Buying a Fixer-Upper House: How To Assess The Real Cost
When you buy a fixer-upper house, you can save a ton of money, or get yourself in a financial fix. If you’re trying to decide whether to buy a fixer-upper house, follow these seven steps, and you’ll know how much you can afford, how much to offer, and whether a fixer-upper house is right for you
Decide what you can do yourself.
TV remodeling shows make home improvement work look like a snap. In the real world, attempting a difficult remodeling job that you don’t know how to do will take longer than you think and can lead to less-than-professional results that won’t increase the value of your fixer-upper house. Do you really have the skills to do it? Some tasks, like stripping wallpaper and painting, are relatively easy. Others, like electrical work, can be dangerous when done by amateurs. Do you really have the time and desire to do it? Can you take time off work to renovate your fixer-upper house? If not, will you be stressed out by living in a work zone for months while you complete projects on the weekends?
Price the cost of repairs and remodeling before you make an offer.
Get your contractor into the house to do a walk-through, so he can give you a written cost estimate on the tasks he’s going to do. If you’re doing the work yourself, price the supplies. Either way, tack on 10% to 20% to cover unforeseen problems that often arise with a fixer-upper house.
Check permit costs.
Ask local officials if the work you’re going to do requires a permit and how much that permit costs. Doing work without a permit may save money, but it’ll cause problems when you resell your home. Decide if you want to get the permits yourself or have the contractor arrange for them. Getting permits can be time-consuming and frustrating. Inspectors may force you to do additional work, or change the way you want to do a project, before they give you the permit. Factor the time and aggravation of permits into your plans.
Double check pricing on structural work.
If your fixer-upper home needs major structural work, hire a structural engineer for $500 to $700 to inspect the home before you put in an offer so you can be confident you’ve uncovered and conservatively budgeted for the full extent of the problems. Get written estimates for repairs before you commit to buying a home with structural issues. You should avoid purchasing a home that needs major structural work unless you’re getting it at a steep discount, you’re sure you’ve uncovered the extent of the problem, and you know the problem can be fixed.
Check the cost of financing.
Be sure you have enough money for a down payment, closing costs, and repairs without draining your savings. If you’re planning to fund the repairs with a home equity or home improvement loan, make sure you are pre-approved for that before you make an offer. Know that on serious fixers, you may be competing with buyers who will be able to pay cash, which means your offer might have to be more competitive.
Calculate your fair purchase offer.
Take the fair market value of the property (what it would be worth if it were in good condition and remodeled to current tastes) and subtract the upgrade and repair costs.
For example: Your target fixer-upper house has a 1960s kitchen, metallic wallpaper, shag carpet, and high levels of radon in the basement. Your comparison house, in the same neighborhood, sold last month for $550,000. That house had a newer kitchen, no wallpaper, and was recently recarpeted.
Let’s say the cost to remodel the kitchen, remove the wallpaper, and carpet the house is $30,000. Your bid for the house should be $520,000.
Include inspection contingencies in your offer.
Don’t rely on your friends or your contractor to eyeball your fixer-upper house. Hire pros to fully inspect the home. In California, all homes are sold “as is” but allow for buyers to go back to the sellers and request repairs, or credit you at closing to pay for the repairs. If you don’t like what you find and aren’t able to reach a satisfactory agreement with the seller, go back to the top of this list and start again.
Source: G.M. Filisko, Attorney and author