Home improvement shows are ever popular on networks like TLC and HGTV. Inspired by your fave show, have you fallen in love with the idea to find your own fixer upper to transform?
First of all, the really good news….chances are you will have few competing for the same home. which means your odds of scoring an awesome deal are really high!
If like most first-time buyers of fixer uppers, maybe you’re not too sure of what to look for in your perfect project home. It’s important to know in advance some key strategies so as to avoid ending up with a lemon of a deal.
It’s important for your fixer upper to have a great location and it’s a really good idea to hire a professional, experienced real estate agent in this part of your search. You want to ensure that your fixer upper is found in a market area that is experiencing good growth and is known for desirable schools, qualities any buyer would want in a home. This will help you later, should you want to sell your project home, making it a strong investment property. It also increases your return on investment with the renovations you plan to do with the home.
Good Bones & Great Personality
When you’re assessing a fixer upper project, you should look at a home’s potential flaws. What flaws are fixable for you considering your budget and your timeline vs what flaws are just too costly to fix and still be profitable with?
When assessing a home, take a look at a home’s basic structure. How does it stand out? Does it have interesting character features to the home? Does the layout work? Can it be easily changed to have a better flow to the home?
It’s important to keep in mind that every eyesore is a blessing in disguise too. Eyesores typically are easiest to fix – avocado green kitchen appliances, while being a turnoff for most buyers, are an easy upgrade opportunity that gives great returns for the seasoned investor. Paint, of course, covers a multitude of sins and can instantly transform any space.
Major replacement or renovation work needs to seriously be evaluated prior to pursuing a home purchase. Costly renovations or replacements may not ever see the cost benefit realized from the investment made. National averages on fixing a foundation alone run almost $4,000.
Older homes typically have older problems that can rack up the costs quickly – mold, lead paint, asbestos and more – all require professionals to correct which adds significantly to your estimated cost.
If you’re going for an authentic restoration too, remember that like old cars, authentic parts take time to source out and they often cost more than what’s available at your box improvement stores, so these both will add to your costs.
Get The Best Advice
Besides an experienced real estate agent at your side in searching for fixer upper projects in good markets, you’ll also want to source some other experts for your assessment of a project’s potential.
A qualified home inspector can help you to determine if there are major renovations that are needed such as structural, wiring, roofing, window replacements, etc. They can certainly help you to avoid unnecessary financial pains on a project that you may never see your returns on for that reno project’s investment.
Gather referrals from your agent, home inspector and family and friends of any qualified general contractor that you can source for estimates on the project. Once you’ve got a green light from a home inspector on pursuing the fixer upper purchase, it will be important to bring in general contractors to get estimates on what the repair costs are going to be to bring the house to the standards you envision. Be sure to add demolition and removal costs as well, especially if the property has a lot of junk to be removed.
For special or bigger parts of the renovation, it is suggested that you break those out of the general contractor’s overall estimates and have them estimated separately. These can be areas of greater opportunity for savings, as well as padding estimates by the general contractor so take note of these detailed areas carefully.
You’ll need all these cost estimates to work with your agent to see if the purchase is viable for you and your budget. They can assist you in doing a full cost analysis. To be on the safe side, plan on including at least one worst-case scenario renovation item that busts a budget by adding an extra 12% to your reno estimate. This gives you a great cushion to protect your interests.
If your costs to purchase and renovate now go over what the market is delivering in that neighborhood, you may have to pass on the deal or change your offer. According to the National Association of Home Builders, remodeling investments should not raise the value of your house more than 10 to 15 percent above the average home price in your neighborhood in order to get the maximum resale value – in other words, you want to avoid “over-improving a property.” Yes, Virginia, it is possible to do “too much.”
Find The Money
Depending on how long the fixer upper has sat on the market, and how motivated your seller is, you could get creative with your real estate agent in your offer presented. Often fixer uppers can go for far less than the original asking price, so it’s worth it to consider your options at the onset.
Finding the money to make the desired changes to a fixer upper is part of the journey as well. Not only do you have to manage the purchase, but all those costs to improve the property and turn it around as well. This can be difficult for some buyers.
Credit cards are certainly an option for smaller improvements and changes. Buyers have also been known to resort to borrowing against their 401(k) plans, life insurance policies or stock portfolios to get started with their renos. The problem with using these strategies, although easier to get without any required approval processes, is that the interest rates are often higher and you can’t deduct them from your taxes.
What most investors choose to do instead is opt for a renovation loan. Renovation loans are available with most lenders. They can be obtained either as a home equity line of credit or a mortgage, or even better still, through a renovation loan tied to the first mortgage. While home equity loans can typically be borrowed against 90 percent of a home’s equity after the home is completed with renovations, a renovation loan tied to a first mortgage is similar but the interest is all tax deductible up to $1 million vs the cap of $100,000 in tax deductions of a home equity line of credit.
Sweat The Details
Another area that buyers use to lower the costs involved is to roll up their sleeves and do some of the work themselves. From simple tasks such as demolition, painting, floor covering, to more involved work as pouring concrete and hanging drywall, motivated buyers find ways to add their sweat to sweeten the bottom line of their project.
Other areas of sweat equity that fixer upper home owners dive into are hanging cabinets, installing trim and siding, replacing screens and windows, hanging doors, and even building decks. If you’re not comfortable with some of these skills but have a desire to learn, check with your local box improvement stores as they often offer free hands-on trainings in these areas. And if you are going to continue to purchase fixer-uppers, these skills are great to add to your personal resources.
Alternatively to doing these items yourself, you’ll switch them from your column of things you’ll do, to those your general contractor will do. As with all the other aspects of what you’re hiring them for, you’ll just need to supervise them over the length of the project on an ongoing basis to make sure that they meet your deadlines for your projects. This is why hiring a general contractor with great references, and not just great estimates, is critical to the success of your project. Every delay costs time and money to your project so it’s important to hire the right contractors for your project that you can trust.
With the right team of trusted professionals in your corner, and with the right amount of homework done for your prospective fixer-upper, you too can find success in transforming a neighborhood eyesore into a dream home fit for you, or for a potential buyer you flip it to. And who knows? You may enjoy the process so much that you find yourself not only with a great return on your investment, but having created a new passion pursuit for yourself as a career or hobby real estate investor just like all those TV stars you love to follow!
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