Buying a Fixer-Upper: What You Need to Know

What to Look for in a Good Fixer-Upper

Location is almost always the most important factor when purchasing real estate, and that's especially true when it comes to finding a good fixer-upper. Look for a home in an established neighborhood that is close to amenities and is predominantly made up of owner-occupied homes.

Unless you're planning on using the home as a long-term rental property it's important to choose a location that's likely to appeal to buyers. Consider the size and layout of the home as well — in most areas three-bedroom homes command the best price per square foot, however, properties that are either smaller or larger may make sense if the majority of homes is the area are similarly-sized.

The best fixer-uppers are homes that require only minor cosmetic updating rather than major structural repairs, such as:

• Fresh interior and exterior paint
• New carpets and flooring
• Resurfacing kitchen cabinets and replacing hardware
• Upgrading appliances
• Cleaning up the landscaping
• Removing outdated fixtures

Once you start dealing with utilities, moving walls, replacing windows, and adding or removing portions of the home, the costs can go up quickly. Keep in mind that cosmetic upgrades rarely require a building permit and inspections, and can mostly be done without hiring a licensed contractor. Major work usually requires contractors and sub-contractors, engineering reports and city or county inspections.

How to Avoid a Fixer-Upper Money Pit

Beware of sellers who list their run-down properties at impossibly low prices that come with a very big catch - they don't want potential buyers to have the property inspected. Issues such as termite damage, sewer line leaks, buried oil tanks and problems with the foundation are all difficult to spot during a walk-through — and can be prohibitively expensive to fix.

Be sure to check the plumbing, heating and electrical systems, as these are big-ticket repair jobs. Re-roofing can also be costly, as is dealing with outdated septic tanks, in-ground swimming pools and soil that's been contaminated with oil or chemicals.

If you're planning on living in the home while you restore it, make sure to have alternative living arrangements lined up ahead of time. One of the most common mistakes first-time flippers make is underestimating how difficult living in a home that's being remodeled can be, and that's especially true if you're dealing with a house that needs extensive upgrades to the kitchen, bathrooms or electrical system.

To determine what a fixer-upper will actually cost you, start by considering how much of the remodeling work you can do on your own. Do you have top-tier DIY skills, or are you all thumbs? Also think about the amount of time you can invest dealing with a property, and whether it's worth doing the needed labor yourself.

Take the time to carefully list all the repairs the property needs and price out those costs before making an offer to purchase. Keep in mind that home repairs rarely cost less than you plan for, so it's a good idea to add 20% onto your renovation estimate. This is especially true for big-ticket repairs like electrical work, HVAC upgrades and anything involving the foundation or nasty surprises like asbestos or mold.

Remember that you'll need to pay property taxes, home insurance and utilities from the moment you take possession of your fixer-upper, and you'll also have to budget for building permits and inspections while doing the remodeling work.

Finally, consider the cost to finance the home and be realist about what you may be able to sell the house for once you're finished the upgrades. Consult with a local real estate agent who knows the local market to find out what the current and forecast market conditions are, as this will give you a better idea of what you may be able to make on your fixer-upper.

Financing Fixer-Uppers with 203k Loans

One of the reasons why fixer-uppers tend to sell well below the market value in a particular neighborhood is that these properties can be tough to finance. Many lenders simply won't finance a home that needs major repairs or is uninhabitable, and that can be a barrier for first-time home flippers. FHA 203k loans are available to qualified lenders who between $5,000 and $35,000 extra for home repairs and improvements in addition to the property purchase price. Backed by the Federal Housing Administration, to qualify for a 203k loan borrowers need a solid credit score and the fixer-upper must meet FHA mortgage limits for the area.

How to Market and Sell a Fixer-Upper

If you own a fixer-upper that you don't have the time or money to upgrade, selling your home may be easier and more lucrative than you might expect. With the emergence of entire television networks devoted to all things DIY, fixer-uppers are an attractive option for buyers who want to put their own personal touches on a home while enjoying all the perks that come with purchasing in an established neighborhood.

Start by considering all the things that make your property appealing. This could include a great location, mature trees, large lot size or a unique home layout. Take steps to highlight the best features of your home such as real hardwood floors, a big garage or a spacious driveway, since these are all things that set older homes apart from new builds.

Keep in mind that when it comes to deficiencies, honesty is the best policy. If the basement floods every spring, say so. The same goes for flaws like leaky roofs, glitchy electrical connections or problems with the plumbing. Failing to disclose problems can leave you at a real disadvantage during the negotiations, and you could face legal claims from unsuspecting buyers long after the deal has closed. And while it may be tempting to try and sell your fixer-upper on your own, an experienced real estate agent will help you set a realistic price, bring in qualified buyers and ensure you're legally protected throughout the process.