Learn to tell the difference between an ugly duckling with potential and a money pit.
It's a temptation few house (and bargain) hunters can resist: The idea of finding a cheap property in need of TLC in a great neighborhood. You do some simple math, weigh the purchase price against the estimated upgrades and repairs, and compare it with other recently sold homes in the neighborhood. Score! You put in some sweat equity and money, and voila, you've got a great house and a valuable investment.
And often, things do work out that way. But not every fixer-upper turns into a dream home. Many can be nightmares in the making. Funky floor plans, hidden damage from water or pests, structural issues, nasty surprises like mold, rot, or radon can all add tens of thousands to the investment you need to make to turn your ugly duckling into a swan.
So how do you know if a diamond in the rough is a good purchase? Here's how to test the waters and tell if it's okay to buy that fixer-upper home.
Know where to look.
Finding properties in less-than-stellar shape can take a bit of digging. Some options are to drive around neighborhoods that interest you and look for "for sale by owner" signs. Another option is to work with a realtor who specializes in fixer-uppers. Foreclosure auctions are a sure-fire place to find distressed properties, but keep in mind you'll be competing with professional flippers.
Don't skip the inspection.
No matter how low and tempting the asking price, this is not a step you can skip—even in the current hot market, which has buyers skipping inspections to appeal to sellers and make deals close faster. An inspection can help reveal major repairs or structural issues that could be a deal-breaker for your improvement plans and put you over budget, so be sure to insist on one before you close.
Calculate your costs for purchase and improvements.
When shopping for a fixer-upper, it can be hard to tell if the price tag is right—after all, most of the comps your realtor may show you will be for homes that are in move-in condition. However, you can still get an idea of what the current market values are for homes in certain areas with a certain number of bedrooms and square footage.
Subtracting the purchase price from the median home price of area comparables gives you a rough idea of the money you may want to invest, and that will keep you from over-improving. But ultimately, your budget and available cash will determine what you'll spend.
A home inspector and a licensed contractor can help you estimate the needed repairs and their cost but set aside some money for unexpected expenses as well, such as delays that prevent you from living in the home (hello, hotel room!), price increases in materials, or costs such as eating out while a kitchen is being renovated.
Avoid homes with major issues.
Under the "major" category, homes with extensive water damage and mold, structural issues, or geological issues such as poor drainage and unstable soil can quickly become fixer-upper nightmares, requiring costly repairs and remediation. And it is possible that some issues, such as environmental problems, just can't be fixed affordably or even at all.
Look for houses that need cosmetic upgrades.
The best fixer-uppers are those that have a case of the uglies but are sturdy, structurally sound, and in good repair. Here are some issues buyers have a hard time seeing past, but that make for ideal fixer candidates. Look for things such as:
- Ugly wallpaper
- Old paint
- Damaged drywall
- Scuffed floors
- Dated light fixtures
- Outdated appliances
- Old siding
- Overgrown landscaping
- Neglected lawn
These superficial fixes are less expensive than pricey construction improvements such as replacing a roof or adding an additional bedroom or living space.
Be willing to DIY.
One of the best ways to make your investment in a home pay off is to create sweat equity. If you can install lighting, hang a cabinet, paint a room, or lay tile, you'll save thousands on costs for home improvement. Just be sure to account for the value of your time and how long it may take to check these things off your to-do list.
Not only can a fixer-upper be a great investment, but it can also help shorten the path to homeownership for those on a budget dreaming of a home of their own. As long as you avoid getting in over your head and over budget, your fixer-upper could be a straight shot to building equity AND winding up in the home of your dreams.
To find out how much home you can afford, visit www.lennarmortgage.com.