Should You Buy a Fixer Upper?

The current market and housing shortage has made it nearly impossible for many homebuyers, especially first time home buyers, to find a home. This fact has many buyers considering a “fixer-upper” and asking their faithful realtor to weigh in on the decision. At EXIT Oceanside Realty we nurture a culture where people come first. This means that we want the best for our clients even if that means advising them against a purchase that isn't in the client’s best interest. So is buying a fixer upper in your best interest? Maybe. 

There are many wonderful benefits to buying a “diamond in the rough” and making it new again. But like anything there are also many (defeating, bankrupting) drawbacks as well. Read any content on the matter and the advice is a chorus of pros and cons. For some homebuyers a fixer upper is a smart investment that will bring huge returns both in equity and lifestyle. However, unprepared buyers can end up with a money pit. 

Here is what you need to know about buying a fixer upper before making your choice: 

-Buying a fixer upper may affect your financing. If the home you choose will need only cosmetic updating you will likely qualify for a conventional loan. This means that you will need to finance the repairs from your savings or plan to live in the mess and update as you go. If you have savings to use, be sure that you have covered the downpayment and closing costs, before committing any amount to renovations.

If, however, the home you choose will need major repairs you will need a renovation loan. According to an article by the blog, Curbed, there are a few types of renovation loans to choose from. All of which are 30-year, fixed rate mortgages, with no prepayment penalties, that allow you to purchase the home and renovate it.  

• FHA 203(k) loans allow buyers with lower credit scores and less to put down to finance a fixer upper, but may require that you hire a HUD consultant. 
• Fannie Mae’s HomeStyle Renovation Loan is a conventional loan that requires a higher credit score than the 203(k) but will cover virtually any improvement including adding a pool and landscaping. 
• A VA Renovation Loan is a loan exclusively for Veterans. This loan type will require you to use a VA-approved contractor and limits the type of renovation you can do. 
• Choice Renovation Loan is a loan through Freddie Mac. This type of loan allows for improvements that help a home withstand a natural disaster, among other things. This mortgage type will also credit you towards down payment for any work you do yourself prior to closing. 

It is also important to note that it may be difficult to find a lender for this type of loan. Milton Manolis, renovation sales manager for Loan Depot is quoted in the Curbed article as saying, “Because the renovation work happens after closing, these loans require the lender to see the project through from beginning to end, which is why they are harder to find. It takes a major commitment by a lender to offer this type of loan product, and many aren’t willing (or even capable) to do so.”

-You’ll need to do your homework before committing to a fixer upper. There are many layers of information you will need to have in order to decide if the fixing is something you can undertake. 

• The first layer is the most obvious. Get a home inspection. A qualified home inspector will provide you with a detailed list of repairs that will need to be done. This will help you ascertain exactly how much of a fixer upper it is. “There’s less-than-perfect shape and then there’s total disrepair,” says Carolyn Morganbesser, senior manager of mortgage originations at Affinity Federal Credit Union in an article on Nerd Wallet about Buying a Fixer Upper
• From there you’ll want to contact renovation experts (an architect and/ or contractor) and get estimates of the cost of the renovations. 
• Contact the municipality where the home is located and find out what kind of permits you will need. Keep in mind that the permitting process can be time-consuming and unpredictable. 
• Talk to the homeowners association (if applicable) to see what kind of renovations are allowed. 
• Finally, talk to the neighbors and get a feel for how likely they are to file a complaint once construction begins. 

Once you have the above information you should have a pretty good picture of exactly how much of a headache you are signing up for. 

-The true cost of your fixer-upper can be hard to figure. I am a big fan of the formula presented in the article Should You Buy A Fixer Upper? by Jefferey Rothfeeder of This Old House. In his article Rothfeeder instructs potential fixer-uppers to start with an average of the estimates you received for the work that needs to be done. Be generous with this total. Include the costs associated with any projects you plan to undertake yourself and the cost of maintaining the home during construction. Next subtract that from the home's likely market value after the renovation. You’ll need your realtor to do a CMA. Keep in mind that major improvements such as plumbing and electrical upgrades and structural work cost a lot and hardly ever raise the value of the home.  Then deduct 10 percent for extras, unforeseen expenses, and inflation. What is left is what you should pay for the home in question. Remember that the whole point of buying a fixer upper is to get a good deal. The last thing you want to do is overpay. 

-You will need to be flexible enough to jump through hoops and steady enough to ride the emotional roller coaster without screaming. Many people buy a fixer upper prepared to deal with unexpected delays in construction. “It always takes longer than you thought it was going to take because that’s the nature of remodeling,” Dan Bawden, president and CEO of Legal Eagle Contractors in Houston, Texas, told Nerd Wallet in a recent article. Scheduling issues with crews, material delays, and surprise issues that crop up once demolition starts should be the expected norm from anyone undertaking a renovation. 

That alone is enough to make many homebuyers head for the hills. However, that is just the beginning. You should also plan for delays in permitting and inspections. If you are using a renovation mortgage you should prepare for there to be a series of appraisals that will need to be completed. Purchasing a home in  foreclosure will most likely result in delays during the mortgage process. 

The best advice here is to plan for the worst. When making your offer be sure to include contingencies that will allow you to back out if the inspection comes back more than you can handle or the home appraises for less than you are borrowing. Make sure your contractor and architect have both liability and workman’s compensation insurance. And, make sure that your homeowner’s policy will protect you in case of any contractor-caused issues. 

If you are still reading and haven’t completely rejected the idea of buying a fixer upper then it just may be a reasonable option for you. Begin by agreeing on exactly how much fixing you’re willing to undertake. Set a budget that includes purchase price and renovation costs. Then talk with your EXIT Realtor about what is on the market that will fit your needs.