If you’re struggling to afford a home that meets your needs, you may be tempted to buy a cheaper fixer-upper and put in the time, hard work, and money needed to transform it into the home you want.
While the lower upfront cost of fixer-upper houses is undeniably attractive, it’s also important to consider the disadvantages of a buying a home that may need more than a little bit of expensive and time-consuming work.
Let’s explore what you need to know about fixer-uppers before you buy one:
- What Is a Fixer-Upper Home?
- Why Buy a Fixer-Upper?
- Is a Fixer-Upper Right for You?
- How Do I Budget Buying a Fixer-Upper?
- How To Find Fixer-Upper Homes
- How To Buy a Fixer-Upper
- What Are the Pros and Cons of Buying a Fixer-Upper?
- When Is It Worth Buying a Fixer-Upper?
- Fixer-Upper FAQ
- The Bottom Line on Buying a Fixer-Upper
What Is a Fixer-Upper Home?
A fixer-upper is a house in need of repairs. The extent of the repairs needed can vary widely, and the condition of such a home usually makes it less expensive.
Cosmetic fixes could include updating a bathroom that’s more suited to your grandmother’s taste, or taking out carpets and refinishing the hardwood floors underneath. More serious repairs could involve fixing termite damage, cracks in the foundation, or faulty plumbing, or the need for an electrical upgrade that meets current building codes.
The more serious issues can affect the safety of the home to the point where you may be unable to live in it until repairs are made.
Why Buy a Fixer-Upper?
Here are a few reasons why you might consider buying a fixer-upper.
It could be more affordable
With home prices having risen rapidly in recent years, it’s no surprise that the lower price of buying a fixer-upper is a big draw. If you’re tired of getting beat out by cash offers above asking for a turnkey dream home, considering fixer-upper houses can open the door to a new, affordable set of possibilities.
Younger buyers and first-time homebuyers are especially likely to feel the pinch of rising home costs. And with that, younger buyers are more willing to buy a fixer-upper.
While the sticker price of a fixer-upper might be more affordable, it’s important to consider the full costs of the repairs and renovations involved before moving forward.
You have control over renovations
Renovations are expensive. They take time, as well as money and hard work, to complete. But on the plus side, you are in control, and can make key decisions about what to renovate and how to do it.
For example, you might be able to reconfigure the house to include a home office, or streamline the layout of the kitchen just the way you want it. Or you could spring for luxuries, such as a walk-in closet to house all your shoes.
The final result is up to you in a way that a turnkey home is not.
It could be a good investment
When you buy a fixer-upper, the goal is to purchase the property for less than a home that’s move-in ready. And with your repairs and upgrades, you could grow the property’s value beyond what you put into it.
Increasing the value of your home could allow you to quickly build equity, which is the difference between what your home is worth and what you owe on it. And equity can be an important and valuable asset. It increases your profit if you sell, and if you’re qualified, it gives you more borrowing options with a cash-out refinance, home equity loan, home equity line of credit, or reverse mortgage.
But not all home projects have the same return on investment. For example, refinishing your hardwood floors has a 147% cost recovery, but adding a new bathroom only recovers 63% of your investment in terms of home value.
Is a Fixer-Upper Right for You?
Fixer-upper houses can be a good choice for the right buyer. Here’s what to ask yourself before buying a fixer-upper.
Can you do the repairs yourself?
It’s important to be honest with yourself about how much of the anticipated repairs you’re willing and able to do on your own.
Many of us can manage to paint the walls if need be. But laying tile or installing plumbing fixtures requires a deeper skill set that you might not have time to acquire.
“A fixer-upper requires a homebuyer who has the time, money, energy, and resources to put into the project,” says Matt Woods, co-founder and CEO of Sold.com, an educational resource and comparison engine for home sellers, based in Irvine, California.
Can you handle setbacks and surprises?
Setbacks and surprises are a part of many homeownership journeys. When you purchase a fixer-upper, there’s potential for more surprises to crop up, and for those surprises to be more difficult and expensive to address.
If you dread the prospect of tearing into a wall only to discover mold or the need for major plumbing or electrical upgrades, then buying a fixer-upper might not be right for you.
“Many homebuyers buy fixer-uppers only to get burnt out on their project part of the way through, and it takes some serious dedication to see this type of project to completion,” Woods says. “Seriously evaluate your lifestyle and your abilities before buying a fixer-upper and accidentally biting off more than you can chew.”
Are you patient and flexible?
When you run into setbacks, you’ll need the patience to adjust your renovation timeline. Depending on what you find, you might need to postpone your move-in date by weeks or months. In the worst-case scenario, a major issue could lead to yearslong delays.
Also, since major setbacks are expensive, it’s ideal to be flexible with your budget priorities when undergoing a major renovation. Doing it right may require you to scale back a project, or delay work until you can afford it.
How Do I Budget Buying a Fixer-Upper?
The list price of a fixer-upper is the starting point. Depending on what renovations are necessary, the final price tag could be much higher.
The advantage of fixer-upper houses is time. If you’re able to live with something that’s less than ideal for now, then you can make and pay for repairs when your budget allows.
Get a home inspection
While not required, a home inspection is highly recommended if you’re buying a fixer-upper. The cost of $300 to $500 is worth it to get an expert opinion on the condition of the home.
A professional home inspector will perform a visual inspection and take a close look at the home’s physical structure, major systems, appliances, and more to spot any major problems.
For example, an inspector can let you know if the water heater is in bad shape and needs to be replaced. If they spot evidence of leaking pipes, you’ll know you need a plumber to determine the source.
In competitive bidding situations, some buyers will agree to skip the inspection to appeal to the sellers. That’s something to avoid — especially if you’re buying a fixer-upper. You want to know what you’re getting into, and avoid buying a home that’s in worse shape than you’re prepared to deal with.
Figure out what you can do yourself
The home inspection will provide a better understanding of what needs to be done to the property. Start listing the necessary repairs, as well as the upgrades you want to make.
Once you have that list, decide which projects you can tackle yourself. When going the DIY route, labor is free, but you’ll need to pay for materials and tools. You also should consider how much time you actually want to spend fixing your new home.
As you tackle home projects, there’s often a learning curve that involves watching plenty of training videos and making unexpected trips to the hardware store. Ask yourself whether you have the time and inclination to commit to this kind of home to-do list.
Get quotes from contractors
You may need help with some or all of the required projects. If so, you’ll need to get quotes from contractors.
It can be challenging to nail down the final cost of your renovations upfront, so be sure to consult with more than one contractor to ensure you’re getting an accurate assessment. With that input, you can estimate how much the repairs will cost and how long they will take.
Determine if a permit is needed
Many cities and local governments require permits for additions, remodeling, roofing, and electrical work. Find out what permits your city requires — especially if you’re doing some of the work yourself.
Permits can be expensive and time-consuming to get, but they help ensure that the work done meets safety standards and building codes. Failing to get the proper permits may land you in trouble with the law, and affect the value of your home when you’re ready to sell it or need to access your equity.
Be prepared to pay more
Even if you diligently price out your projects, it’s likely that you’ll run into additional issues along the way — and each issue will add to your total cost. Also expect that even estimates touted as accurate can come in well below the actual cost.
When tackling a fixer-upper, do your best to build some breathing room into your renovation budget, so you can more easily handle those bumps in the road if they appear.
How To Find Fixer-Upper Homes
Before you can learn how to buy a fixer-upper, you’ll need to know how to find fixer-upper homes. When shopping around, it can be challenging to find a deal through popular real estate platforms. But there are other options to explore.
Herndon Davis, a mortgage loan officer and real estate consultant based in Fort Lauderdale, Florida, suggests tapping the real-world experience of a real estate agent or Realtor.
“You can use a really good Realtor, who has their pulse on city neighborhoods,” Davis says.
If you still aren’t finding what you want with a real estate agent, then consider taking a drive around your dream neighborhood. With some luck, you might stumble across a fixer-upper that fits your needs.
How To Buy a Fixer-Upper
When getting a mortgage for a fixer-upper, the extent of the required renovations affects your financing options. Let’s explore what types of loans can work for a fixer-upper.
When the home in question only needs cosmetic updates, then regular mortgage options such as conventional loans, Federal Housing Administration loans, Department of Agriculture loans, and Veterans Affairs loans may work for you, if qualified.
For example, let’s say that a home passes muster for a traditional mortgage, which means the home is in livable condition. After closing, you could apply for a HELOC or home equity loan to fund the projects on your to-do list.
If you’re pursuing a fixer-upper with plenty of issues, a renovation loan is likely your best financing option. Renovation loans typically allow qualified homebuyers to borrow money to pay for the house and improvement costs at the same time.
The FHA 203(k) loans are available to help homeowners and homebuyers rehabilitate a property. As a homebuyer, you can add this type of loan to your mortgage, if qualified.
These loans are made for a minimum of $5,000. The maximum loan amount is up to the value of the property plus the cost of the improvements, or 110% of the value of the property after the improvements are made.
An FHA 203(k) loan can be used to pay for structural alterations, elimination of hazards, plumbing, septic systems, roofing, flooring, energy efficiency, and more.
VA renovation loans
VA renovation loans allow qualified buyers to include the cost of allowed repairs in their total loan amount. Although this isn’t a loan option for major issues, it could work if you need to make relatively small repairs.
The lender you work with will determine what maximum loan amount you qualify for. Typically, this amount won’t exceed the as-completed value of the home.
It can be difficult to find a lender that offers this type of loan. If you do find one, you’ll need to stick to the list of approved home repairs, which means no structural changes or luxury improvements allowed.
After closing, you’ll need to work with a VA-approved builder. All these extra steps can make this a time-consuming loan process.
HomeStyle is a renovation loan guaranteed through Fannie Mae. Although you’ll need a higher credit score compared with the requirement for an FHA 203(k) loan, you’ll have more freedom in the types of improvements you can make.
ChoiceRenovation is a renovation loan guaranteed through Freddie Mac. The loan is designed to help qualified homebuyers with the cost of renovations. The permitted renovations are rather flexible, but there’s a focus on energy-efficient improvements and housing resilience against natural disasters.
What Are the Pros and Cons of Buying a Fixer-Upper?
When making such a major financial decision, it’s critical to weigh the advantages and disadvantages.
Let’s start with the pros:
- Homes in need of repairs come with a lower purchase price.
- Many buyers want move-in ready homes, so there is less competition.
- Handling the renovations yourself means you can create a home that suits your tastes.
Now for the cons:
- Unexpected issues can arise to wreck your budget.
- Even with careful planning, you might face a bigger bill at the end of the day.
- If you’re planning to live in the house during renovations, it can be a stressful experience.
When Is It Worth Buying a Fixer-Upper?
So, should you buy a fixer-upper house? The answer varies depending on your preferences.
“A general rule of thumb is when you have found a property whose value after repairs or its new market value is at least 30% greater than the cost of acquisition and repairs,” Davis says. “That way, you have sizeable equity in the home. Anything less isn’t worth it, in my opinion.”
Another situation to consider buying a fixer-upper is when a tight housing market limits your options. If you need a relatively affordable place to live, then handling the repairs for a fixer-upper could be worth it for you to own your home.
Here are other frequently asked questions about getting a fixer-upper.
Depending on the extent of the repairs, you might not be able to live in the home until the renovations are completed. Make sure to budget for a different living arrangement until it’s ready. A few possibilities include a small apartment nearby, a family member’s spare room, or a short-term rental.
Although you can run some numbers in advance, you likely won’t know the total renovation cost until after the repairs are completed. With that, it can be difficult to determine whether the property is a good investment until after the renovations. Consider talking to a real estate agent to find out more about what makes a property a good investment in your area.
The market you buy in will have a big impact on whether it’s cheaper to buy a fixer-upper or a move-in ready home. In some markets, a fixer-upper’s list price won’t be significantly cheaper than a move-in ready home. But in other areas, you could save significantly on the list price.
The Bottom Line on Buying a Fixer-Upper
A fixer-upper can open more doors for potential homebuyers. If you’re willing to put in the time and effort, it’s possible to buy a fixer-upper now and make it into the home you want. The process takes time, and could cost more than you think it will. But if you’re dedicated and smart about it, getting a fixer-upper can be a good way to buy and build a home that’s right for you.