Can a Fixer-Upper Home Really Save You Money?
A recent study from StorageCafe.com found that fixer-upper homes, on average, are 32% cheaper than turnkey homes nationwide. However, as with anything in real estate, prices vary dramatically depending on the city or region. For instance, you could get two turnkey homes — needing no repairs or renovations — in Austin, Texas, for the price of one fixer-upper in San Jose, California.
However, dollar for dollar, you’ll save more buying a fixer-upper in California, the study shows. You could save ~$500,000 with a home in need of repairs in Los Angeles. You could save as much as $450,000 in San Diego and $405,000 in San Francisco by selecting a property that may need a bit of elbow grease.
But when is a fixer-upper a deal, rather than a money pit?
Evaluate the ‘Bones’
A solid structural foundation, up-to-date electrical and plumbing systems and a newer roof are all elements of the home you should consider before purchasing a fixer-upper. These updates, if needed, can be challenging and expensive. Likewise, you’ll want to make sure there are no mold issues, insect or rodent infestations, or cracks on interior walls.
“Try to avoid properties with underlying structural problems, especially foundation, plumbing, or electrical issues,” says Nate Johnson of NeighborWho, a property search site. These kinds of issues will need to be corrected, and could mean costly repair bills. They also don’t add much resale value, Johnson says.
He notes, “Good bones are often just a feeling you get when you walk through the home.”
But, there are some aspects you should look for. “Homes that have good bones tend to have spacious rooms and high ceilings, so they feel spacious rather than cramped. Large windows that allow plenty of natural light to enter the room are a plus. It’s very important to know the common construction methods and materials used in your preferred investment area before looking at properties,” he says.
Get Professional Help Before You Buy
When you’re looking at fixer-upper houses, a professional inspection can help you save time and money — and keep you from making a bad decision. “I recommend walking through the property with an experienced home inspector, preferably one that knows construction techniques for your market,” Johnson continues.
You might think the time to start getting estimates for repairs is after you’ve closed on the deal. But Chris Jones, a real estate agent for Key Realty Columbus and the owner of CMJones Homes, LLC, suggests visiting the home with a general contractor before you make an offer.
“Explain in detail what you are looking for and ask for a quote or estimate with the different line items broken out,” Jones says. “This will give you an idea of the repair costs that you would expect to pay if you didn’t want to do any of the work yourself. You can always do some of the work yourself and pay a contractor to do the things you don’t want to, but it’s good to have your estimates of repairs on the high end to start.”
Calculate Repair Costs and Resale Value (Conservatively)
Once you’ve got your estimates, you’ll want to do the math to determine if the house is a good value. “As a good rule of thumb, many investors and house flippers do not let their total costs exceed more than 70% of the after-repair-value of the home,” Jones says.
He uses the example of a home that would be worth $100,000 once it’s fully repaired and ready for resale. “The total cost of the rehab, which includes purchase price, repair, and holding costs, shouldn’t exceed more than $70,000,” he says. If you decided to sell, or even do a cash-out re-fi on the home’s appraised value after rehab, you’d walk away with $30,000 in profit.
To determine the resale value of the home once its renovated, Jones says, speak to local real estate agents, browse websites like Zillow to see what similar homes in the neighborhood have gone for recently, and go to open houses for turnkey homes in the area. “Be conservative in your estimations of final value,” Jones advises, since the housing market is changing rapidly.
Of course, for a home you intend to live in, the profit margins may not be as important — but you still want to know that you’re saving money with a fixer-upper. Otherwise, it would be best to forgo the ordeal of repairs and just purchase a turnkey home.
Avoid These Red Flags
Major structural repairs, especially those which could delay your moving into the home, could be a deal-breaker for most buyers, Jones says.
“Heavy repairs are typically going to be structural or foundation repairs, grading of soil, roofing, rerunning utilities, septic systems, a full rehab of the interior structure, etc. Items in this category require specialists and larger crews with heavy equipment to fix.” He estimates that costs on a project like this could exceed $50,000, depending on the scope.
In a state like California, where fixer-uppers are selling for hundreds of thousands less than comparable turnkey homes, the investment might be worth it. But in lower-cost markets, it’s probably best to steer clear.
Older homes, of course, are apt to need more significant major structural repairs or updates of mechanical systems than newer ones. Lukasz Kukwa, a real estate advisor in New Jersey, divides fixer-uppers into two categories: pre-war (built before 1940) and post-war (built between 1940 and 1960 or later).
“Pre-war homes may have a lower selling price, but will be more work-intensive, with a greater investment required to bring structural aspects up to modern-day standards and codes,” Kukwa says.
He notes that pre-war homes were constructed differently — not just in the building materials, but in the home’s layout. “The overall intention and use of the home was different during that time. Renovating or updating an original layout without addressing the flow of the home usually will create a cramped and unusable space for today’s time,” he says.
He recommends looking at the home’s footprint and determining if the layout can be altered within the structure to improve the overall functionality of the home.
If you have the opportunity and can renovate a pre-war home to fit modern standards, it can be a rewarding project — emotionally and financially. However, it can also be a major undertaking.
Cosmetic Repairs Can Add the Most Value
Beyond ensuring the home has a strong, functional layout and there are no major structural or mechanical issues, small cosmetic repairs can add the most value to your home — both as an investment and as a place where you want to spend your time.
“It is best to choose fixer-uppers that mostly need cosmetic updates such as cabinet refinishing, siding repairs, or wallpaper removal,” Johnson says. He notes that he usually looks to invest in properties with “nice exterior curb appeal and outdated interior design.”
Jones agrees that cosmetic repairs, including carpets and flooring, outlet covers, paint, and trim, can often cost less than $10,000 but add to a home’s appeal, both now and when it comes time to sell.
Location Is Everything
“When it comes to fixer-uppers, location matters,” Johnson says. “Even a new coat of paint and wood floors won’t make a house on a busy street across from a sewage plant desirable. It’s all about finding a neglected property in a desirable neighborhood that can be brought back up to code.”
He concludes, “After you factor in expenses, if you’re spending more than you can expect to get back when you sell the house, you probably shouldn’t buy it.”
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