Assessing the Costs of a Fixer-Upper

Everyone wants to live in the best neighborhood in town.  Unfortunately, not everyone can afford the best neighborhood in town.  A great way to live in the neighborhood you want without breaking the bank is buying a home that needs some repair.

But how do you make sure you are actually getting a good deal on the fixer-upper?  Follow these guidelines and you will be sure to save money in the long run.

1. Get some help

First things first, you are not a handyman.  You are not a general contractor.  You cannot tell the difference between a structural and a non-structural wall or the difference between wiring a 110 or a 220 outlet.  Once you put your ego aside and allow other people to help you with the projects inside and outside of your home, you will save time which also means saving money in the long run.  Sure, there are definitely jobs you can handle on your own, but you should always find a professional to do a professional job.

2. Price it out

If you know you are looking to buy a fixer-upper, get rough estimates of the work you would like to get done on your potential new home before you even purchase it.  Have design ideas, material selections, and an approximate budget for renovation costs before you close on your new home.

3. Check permit costs

Ask local officials if the work you would like to do requires a permit and how much that permit costs.  Essentially everything other than painting and flooring would most likely require a permit.  Doing work without a permit will cause problems when you resell your home.  Depending on who you are working with, different people will have to pull different permits.  A general contractor will most likely pull the permits for you, saving you time but costing you money. A construction manager will have the homeowner pull the permits, which costs nothing but your time.  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 of permitting into your plans.

4. Stay away from structural work

The best fixer-uppers are the ones with no structural work required.  Not only does structural work cost more, it will take longer to finish.  Only purchase a home that needs structural work if you are getting it at a steep discount; you are absolutely sure your contractors and engineers have uncovered the extent of the problem and the problems can be fixed; and have binding written estimates for the repairs.

5. Check the cost of financing

If you plan on purchasing a fixer-upper, you have a different financing options available to you that are unique from standard mortgage products.  If you plan on funding the repairs with a home equity or home improvement loan, make the deal contingent on getting both the purchase money loan and the renovation money loan (or a combination loan), so you do not have to close the sale without money for the renovations.

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 value of the property must fall within the FHA mortgage limit for your area.

6. Make the right offer

When looking to buy a fixer-upper, make sure you are working with a real estate agent who handles this type of negotiation.  Making an offer on a fixer-upper requires making different types of calculations.  Mainly, make sure to 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 you have in mind to come to an offer price.

7. Include inspection contingencies

A home inspection is a major component of all home purchases, but it is especially important when you are looking to buy a fixer-upper.  You may know you want to replace older kitchen cabinets, but the home inspector has a meter that can detect a 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.  Or, with an "as is" contract, the buyer has the right to back out of the deal for any reason whatsoever that is uncovered by the home inspection.  Know your limits on what you are willing to renovate so not to buy a home that will become an endless money pit.

Make sure you are always working with professionals who know the best way to handle fixer-uppers and you will get the home of your dreams in the neighborhood you want without breaking the bank.