With recent home prices at an all-time high, many homebuyers are considering properties that are less than “move-in ready”. While a fixer-upper can be a great way to get your foot into an otherwise unaffordable neighborhood, it’s important to consider what it really means to take one on. You’ll want to understand exactly what work needs to be done on the home, how much it will cost, and how much time it will take. Only then can you truly tell if a fixer-upper is worth it. Let’s take a look at some of the pros and cons of buying a fixer-upper.
Potential Benefits of Buying a Fixer-Upper
Potential Benefits of Buying a Fixer-Upper
- Lower Price Point. A home that needs a lot of work will typically have a lower asking price than nearby homes in better condition. With median home prices hovering around $467,000 in Rhode Island and $624,000 in Massachusetts, many homebuyers will have no choice but to buy something that needs repairs.
- Less Competition. A lack of housing inventory has made for a very competitive real estate market over the past few years. This has resulted in many discouraged buyers who find themselves outbid every time they put an offer in on a home. With a fixer-upper, there are likely to be fewer buyers interested in the property, giving you more room for price negotiation, especially if the property has been sitting on the market for a while.
- Ability to Customize. As you do renovations, you can customize the home to meet your needs and personal preferences. This could include moving walls, expanding rooms, adding closets or bathrooms, and changing wall colors, flooring, and cabinetry. While you’ll need to adhere to a renovation budget, the sky’s the limit with your design choices.
- Opportunity to Build Equity. As renovations are completed on the home, its value will typically increase. This allows you to build equity in your home faster than you would with a move-in ready property. The more home equity you have, the more protected you are from becoming “underwater” on your mortgage – in other words, owing more than the home is worth. Home equity is also helpful because you can tap into it down the road if you need financing for a major project or purchase.
- Financing Challenges. Getting the money you need to purchase a fixer-upper can be more challenging than securing a loan for a move-in ready home. Lenders tend to be more cautious about issuing a mortgage for a home that needs significant repairs, so you may find yourself needing a special mortgage, such as an FHA 203k loan. This type of loan can help you get the funds you need to purchase the home and make necessary repairs.
- Unexpected Issues. One potential danger of buying a fixer-upper is finding hidden problems after purchasing the property. Most buyers are prepared for a few unanticipated issues after signing a purchase contract, but uncovering major structural problems or costly safety issues can be shocking and financially overwhelming. While sellers are legally mandated to disclose known property issues prior to selling, it can get murky if a seller claims to not have known about a particular issue. For this reason, it’s crucial to have a thorough home inspection from a certified professional so you have a good idea of what you’re getting into.
- Major Time Commitment. It can take weeks or months to complete renovations on a fixer-upper. Depending on what work needs to be done, you may not even be able to live in the home while renovations are underway. Be sure to take into account the potential cost of having to find temporary housing, and work with your contractors to get an estimate of how long the project will take. If you’ll be completing renovations on your own, be realistic about how much time you’ll be able to devote to the project each week. No matter what, leave some wiggle room in your timeline for delays.
- Underestimating the Costs Involved. It can be difficult to properly estimate exactly how much a renovation will cost. You certainly don’t want to be left with an unfinished remodel if your funding runs out, so it’s critical to keep track of all of your renovation expenses, and adjust your plans accordingly if unforeseen costs come up. If you are funding your fixer-upper through an FHA 203k loan, you will have some protection from unexpected costs, as these loans have a “contingency reserve” rolled into the total loan amount that is set aside to cover unanticipated expenses. Any money leftover in the contingency reserve after the renovation is complete will be credited back to the borrower, typically by being applied to the outstanding mortgage balance.