Buying a Fixer-Upper: Is that the Right Decision?
Investing in a fixer-upper can be a lucrative opportunity. You can purchase a property at a discount and then renovate it according to your preferences. There are professional companies out there that are busy rehabbing homes. You can purchase an undervalued house, and slowly repair it. That way, you can create your dream house with little financial investment. However, buying a fixer-upper is not for everyone.
First of all, rehabbing a home is not the same as shown on reality TV. Fixing a house requires lots of patience, elbow grease, capital, and time. It takes imagination and persistence to succeed in your mission. Your home is your comfort zone. Renovating the property is going to be a challenge if you are living in it. You might have the funds to cover renovations before you move into the house. In both cases, you need to evaluate the pros & cons of buying a fixer-upper.
What is the Condition of the House?
Consider the house you are planning to buy. What is the nature of the required repairs?
Are we talking about a cosmetic makeover or structural repairs? Cosmetic makeover can get you instant appeal, and a boost in home prices. On the other hand, changing plumbing structures or electric wiring requires a significant investment of capital and time.
You have to note down all the repairs that are required to make the house livable. What is your purpose for purchasing the property? Are you buying the fixer-upper for yourself? Or are you considering it as a business opportunity?
Who is Responsible for Doing the Work?
Is it a DIY project, or are you going to hire someone else? Keep in mind, managing such projects can be stressful.
How will you handle the disturbance? Dust, noise, and daily work can be uncomfortable for many people and they might prefer a renovated, move-in ready home.
Calculate the Numbers
Inspect the home in detail
Spending a few hundred dollars on inspection will go a long way. A good report will give you complete information regarding the health of the house. You’ll know the status of the structure and essential systems. Then you can come up with a better price for the property. Make it a win-win situation for all parties. It is possible to negotiate the cost of repairs after you read the inspection report.
You can also get price estimates from local contractors. Get at least three estimates so that you can get an idea of the cost. What is the price of the house in its as-is condition? What is the after-repair value of the house? Subtract the cost of repairs from the resale value of the home. Subtract another 10% for your time and unforeseen circumstances. Now you can determine the potential profit.
Investing in a fixer-upper is useful only if repairs are going to be affordable. If the repairs are going to cost thousands of dollars, then it is probably not a good idea to rehab that specific house. Once you start replacing wires & pipes, you’ll have to tear open walls that’ll add a new layer of time & money to your project.
Repairs will take time. Holding costs and interest rates can eat your profit if the numbers are not calculated correctly.
Keep all the receipts with you. Whatever work is done on the house, should be considered a valuable addition. You should have all the receipts and certifications. Later on, when selling the home, you’ll need these receipts to adjust the tax basis of your house.