Need a heavily discounted property? Try a fixer-upper! But know what you’re getting into ahead of time…
Housing is expensive these days, whether you’re renting or trying to buy. But our generation is much for handy and DIY-enthusiastic, so many hopeful homeowners are looking at “fixer-uppers” as a way to save some dough on the initial home purchase. A home that has not been updated in many years, or one that is not habitable in it’s current state will be heavily discounted compared to newly renovated and move-in ready homes. But beware of the risks and know what to look for when considering a fixer.
Some Flaws Can Be Fixed
There is a huge difference between an ugly house and a tear-down, though it might not be readily apparent unless you know the signs to look for. Broken tiles, chipping paint, peeling wallpaper, holes in the drywall, dirt, grime, and general disarray are all easy fixes. It can be hard to look past an ugly house that has not been well-maintained, but if it has “good bones,” you might be looking at a diamond in the rough.
Painting is the cheapest and easiest thing you can do all on your own that will make a huge difference to your living space. Don’t skimp on the preparation and materials! Make sure to clean the areas to be painted first, and even sand them down if necessary. Use a primer or paint with primer, mask off the edges and roll on at least two coats of color.
If you are a little bit more handy and have some experience with home renovations, you may be able to tackle some larger DIY projects such as floor replacement, cabinet installation, or bathroom remodel. Putting as much of your own elbow grease into your home improvements could shave thousands of dollars off your budget.
Some Flaws Are Costly
There are some problems that can be insurmountable. Issues affecting the foundation, structural integrity of the home, the roof, siding, sewage/septic, heating/air conditioning, and concrete repairs can be imperative and very expensive. Foundation and structural issues will almost certainly need to be addressed by a structural engineer. Plans and calculations will need to be approved by the city or your local municipality, which adds both time and expense to your project. These issues may not necessarily be deal-breakers if they were identified ahead of time and have been worked into your budget, but a major surprise like this could completely derail your project.
Some issues may not be able to be resolved entirely. In some cases, it is impossible to completely eradicate mold, for example, in a perpetually damp basement. Erosion or compaction problems with the soil underneath the foundation may be untreatable. Even zoning restrictions may hinder your ability to transform the home as you would like.
The most important thing to remember when investigating a home is to get a thorough home inspection, and follow-up with any specialized inspections as needed. You need to have a clear picture of all the defects of the home to make a proper evaluation.
Estimate Repair Costs and Formulate a Budget
After you’ve had the home thoroughly inspected and have identified the defects that you will need to address, the next step is to determine how much it will cost to make the necessary repairs. Start out by asking friends and family if they have had any work done recently on their home and the estimated cost of their improvements. This will give you a general idea of the price range for certain services. Next, get a few quotes from a few different contractors and compare rates. Draw up a reference sheet with all the necessary repairs and their estimated costs, including contractor estimates, to determine a viable offer price.
Ask For A Discount. Gently.
Now that you are armed with information, you can make your highest and best offer to the seller and ask for any credits or discount as necessary. Most likely the seller knows the condition of the home, but a low-ball offer or aggressively demanding repairs or a discount isn’t the best way to get a seller to work with you.
To avoid insulting the seller, start out by expressing what you love about the home but that you (and you contractor/engineer/etc) have noticed some issues that will take time and money to fix. Here’s where your reference sheet and contractor bids can be helpful as well. Subtract the necessary repairs from the asking price.
And you don’t have to stop there. If the defects in the home keep you from living (or living comfortably) in the home until they are repaired, it is also customary to tack on an extra fee for what Realtors call the “hassle factor,” which can be estimated by the amount of time and money you would spend living somewhere else until the renovations are complete.
The bottom line, the more you break down your expenses, the more sense your offer will make to the sellers. Homes that need a lot of work can be a worthwhile project, saving you anywhere from 20%-40% of the original asking price.
Get The Right Kind of Loan
If your fixer requires major renovations, you may qualify for a special type of financing called a “renovation loan.” One of the most popular renovation loans is offered by the Federal Housing Administration (FHA). The FHA 203(k) renovation loan offers great interest rates since it is backed by the government. The downside is there is a limit to how much you can borrow – anywhere from $217,000-$729,750, depending on the median home value in your area. Be upfront with your lender about the condition of the home and your renovation plans and ask to review any loan programs that will help with renovation costs.