Our Simple Guide to Help Assess How Much Fixing You’re Up For
Let’s start with defining what a fixer-upper is: it’s a home that needs minor or major rehabilitation. A fixer-upper’s repairs can range from cosmetic work such as fresh paint or new carpet, to significant renovations, such as a new roof, foundation, plumbing or electrical. Whether the repairs are minor or major can be the critical factor in deciding whether or not you should purchase the home.
Most people don’t anticipate the amount or work and frustration that buying a fixer-upper requires. Many home shoppers start by wanting “home improvement TV” fixer-upper experience, but then reality hits them and they do a 180 after looking at some badly neglected, dilapidated homes. There’s quite a difference from a home requiring a new carpeting and fresh paint versus real fixer-uppers that have big issues such as out-of-date appliances, out-of-code electrical, uneven flooring, broken doors and windows, leaky roofs, struggling heating/AC units, foundation problems and plumbing leaks.
To avoid being blind-sided by some of these major pitfalls, you need to do your homework before you put down an offer and evaluate every aspect of the house. That’s where a home appraisal and thorough home inspection come into play; they’ll tell you want you need to know.
The pros and cons of a major renovation:
Fixer-uppers that include more than just cosmetic changes are inherently risky because there can be hidden pitfalls that do not present themselves until you start the renovation process. But on the upside, unlike the move-in ready homes most people prefer, you have less competition and the potential to customize the home to your liking. Buying a fixer-upper gives you the opportunity to design every detail of the home, from brand of appliance to kind of wood flooring, and end up with your ideal space.
Fixer-uppers also provide a means to build immediate equity in the property through “forced appreciation.” What is forced appreciation, you ask? While properties tend to gain value over time, a fixer-upper can shorten that timeframe by raising its value faster through rehabilitating it to the standard of other homes in the area.
Other benefits to a major fixer-upper include:
- The price – one of the biggest advantages to buying a fixer-upper is a lower price; it gives homeowners the opportunity to buy a home with potential much more affordably
- Tax savings – property taxes are lower on a fixer-upper as compared to a new home, and some fixer-uppers allow the homeowner to claim an investment tax credit for qualified rehabilitation costs*
- Design choices – a fixer-upper is a blank canvas, so you have the freedom to design the house the way you want (until the cash runs out)
Fixer-upper cons to consider include:
- The amount of work involved – fixer-uppers obviously require more work than a move-in ready home; not only will you have to find the people to do the work and save money to pay for it, you’ll may have to get your hands dirty too
- The amount of time involved – move-in ready homes come at a premium; all you have to do is unload and unpack your boxes; a remodel, on the other hand may not be ready for months so you might have to contend with an expiring lease, paying rent and a mortgage for a period of time, or finding other temporary living arrangements
- Surprises – fixer-uppers usually come with unwelcome surprises; what’s behind that wall or around those pipes can be an expensive and unexpected shock to the system
- Remodeling costs may outweigh the savings – there are occasions where the remodeling costs eclipse the savings, so make sure you do your homework and research average costs to remodel every room before you start writing checks
If you do decide you are ready to take on a major fixer-upper, the good news is that there are renovation loan products specially designed to make the process simple and affordable. For instance, FHA 203(k) loan, as insured by the Federal Housing Administration, allows you to make renovations to your newly purchased fixer-upper by combining renovation costs and your mortgage into one loan and one closing. In practical terms, that means one loan amount, one interest rate, one payment and one round of closing costs. Not every lender specializes in renovations loans, but at PrimeLending, we’ve made it one of our specialties. Contact a PrimeLending loan officer to learn more about all of your home renovation options, including FHA 203(k) loans.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.