5 Tips for Buying a Fixer-Upper
Not every fixer-upper home is worth the effort. Before you dive into making a purchase, there are certain factors that you need to consider. Here are five tips for buying a fixer-upper home.
1. Determine a Renovation Budget
First and foremost, you need to determine a budget. Not just the budget for the fixer-upper home, but all the renovations and work that will need to go into it. Once you decide on a budget and have your eye on a fixer-upper, find out if it has potential and hire a professional contractor to give an estimate of the amount and cost of work.
Take note of the big-ticket items like roof repairs, new siding or hardwood flooring to spruce up the living areas. Check to ensure the foundation is structurally sound, especially if you want to add flooring to an unfinished basement. Make sure the HVAC systems are in working order and consider replacing outdated appliances with Energy Star-qualified ones.
From there, you can break it down with a month-to-month cost analysis and schedule, find the appropriate mortgage option, and, if you are handy at DIY renovations, possibly even reduce labor costs.
2. Find the Right Fixer-Upper Mortgage Option
Traditional mortgages will require you to make upgrades paid by cash, credit card or a personal loan, which will mean bootstrapping your finances. But with renovation intention and a budget in mind, you may want to consider a different type of mortgage option.
For fixer-uppers, homeowners can find various types of renovation loan mortgages that can allow you to finance and improve the home simultaneously, paying it off over an extended period and at a lower interest rate. Some renovation loan mortgages to consider are:
- FHA 203(k)–The standard FHA 203(k) loan requires homebuyers to hire a Department of Housing and Urban Development (HUD) consultant. This HUD consultant will approve your renovation plans, manage contractor payments and even inspect the property as various reno phases are complete.
- VA Renovation Loan–The Department of Veterans Affairs has recently updated their loan guidelines to include the purchase and renovation of a fixer-upper home. Like the FHA 203(k), a VA-approved contractor is required. For this loan, however, you may find yourself limited on the types of reno projects you can complete. In addition, the lender may require a construction fee.
- Fannie Mae HomeStyle Loan–HomeStyle mortgages by Fannie Mae require a higher credit score than an FHA 203(k) loan. However, most improvements to your fixer-upper will be eligible—even the more luxurious upgrades like inground pools and landscaping.
- CHOICERenovation Loan–This loan offers a sweat equity provision, which means you can go through multiple appraisals. Each appraiser can confirm that the renovations, materials and finishes match what was agreed to in the contract. Ultimately, this means your newly renovated fixer-upper is guaranteed to reach its estimated value.
Keep in mind that with any fixer-upper home, a renovation loan will require extra consultations, as well as inspections and appraisals. These are not just designed to protect the lender’s investment, but also your own. While it can be frustrating to go through the additional red tape, these consultations and appraisals can ensure you are on-schedule and adding value.
3. Schedule Inspections for Fixer-Upper Homes
With any home purchase, you need an inspection by an accredited home inspector. But when it comes to a fixer-upper, you have to be more diligent and investigate what exactly you’re buying into. Here are the must-have inspections for fixer-upper homes.
- Roof Certifications–The seller should provide evidence of the age and condition of the fixer-upper’s roof. If not, be sure to obtain a roof certification, preferably at the seller’s expense.
- Pest Inspections–Pests like beetles, termites and carpenter ants can create significant damages to the home if left untreated. Get an inspection, especially if the home resides in a pest-prone area. Make the purchase offer contingent on the report’s approval and request seller-paid repairs if necessary.
- Sewer Line Inspections–Your fixer-upper is likely aged a bit, so it’s critical to get a sewer line inspection to determine if the lines and septic tank are in working order.
- Engineering Reports–This inspection can determine any natural hazards and geological disclosures, as well as contamination reports and more.
4. Find the Right Location
Research the surrounding area. Is it an up-and-coming neighborhood with well-maintained homes, or are there other homes that look equally unoccupied and rough? Also, consider where the fixer-upper is situated. As a general rule, avoid buying a fixer-upper on a busy intersection or next to a school.
5. Choose the Right Interior Layout
Many fixer-uppers are older homes built with different layouts to meet the needs of the average family back then. However, today, homebuyers desire something different. Look for a fixer-upper home with three bedrooms and more than one bath.
In addition, the home’s floor plan should flow and have a somewhat open floor plan. Otherwise, it can become expensive to break down and move walls. Families with kids can be turned off by distant bedrooms, whether positioned at opposite ends of a house or divided between levels.
Fixer-Uppers Are Not for the Faint of Heart
If you have what it takes to tackle a rundown fixer-upper, go for it! But it’s important to know what you are getting into and how to prepare. Consider how much remodeling expertise you have, as well as your personal finances. If you have some savings built up and have some construction experience, it may be right for you. But it’s important to go in with the right expectations.
Buying a fixer-upper home and renovating is not for the faint of heart. It takes commitment and patience. If you can handle DIY projects, get ready to spend every hour of your free time fixing it up. If you hire a professional, expect unexpected setbacks, too.
Many fixer-uppers are foreclosures. If this is the case, securing a mortgage could become a long and drawn-out process, taking up to several months. This is because you have to negotiate with the lender that now owns the property.
Ultimately, you have to have a strong desire to turn a promising fixer-upper into a dream home.