Buying a Fixer-Upper Home: A smart choice?

If you’re looking to buy a home in a hot seller’s market and are limited with funds, and/or are contemplating house flipping, you may be considering a fixer-upper home. The main appeal of a fixer-upper is that it usually comes with a lower price tag than a move-in-ready type of home.

While a fixer-upper can be a great option for some people, it’s not for everyone. Fixer-uppers come with additional costs of their own. These costs often include time, dedication, and money, depending on your specific plans for the home.

What Is a Fixer-Upper?

A fixer-upper is a type of property that’s in need of significant repairs or upgrades. There are typically two types of buyers who are interested in purchasing fixer-uppers: real estate investors looking to flip the home (purchase at a lower price, make necessary repairs/upgrade, and make a profit upon resale) and homebuyers on a budget (especially first-time homebuyers).

Fixer-uppers can offer an entry-way into homeownership for many homebuyers struggling to afford the skyrocketing home prices over the past few years. Alternatively, they can provide a decent income to those who have the time, patience, and upfront funding needed to flip the home. However, they can also end up being a lot more work than you bargained for.

What Renovations Can You Expect to Make on a Fixer-Upper?

The renovations required for a fixer-upper can vary drastically from home to home. Some fixer-uppers may only require a few cosmetic upgrades, such as new paint, new flooring, new cabinets, and new countertops.

Alternatively, other fixer-uppers may require full remodeling that may include structural repairs/upgrades, room additions, foundation issues, and/or plumbing and electrical system replacements.

In general, cosmetic improvements are less expensive than structural repairs and upgrades, yet can have a significant impact on a home’s value. So this type of fixer-upper may be more your speed if have limited time and money.

It’s important to keep in mind that home renovations often result in unexpected expenses. While you can’t plan for everything, it is recommended to work with a home inspector to check for major issues before you purchase.

Average Costs of Fixing Up a Home

The renovations that you can expect to make to a fixer-upper depend on the property you’re looking at. Additionally, the cost of those renovations will vary depending on your location, the price of materials at the time, and the cost of labor in your area.

Being aware of the estimated costs of the upgrades/repairs can help you decide early on whether or not a fixer-upper is the right choice for you.

For example, a full kitchen remodel that includes all new paint, flooring, cabinets, backsplashes, countertops, appliances, and lighting might cost anywhere between $7,000 to $30,000 depending on the quality of the new materials and appliances. Likewise, the average costs for a full small bathroom remodel range from about $4,000 to $25,000.

Furthermore, hiring professionals versus making these improvements yourself can greatly impact the amount of money you’ll spend. And while it certainly can be significantly more affordable to make the upgrades and repairs yourself, you should factor in the cost of any tools/supplies, as well as the time, sweat, and skills needed for a home remodel.

Advantages of Purchasing a Fixer-Upper

There are advantages to purchasing a fixer-upper — otherwise, people probably wouldn’t buy them! These advantages include:

A lower purchase price
Home flipping
Less competition
Customization control
Opportunity to significantly increase home value

Lower Purchase Price

The most obvious advantage to a fixer-upper is that the asking price is generally lower than a move-in ready home. For first-time buyers in particular, this type of home may offer an affordable path to homeownership.

As a bonus, some fixer-upper homes may come with a lower property tax bill since the purchase price of the home is lower. However, this isn’t always the case. Property taxes are calculated differently depending on the location of the home, so prospective buyers should familiarize themselves with how the property taxes will be calculated on any property they’re considering.

Home Flipping

As mentioned above, savvy investors will reap the benefits of home flipping. Flipping houses can be difficult and risky, but it can be very profitable. The two most common ways to flip houses are to buy, repair, and sell, or buy, wait, and sell. In either case, you should aim to limit your initial investment with a low down payment and keep renovation costs as minimal as possible.

However, house flipping can be risky. Keeping renovation costs to a minimum may sound easy, but it may be difficult if you don’t have direct construction experience. As of 2021, materials prices have increased and there are worker shortages. And of course, the market could fluctuate at any time.

If you choose to flip houses, be smart and figure out a way to sit it out when the market gets too hot. It may seem counterintuitive, but it’ll save you in the long run.

Less Competition

Another great advantage of purchasing a fixer-upper is that there may be less competition for that particular property. The level of competition will vary by location, but in general, you may be less likely to get in a bidding war against other buyers over a fixer-upper.

But, in a seller’s market, you may face competition — even on these types of homes. If you find yourself in a bidding war, check out our top tips to put yourself ahead in a real estate bidding war.

Customization Control

A full or partial renovation of a property means you get some control over the design and finishes of the home — you can make customizations to your particular tastes. Depending on how much remodeling you plan to do, this can mean you get to choose the flooring, the cabinets, the countertops, the appliances, the fixtures, the color schemes, and so much more.

Also, you get to decide which parts of the home are more important to you than others. If you love cooking and know you’ll be spending a lot of time in the kitchen, you can allocate the majority of your budget for the kitchen. Or if you dream of having your morning coffee outside in the sunshine each morning, you can focus on building a beautiful deck for you and your family to enjoy.

If the purchase price is low enough to allow for some extra cash to play with, you can have a lot of fun customizing your renovations to your style and preferences.

Opportunity to Increase Home Value

Investing in a fixer-upper can provide you with more opportunities to increase the value of the property and recoup some of your investment when it comes time for you to move on. Of course, this isn’t a guarantee — it is dependent on the market at the time and other factors.

If increasing the property value is one of your goals in purchasing a fixer-upper, there are things you can do to give it a boost. For instance, you can do some research to determine which improvements result in the highest increases (such as kitchen and bathroom remodels), and which improvements result in a lesser or no increase (such as adding a swimming pool), then formulate the best plan for you.

Disadvantages of Purchasing a Fixer-Upper

Needless to say, not all fixer-uppers pan out for the buyers financially. If you’re thinking about purchasing one, here are some disadvantages to keep in mind:

Expensive renovation costs
Unpredictable renovation costs
Undesirable (if temporary) living conditions
Financing difficulties

Expensive Renovation Costs

Before purchasing a fixer-upper, you’ll want to make sure you have at least some idea of how much the renovations will cost. If the renovations will cost more than what you’ll save on the lower purchase price, then a fixer-upper may end up being more expensive than a move-in ready home.

Of course, there are ways to decrease renovation costs. If you’re willing and able to make the renovations and repairs yourself, you can save significantly on labor costs.

But be sure you know just how much work it takes — and what tools you’ll need — to complete the renovations you’re planning to make before you commit to this option. Many people underestimate the amount of work, time, and skill required to improve a home.

On the other hand, you might consider using more basic materials to renovate the home rather than upgrading to luxury finishes. Renovating a home comes with plenty of opportunities for creative problem-solving, but you should be realistic about just how creative you’re willing to be.

Unpredictable Renovation Costs

Home renovation projects are infamous for resulting in totally unpredictable and unexpected costs. For example, if you rip out old cabinets only to find mold in the drywall, you’ll have to remove the mold and replace the drywall before you install your beautiful new cabinets. If you remove a subfloor and discover foundational cracks, you may have to bring in a structural engineer to repair the damage before you can even think about laying new flooring.

When renovating a fixer-upper, you should do your best to budget for all the expected costs you can think of. Unfortunately, even the most meticulous budgeters can’t predict everything, so you’ll want your budget to be flexible.

Undesirable Living Conditions

Renovations take time. So whether you plan to make the upgrades yourself or hire professionals, you should expect to live in a half-finished house for a period of time before everything is completely finished. Planning out your renovations to be done on certain areas of the home at a time can reduce the inconvenience.

Financing Difficulties

If you have a preapproval in hand, you’re at an advantage to getting the financing you’d need on a move-in ready home. But lenders might be a bit more skeptical about a fixer-upper.

If you can’t pay for the renovations out of pocket, you may be able to get a rehab loan that allows you to roll the costs of the renovations into your mortgage. Alternatively, you may have to apply for a personal loan, which will may have a higher interest rate than a mortgage loan.

Overall, it’s not generally recommend to use credit cards to finance a home renovation, unless you know for certain that you’ll be able to pay off the balance.

How to Determine If a Fixer-Upper Is the Right Choice for You

Now that you know the pros and cons of buying a fixer-upper home, you’re in a better position to make an informed decision about whether or not a fixer-upper is right for you. But if you’re still undecided, use the following questions to help you determine whether you should purchase a fixer-upper:

What is the average cost difference between a fixer-upper and a move-in ready home in my area?
Am I willing to live in a half-finished house for at least six months or more?
Am I willing and able to put in the work required for a fixer-upper if I plan to make the renovations myself?

If you feel that a fixer-upper is right for you and your situation, figure out exactly what renovations need to be made. Calculate the average cost of those renovations (including labor if you won’t be completing the work yourself) to see if purchasing a fixer-upper will actually save you money, and don’t forget to add extra to your budget for those unpredictable costs!

Lafayette Federal Is Your Mortgage Headquarters

At Lafayette Federal Credit Union, we’re committed to helping you find the right mortgage financing for the property you’re looking to buy. If you’re considering a fixer-upper, we can help you explore different financing options that may be available to you.

As a member of Lafayette Federal, you’ll enjoy our 30-day Close Guarantee with a $250 closing cost credit (up to $2,000) for each day it takes to close beyond 30 days.

Contact me today to get started!
Jermaine Medley
(240) 747-2471
jmedley@lfcu.org