5 Things to Consider before Buying a Fixer Upper
Houses are typically the biggest investments we make in our lifetime. Owning a home can come with huge benefits, but buying the wrong house can deliver big headaches too.
If you’re considering a home that needs some updates—or an entire overhaul—make sure the purchase is the right decision for your situation.
1. Know the Reason You’re Buying
There are several reasons to buy a fixer upper and you should be really clear about what your reasons are. It will help with every decision along the way, including what type of house you want, which features are at the top of the wish list, and how you'll handle money matters.
One reason people buy fixer uppers is to flip them for a profit. This can be very lucrative if you find the right place at the right price, you have a knowledgeable team, and the market is strong.
A second reason for buying a fixer upper is to live in it yourself, giving you the advantage of scoring a home that may be less desirable to others at a significant cost savings.
The third reason to buy a fixer upper is kind of a combination of the first two reasons. If you’re able to buy and update a home, it can make an excellent rental income opportunity.
Buying and selling homes always offers investment opportunities and tax advantages if handled properly, but it’s also risky.
2. Understand the Market
The market can be examined in a general sense, such as evaluating whether interest rates are rising or falling, the state of the economy, and the amount of inventory available.
However, it’s best to perform your evaluation at a micro-local level. Know the areas of town where you’re looking.
Scrutinize the historical values of specific areas compared to others. Look at the neighborhood, the schools, the crime rate, and availability of nearby shopping and transportation.
Evaluate the inventory in your area along with the needs of the citizens.
Are people looking for low-income housing? Are professionals looking for land to build on? Is the rental market screaming for more options?
Really understanding where people are looking to put their hard-earned dollars will provide a clearer vision of whether your fixer upper has the potential to offer a good return on investment or long-term rental income.
3. Know How to Look for the Big Stuff
Some fixer uppers have solid bones but need to be gutted down to the studs. Other homes look good on the inside but need extensive landscaping work. Some houses simply need an interior design facelift.
If you’re confident in the market and the price you’re willing to pay for the house, the biggest risk is finding unexpected expenses after the sale closes.
While there will always be some unforeseen expenses, we’re talking about the big ticket items here.
If you’re seriously considering investing in a home that needs extensive repair, you’d better know how to evaluate the condition of the roof, foundation, HVAC system, and electrical system.
Any of these problems can set you back tens of thousands of dollars.
If you don’t have the expertise yourself, make sure you have a qualified inspector to give it a thorough probe.
4. Run a Spreadsheet
While you should be concerned about the location of the home and the status of any needed repairs, the number one consideration when it comes to buying a fixer upper comes down to dollars.
Set yourself up a spreadsheet with line items for every expense from loan fees to interest to construction materials.
Calculate labor expenses, permit fees, and inspection charges. Scour the internet for lists of possible costs and include them all. Be realistic--and then add 30% to the top amount.
Creating the most detailed cost analysis possible is your best chance of coming out ahead when buying a fixer upper. Expect and plan for the worst-case scenario in every room. This will give you a realistic blueprint to work from.
5. Understand it’s About Balance
If you’re considering buying a fixer upper, you’re likely someone who’s comfortable with some degree of risk. You’re also willing to put money into the project and see the work through.
Each house is different, so thoroughly evaluate each one to make sure it’s in alignment with your financial and housing goals.