will you be stressed out by living in a work zone for months while you complete projects on the weekends? Prob.
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 they can give you a written cost estimate on the tasks they’re 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 are guaranteed to arise. There are a million little pieces that go into renovations, inviting a million little surprises. Oh boy.
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 or neighbor decides to rat you out. 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 so factor that into your timeline too.
4. Double check pricing on structural work.
If your fixer-upper needs major structural work, spend a couple hundies to hire a structural engineer 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 and do not purchase unless:
You’re getting it at a steep discount
You’re sure you’ve uncovered the extent of the problems
You know the problems can be fixed
You have a binding written estimate for the repairs
5. Check the cost of financing.
Be sure you have enough money for a down payment, closing costs, and repairs without draining your savings. If you’re planning to fund the repairs with a home equity or home improvement loan, get yourself pre-approved for both loans before you make an offer.
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. Have a conversation with your trusty Realtor to determine 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. 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. 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.