Decide if you're ready to turn a diamond in the rough into your dream home
Reality shows make renovating a home seem like a magical and almost overnight experience. In reality, though, turning a fixer-upper into a place you’d want to live in can be a mammoth undertaking. Beyond having the money to renovate, you must have the time, patience and fortitude to endure what can be a painstaking and often highly emotional process. You’ll likely have to deal with a contractor, codes officials, nosy neighbors, maxed-out budgets and unforeseen issues that could change your plans.
The whole process, even for pros, is a stressful undertaking, but if you’ve got the time, money and patience to renovate, buying a fixer upper can be an incredible deal. It could let you move into a home that may be larger than you thought you could afford and in a highly desirable location.
Deal or No Deal
Just figuring out whether it makes financial sense to buy a fixer upper is a puzzle. You’ve got to know how much the house could be worth once all improvements are made. Do this by looking for comparable homes in the neighborhood and seeing what they sold for. Then add up all of the renovation costs, including labor and materials, and subtract that from the home’s estimated value after renovation. Then subtract at least two mortgage payments, based on the average renovation period of six to eight weeks. Then subtract the amount of money you’ll spend on housing while the renovation is going on, and subtract 10 percent of your renovation budget for unforeseen issues that may arise. The figure you get at is the maximum you should pay for the house.
Finding out where you can get the money to pay for the renovation is another puzzle to solve. Consult with a real estate agent or loan officer to determine what will work for you. Of course, having cash on hand is the best way to go.
Start with home value after renovation
– renovation budget
– two mortgage payments
– two months current rent or housing expenses
– 10 percent of renovation budget
= max price you should pay for home
Get a Thorough Inspection
In order to complete the equation, you have to know how much money it’s going to take to renovate the home. This means spending the time and money to have the home inspected. You’ll want to dig deeper than just cosmetic issues and look for issues with the foundation, plumbing and electrical systems, roof, and walls. It’s well worth hiring a professional who knows what to look for. Also, make sure your real estate contract includes an inspection clause. This will assure that the house meets local codes, and if it doesn’t, could let you back out of the deal or get the seller to pay for repairs or come down on the price. Foreclosures are often sold “as is,” so you’ll need to do a thorough inspection to be sure there are no major problems.
Bang for Your Buck
The best home renovation projects are the ones that require mainly cosmetic fixes, things like new paint, new fixtures, counters, cabinets and toilets. Kitchen and bathroom improvements add the most value to your home. Moving walls, changing layouts and repairing structural issues won’t do much to increase the market value of the home. Avoid going too lavish and making your potential home the most expensive in the neighborhood. This will hurt you should you decide to sell within 10 years of a major renovation. Consider putting in as much sweat equity as you can muster. To keep costs down, you should think about doing the demo and whatever other projects that fit into your skill set. However, when it comes to electrical, plumbing and structural jobs, leave those to the pros. Get things wrong there, and it’s going to set you back. Even if you don’t have any handy-man experience, you should plan on giving up many hours to supervise the work. You’ll want to check in on the renovation at least a few times a week, if not every day, to be sure no delays or problems pop up.