Is a Fixer-Upper a Smart Investment?
It’s no secret that today’s higher mortgage rates and home prices can be a challenge for buyers, especially first-timers. These conditions, along with carefully edited home makeover shows, can even make it tempting for buyers to consider a fixer-upper instead of a move-in ready home.
While a property that needs work can be a smart investment and a chance to create the perfect dream home, it’s a rather complex matter. There’s a lot to consider before moving forward with help from a real estate agent. First, a buyer should consider the advantages and challenges of buying a fixer-upper.
Pros of Buying a Fixer
- Lower Purchase Price: Fixer-uppers typically have a lower initial cost, and there may be room to negotiate the price down further if it’s been on the market for a while.
- Opportunity to Personalize: Renovating allows a buyer to tailor the home to their needs, style, material and layout preferences, creating the ideal spaces for their lifestyle.
- Potential for Equity: Improving a property's condition can significantly boost its market value, leading to substantial equity gains that make the reno costs worth it.
Cons of Buying a Fixer
- Spiraling Costs: Even with an inspection, unforeseen issues can be found such as mold, asbestos, outdated wiring, or structural issues. This can massively impact the budget.
- Time-Consuming: While remodeling shows do it in an hour or less, real-life renovations can extend over months or even years, requiring significant time, money and effort.
- Financing Challenges: Securing loans for fixers can be more complex, especially if the property doesn't meet standard criteria. Choosing an agent and lender is critical!
Profit Potential of a Fixer
Buyers should keep resale value in mind even if they plan to live in the home forever. Unexpected job or life changes may upend “forever home” plans and require selling down the road.
While they don’t have a crystal ball, a real estate agent can analyze the sale price of comparable properties in the neighborhood. If the purchase price of the fixer-upper plus the estimated cost of a renovation comes in below that figure, the difference represents potential profit and the home may be a good investment.
Defining the Meaning of a Fixer-Upper
Before jumping into house hunting, a buyer should first decide on and talk to their agent about what they mean by “fixer-upper” as it’s a very broad term. There’s no point in seeing homes that require too much or too little work. A buyer should think about what they’re looking for and what’s realistic.
DIY-Friendly Projects: Buyers may opt for a mid-priced fixer that can be lived in and updated over time. It has the right layout and a solid structure but needs cosmetic work and personalization like painting, putting up wallpaper, laying tile, installing new fixtures, swapping lights, basic carpentry, and minor landscaping.
This buyer should keep in mind their skillset and toolset (those can be costly), as well as how much time and energy they have to complete DIY projects. While it might look easy on television or in YouTube videos, taking on home projects after a long day or giving up entire weekends can be overwhelming.
Full Professional Reno: Those with unlimited fortitude may be looking for a home needing an overhaul of the electrical, plumbing, and HVAC. The roof and windows. They may be open to foundation repairs, major structural changes, building an addition, or gutting and renovating multiple bathrooms and the kitchen.
For a larger remodel, the budget and timeline should be flexible, as well as able to accommodate the need for an architect and engineer, plus permits and inspections, and inevitable delays. That could mean either living in a construction zone for months or paying for two residences until the home is ready for move-in.
How to Pay For Fixer-Upper Updates
Some buyers may be looking for a well-priced fixer that leaves room to cover the cost of smaller and DIY updates out of pocket. There are also private loans, separate construction loans, as well as home loan programs for buyers looking for more intensive renovations.
Depending on credit score, down payment, scope of work, and other factors, options include:
- Fannie Mae HomeStyle® Renovation Loan
- Freddie Mac CHOICERenovation® Loan
- Freddie Mac CHOICEReno eXPress loan
- FHA 203(k) Loan
- VA Renovation Loan
- USDA renovation loan
Before pursuing a fixer property, buyers should discuss these products with a reputable lender. The paperwork and qualifying process is typically complicated, may require buyers to use approved contractors, and some renovation projects may not qualify to be covered by the loans.
If the renovations can’t be completed using the options above, projects can be broken up into phases or a buyer can live in the home as-is until it gains equity over time. This equity can then be used to access funds via a home equity line of credit (HELOC), a home equity loan, or a cash-out refinance. Again, all are options that should be discussed with a financial professional.
What to Look For in a Fixer-Upper
Once a buyer is on board with tackling this type of home, knows what they’re looking for, and how they’re going to cover the costs, it’s time to map out a strategy with their agent and begin the house hunt.
The most important thing to look for in a fixer-upper has nothing to do with the house itself. It’s all about the location, location, location. A home can be renovated, but it can’t be moved. So, whether a buyer is flipping or moving in, the goal is to find the worst house on the best block in a prime neighborhood.
If that’s not possible, look into local schools, parks, and amenities. Check on accessibility to freeways, retail, restaurants, and entertainment. Crime rates and safety scores should also be researched.
A real estate agent can also help buyers identify up-and-coming areas that may be perfect for future resale, and advise on zoning laws that may affect plans like building an addition or accessory dwelling unit (ADU).
How to Identify “Good Bones”
Keeping budget constraints and the scope of work they’re comfortable with in mind, a buyer should look at the following—better yet, have concerning items inspected by a professional. A roof replacement and major foundation repairs can cost tens of thousands of dollars before any work can be done to style the interior.
Solid Structure
- The foundation should be solid with no signs of cracking, sinking, or crumbling.
- There should be no missing, peeling, or damaged roof shingles–or more than two layers.
- Landscaping should slope away from the foundation to protect it from water intrusion.
- Check on the condition of the home's windows, doors, siding, gutters, and downspouts.
- If previous work or an addition was done, make sure it was permitted and completed to code.
- Inside, are the floors level, windows/doors operable? No cracks in the walls or ceilings?
- There should be no signs of water damage, stains, or musty odors, especially in the basement.
- Check on any past repairs due to issues like pest infestations, fire, mold, asbestos, etc.
Working Systems
- A thorough inspection of the furnace, cooling unit, and all ducting should be performed.
- Look into the age, condition, and type of plumbing, along with the water heater.
- Especially in older homes, see if the electrical components and wiring have been updated.
- Don’t forget to check on any septic, irrigation, solar, and radon mitigation systems.
- Have the fireplace and chimney inspected, especially if it’s currently inoperable.
Sensible Interior
- Are there enough bedrooms, baths, and square footage for current/future needs?
- The home’s configuration should make sense for everyday living and entertaining.
- Determine if the layout works even if there isn’t budget to knock down or move walls.
- Inspect original features to determine craftsmanship and proper maintenance.
- Make a room-by-room list of potential projects that are DIY or require a professional.
Even with a thorough inspection, new problems can be revealed once drywall comes down and walls are opened up. Buyers who become homeowners of a fixer-upper should add at least 10% of their renovation estimate to the budget for unforeseen overages, and up to a 25% buffer for older homes.
Searching for a Fixer-Upper in Denver or Boulder?
Whether you’re interested in a budget-friendly forever home or a fix-and-flip investment opportunity, a PorchLight agent can help you achieve your goals and make smart decisions. With in-depth knowledge of Colorado’s Front Range real estate market, they can guide you in finding the right location and the right home. Feel free to reach out to learn more and connect with one of our friendly advisors.
