Tips for buying a fixer-upper: Is it right for you?

By Meeghan Truelove

That rundown house with the bargain-basement asking price might seem like a steal. Sometimes, fixer-uppers are worth it — but sometimes, they aren’t. Here’s what you need to know before you buy one.

What is the definition of a fixer-upper?

In the broadest sense, a fixer-upper is a home that isn’t move-in ready. Beyond that, the definition varies widely. The home might need mostly cosmetic repairs or upgrades, such as an overhaul due to critical structural or systems issues. Whatever its condition, fixer-uppers are typically priced below market because it’s understood that there will be some amount of work involved to make it more aesthetically pleasing, more efficient or safe to live in, or both.

Should you buy a fixer-upper?

If you were around in the 1980s, you might remember the Tom Hanks and Shelley Long flick “The Money Pit.” The takeaway: Fixer-uppers can be big — sometimes even giant — projects.

If you’re financially and mentally up for the work, though, a fixer-upper can be an excellent opportunity. The keys are to be diligent when running the projected costs and to be clear about your goals.

“With a fixer-upper, so much can be wrong that it turns out to be right,” says John Gould, a real estate agent with William Raveis Real Estate in Washington Depot, Connecticut. “You need to give yourself the chance to add value with the purchase. The timing has to be right with the pricing of the current market, and you need to be clear about your end goals. Will you be in the house long-term or short-term? Do you intend to flip it, live in it, or use it as a rental income property? All these things should factor into your decision — and into your budget.”

Don’t forget that a fixer-upper takes time and work, especially if you plan to do some of it yourself.

Pros

• You’ll likely increase the home’s value when all is said and done, especially if you made market- and money-smart upgrades.

• There might be less competition from other buyers — not everyone is ready to do the work involved with a fixer.

• You’ll have lower upfront costs initially, which might mean you can reserve more for the project and literally buy yourself time.

• You could have the ability to make aesthetic choices from the get-go.

Cons

• By and large, fixer-uppers are a substantial commitment of money and time.

• Depending on the condition of the home, you might not be able to live there while you’re rehabbing it. (If that’s the case, make sure you factor the costs of temporary housing into your budget.)

• Even if you’ve done everything possible to anticipate what a fixer-upper will need, it’s not uncommon to uncover additional problems and surprises along the way. Plan for the unexpected.

• You’ll need to live and die by your budget — take your hands off that wheel, and the odds of losing money dramatically increase.

Should a first-time buyer buy a fixer-upper?

A fixer-upper can be a great way for a first-time homebuyer to get into a home at a lower point of entry. In this situation, however, it’s more important than ever for first-time buyers to do their homework and know exactly what they’re getting into.

“Hire the best building inspector available so that you truly understand what you’re buying,” Gould says, “and if you don’t like what you learn or it doesn’t fit with your budget, don’t be afraid to walk away.”

Tips for buying a fixer-upper

• Location, location, location. Seek out fixer-uppers in otherwise well-established neighborhoods to help maximize their potential value.

• Create a thorough, itemized budget. of every projected cost for your fixer-upper rehab (this is not the time to be vague). Then, add 5 percent to 10 percent for unexpected situations.

• Get the best inspector possible. It is crucial to understand absolutely everything you’ll need to do to bring your fixer-upper back to life.

• Add inspection and appraisal contingencies. to your contract to get out of the deal unscathed if the inspection reveals a previously unknown whopper or if the appraisal comes back lower than your offer. The exception to both these is if you’re looking at a house that’s being sold “as-is” — that’s the seller’s way of indicating that there’s no room for contingencies; what you see is what you get.

• Look beyond conventional mortgages. and home equity loans when buying a fixer-upper. Fannie Mae’s HomeStyle package allows buyers to add in the detailed estimated costs for the renovation, so long as the costs don’t exceed 75 percent of what the home’s projected value will be. Freddie Mac’s CHOICERenovation program is similar. An FHA 203(k) loan or VA renovation loan (if you’re eligible) can also be smart options.

• Get out your tool belt. One of the best ways to earn value for your fixer-upper is to do as much of the work as you can yourself.

This article is also posted on Bankrate here.