Buying a brand new home can be tricky if you're on a limited budget. With increasing home prices, it makes sense why buying fixer upper houses over turnkey homes has become popular. Although many popular television shows make the process of fixing up a house look fun and glamorous, there are several factors you should consider before taking the plunge.
In this guide, we'll discuss the pros and cons of fixer upper homes to help you decide whether to make the investment. Most importantly, we'll walk you through how to find fixer upper homes so you can start reviewing your options.
What Is A Fixer Upper House?
A fixer upper house is a property that requires maintenance and renovations. Because the cost of repairs and improvements will fall on the buyer, they are sold for a lower purchase price relative to turnkey homes.
A fixer upper house is a great option for a homebuyer who wants to get more house for their money or for investors who'd like to fix-and-flip homes to make a profit. Most buyers tend to live in their fixer upper home while making incremental improvements to it.
Pros Of A Fixer Upper House
The obvious advantage of a fixer upper house is that it comes at a lower price tag than turnkey homes. Although you'll have to renovate it, you'll benefit from a lower list price and down payment requirement.
Because fixer upper houses require renovations and repairs, they also tend to drive away competition. With most homebuyers competing over turnkey homes, you'll have better chances of scoring a deal at a great price.
Some buyers are drawn to fixer upper homes because they enjoy the process of customizing their abode to their taste. Popular remodeling television shows have shown viewers how satisfying it can be to turn an older, run-down house into a sparkling gem.
When conducting your renovations, you're the boss. This means that you get to control all aspects of the project, including your budget, which contractors you work with, and what colors and materials are used.
Cons Of A Fixer Upper House
Before jumping into a fixer upper project, there are some drawbacks to consider. First, renovations can be expensive and risky. Ideally, fixer upper finished homes can be sold at a profit. This means that the fair market value exceeds the cost of purchasing and renovating the home. However, unexpected problems, errors, and delays can drive up the cost.
According to Matt Carter from Inc and Go, "generally, you lose money on one of these homes the longer you hold it because holding it longer means you are working on it longer and dealing with carrying costs (e.g., utilities). Being a successful fixer-upper investor means both fixing it up and selling it in a timely way."
This also means that it's nearly impossible to get an accurate estimate of the cost of fixing up a home. During inspections, you'll likely run into some issues that you hadn't initially budgeted for. It's recommended that you overestimate your renovation budget to allow for errors and surprises.
Last but not least, you'll need to be prepared to live in a construction zone. In some cases, a renovation project can take months to years, which can be quite an inconvenience.
How to Find Fixer Upper Homes
If you're someone who has decided that the pros of fixer upper homes outweigh the cons, you may be wondering how to go about finding one.
Luckily, we have some specialized tips just for real estate investors who'd like to know how to find their fixer upper homes.
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Drive For Dollars: "Driving for dollars" is real estate investor jargon for hopping in your car and searching for homes in your target neighborhood. This is an old-school but tried and true method. Simply drive along the streets of your desired neighborhood and look for homes that look the worse for wear.
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Search the MLS: Fixer upper homes can also be found via the Multiple Listing Services, or MLS for short. Access is granted only to those holding a real estate license. If you don't have one, you can work with a real estate agent or broker.
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Auctions: Real estate auctions are a great way to score a deal on a foreclosed home as long as you avoid getting into a bidding war.
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Real Estate Investor Websites: If you don't have access to the MLS, a great complement is the use of real estate investing websites. These websites offer public real estate listings, including those for off-market properties.
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Bank & Lender Websites: You can also find fixer upper homes by going directly to bank and mortgage lender websites. When a property is foreclosed upon, the lender has the right to reclaim ownership to recover some costs. Therefore, they are motivated to sell these homes at an affordable price.
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Tax Records: If you're willing to roll up your sleeves and do some detective work, tax records are a surprising way to find fixer upper houses to buy.
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Real Estate Agents: It's a real estate agent's job to know about the best deals in their market, so why not partner up with one?
How to Buy a Fixer Upper Home
Buying fixer upper homes can be broken up into 6 actionable steps:
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Schedule an inspection: Before you consider buying a fixer upper, get a thorough home inspection. This step should never be skipped when dealing with fixer upper houses because an investigation reveals what repairs will be needed. It's also an integral part of estimating your costs.
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Estimate your costs: In addition to the cost of making any repairs discovered through the inspection process, be sure to factor in the cost of cosmetic updates, labor, materials, and supplies.
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Obtain any required permits: You may also need to obtain some permits from your city for certain types of projects.
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Determine DIY projects: Many rehabbers save money by executing as many projects as they can by themselves.
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Secure a loan: When you become certain that you've found a fixer upper that's a worthwhile investment, it's time to explore financing options.
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Submit an offer: Last but not least, submit your offer. The point of buying an undervalued house is to get a great deal out of it, so make sure not to overpay.
Are Fixer Upper Houses a Good Investment?
Fixer upper houses can be good investments when done correctly. When all goes well, the resale value of a fixer upper will exceed your purchase price, plus the cost of renovating the home.
However, delays, errors, and surprises often drive up the price of renovating the house. As an investor, it's important to mind your due diligence and ensure that your fixer upper investment is well worth the risk.
Which Fixer Upper Homes Should You Buy?
Many investors would love to have the ability to point out the perfect fixer upper: one with cosmetic renovations and no surprise costs. However, there is no such superpower available.
The best place to start is by analyzing your budget. What is an ideal purchase price, and how much will you have leftover for renovations? With those numbers in mind, assess the potential improvements in properties you look at. If you see a property in need of costly changes, refer to your budget and make sure you can still secure your ideal ROI. The right property to buy may have one major change (or none) and then mostly cosmetic fixes.
Aside from potential changes, you will want to buy the fixer uppers that are priced right. Look at purchase prices and comparable homes in the area — this will tell you how much you stand to gain from the deal.
Summary
Investing in fixer upper houses can be extremely rewarding when all goes according to plan. You'll have secured a property at a low price and customized it to your taste. This is an affordable way for a homebuyer to buy more house for their money and really make it their own. In an investor's case, fixer upper homes are great for making a profit.
If you do decide to pursue this route, it's always a good idea to learn how to find fixer upper homes. That way, you can identify the right opportunities and jump on them when you're ready. Remember that careful research and due diligence are required to help hedge against risk. Fixing up a home can be an effective way to boost the value of a home while on a budget.