Buying a fixer-upper is one of those endeavors that looks so fun on TV (thanks, Chip and Joanna Gaines). But make no mistake: In real life, it’s a huge risk, and a whole lot of work. So before you set out to swoon over some hovel you dream of transforming into your dream home, you should learn a few things about how to find a diamond in the rough rather than a money pit—and how to do the math to make sure it’s worth all the sweat equity you’re about to pour into it. So here’s what you really need to know about buying a fixer-upper.
Find the worst house on the best block
Rule No. 1? You can’t go wrong with the age-old adage of buying “the worst house on the best block,” says Dan Bawden, Remodelers Chair of the National Association of Homebuilders and veteran fixer-upper contractor. The reason: The high price of comps—i.e., homes of similar size nearby—will have a positive effect on the price of the homely bargain you’re buying. Once it’s fixed up, of course.
Bawden’s rule of thumb is that you should aim to spend 20% to 25% less than what a property in good condition would cost in the area. Do your research and make sure you’re comparing apples to apples: Look at price per square foot and numbers of bathrooms and bedrooms. And understand that price isn’t the only factor to consider (more on that next).
Find a fixer-upper that needs cosmetic changes
Bawden cautions against buying anything with major flaws that will eat up your renovation budget. The best fixer-uppers are ones that mostly need cosmetic updates—things like kitchen and bathroom renovations, new floors, siding repair, or wallpaper removal. When it comes to big things like foundation problems, termite damage, or evidence of water damage (especially in coastal areas), these should be deal-killers. If you’re considering a house that needs serious upgrades to the electrical systems, roof, or HVAC, make sure you’re getting enough of a discount to cover the expense of these repairs, which can be sizable.
Get a contractor to estimate how much it’ll cost
If you are planning to hire a contractor to do the work, have him give you a bid for the job before you make an offer on the house. You may have to pay the professional a few hundred dollars to walk through a potential home and estimate the renovation costs, but it’s worth it.
“Think of it like another home inspector,” suggests Bawden. Once you have your figure for the remodeling work, add at least 5% for unforeseen issues, since there will always be some surprises. Even the best contractor can’t see through walls, and you don’t want to blow your budget if you pull up the linoleum in the kitchen and find rotten boards below.
Do the math before you make an offer
The time to figure out if a fixer-upper is really a good deal is before you buy it. It’s easy to get swept up in planning a major renovation, but for your long-term financial well-being, you have to make sure the numbers work first.
To get the green light, you should know confidently that after your renovations are complete, you can sell the place for at least as much money as you’ve put in (ideally more). Got that? Even if you plan to live there forever, this is key. Because life is unpredictable. You never know when you’re going to have to move unexpectedly, so you should never invest in a home where you can’t recoup the costs, if need be.
So first, determine what the house would sell for with the upgrades you’re planning. Let’s say hypothetically $300,000. Let’s also say that your contractor tells you it’s going to cost $80,000 to do your repairs (including your 5% wiggle room). To make the numbers work, you should not pay more than $220,000 for the house. If, for instance, the home seller won’t accept less than $240,000, that may mean you should rethink your renovations and spend only $60,000.
Finally, determine whether you can live in the house while doing the renovations. If not, you’ll have to factor in rent during the time it takes to renovate (and you’ll want to give yourself a few months’ padding there, too).
Stick to your budget
While totaling your reno budget, make sure you’ve picked out the finishes you want, too, because it’s very easy to splurge when shopping for things like faucets, backsplash tile, or appliances.
“You can go to the store expecting to spend $60 on a faucet and fall in love with a lever-handled faucet that looks like angel wings … and costs $250,” says Bawden. “It’s human nature to say, ‘Why are we spending all this money to cheap out on the little things?’ But it can add up fast and really inflate your budget.”
Look into home improvement loans
Lack all the cash you need to finance your fixer-upper? There are ways to renovate with borrowed money, such as via FHA 203(k) and Fannie Mae HomeStyle loans. As with the mortgage on your house, you have to approach lenders for approval, make a small down payment, then pay it back over time. Keep in mind that you also have to hire an “approved” contractor, who’ll submit a bid for the project with the loan paperwork. So if you go this route, prepare for some extra red tape. Here’s a guide to types of home improvement loans, and their pros and cons. Just keep in mind that the more you borrow, the more you’ll have to pay back!