The homebuying process is undoubtedly a long, expensive process. However, if you look into purchasing a “fixer-upper,” you may be able to save some money and even earn a return on your investment.
What Is a Fixer-Upper?
A fixer-upper is a house usually available at a lower cost than a move-in-ready home because it needs significant repairs and renovations to be livable. The two main reasons for buying a fixer-upper home are usually to:
- Increase the property’s potential value to get a return on investment — i.e., flipping.
- Own a starter home, particularly if you’re on a budget.
Should You Buy a Fixer-Upper?
Here are some pros and cons of buying a house that needs work.
- Lower purchasing price — According to a Zillow Digs report, fixer-uppers sell for an average of 8% less than market value, meaning you could qualify for a home loan with a lower down payment.
- Less competition — Generally speaking, you’re less likely to get into a bidding war over a fixer-upper, so you have a good chance of landing the home you want at a reasonable price.
- Easier customization — Since a fixer-upper already needs work done, it’s much easier to customize your new home the way you want it as opposed to personalizing a turnkey home.
- Potential increase in home value — With all your necessary repairs and renovations, you may be able to increase your home’s value, allowing you to receive a good return on investment if you decide to sell the house.
- Expensive renovations — While the upfront cost of a fixer-upper may be lower than a turnkey home, it’ll take some extra work and research to factor in the cost of renovations and ensure it stays within your budget.
- Unexpected issues — Whether it’s holes in the exterior or critters hidden in the attic, you may encounter some unpleasant surprises, especially if it’s an older home.
- Budgeting is hard — While you may have a budget in mind for your renovations, it’s nearly impossible to determine an exact figure, especially when considering surprise costs.
- Long-term project — It may take months or even years before your home is fully renovated. Unless you have somewhere else to stay, you’ll likely live in a construction zone until the project is complete.
If you’re thinking about buying a fixer-upper, be sure to keep these tips in mind.
Get a Home Inspection
While a home inspection is often not mandatory, hiring an inspector is highly recommended. This is especially true when dealing with older properties requiring renovations because you may run into unexpected problems, such as a cracked foundation or an outdated electrical system. Ultimately, a home inspection can help you mitigate surprises, allowing you to budget your costs and prioritize your projects.
Price Out Renovation Costs
Pricing out your renovations is one of the most important things to consider when buying a fixer-upper. Otherwise, you may go over your budget and take a loss on your investment. Write down a list of all the renovations you need to complete and price out the materials and labor costs since many projects require a licensed professional such as replacing a water heater. Although you likely won’t get an exact price for every renovation, you can get a ballpark estimate by researching and getting contractors' quotes.
Determining which projects you can do yourself is also a good idea. This will help you save a lot of money in the long run since contractors can be expensive. Projects such as painting, installing molding, replacing light fixtures, and changing faucets and showerheads are all easy DIY jobs every homeowner can do.
Make the Right Offer
The purpose of purchasing a fixer-upper is to get a good deal on it, so you should avoid overpaying for your home. Ensure your offer is the right balance between a good deal and the cost of repairs and renovations.
Additionally, your offer should include contingencies — exceptions that allow you back out of a purchase due to unforeseen events or circumstances. Inspection and appraisal contingencies are some of the most common ones, so if an inspector discovers a major problem in the home or the appraiser discovers the home’s value is lower than you offered, you have the opportunity to back out.
Is a Fixer-Upper a Good Investment?
Should you buy a fixer-upper or a move-in-ready home? Deciding whether a fixer-upper is a good investment depends on your unique situation. Each property is different, so consider your budget, time, needs, and lifestyle before deciding.
A fixer-upper may be a sound investment, but the expenses can pile up quickly, especially if you estimate your renovations incorrectly, avoid an inspection, and leave most of the work to contractors. But if you do everything as correctly as possible, your fixer-upper can be a worthwhile endeavor.
Whether you purchase a fixer-upper or move-in-ready home, it’s a good idea to get homeowners insurance to protect your family and property. Mercury Insurance provides reliable coverage at an affordable rate.