Buy a Fixer Upper or Move-in Ready Home?
Puzzled by whether to buy a Fixer Upper or a Move-in Ready Home?
Did you know that Fixer Uppers only sell for an average of 8% below market price?
That amounts on average to about $11,000 of savings to the home buyer, not nearly enough to cover a kitchen or bathroom renovation (but if you’re only doing cosmetic work, that amount might be fine).
We found this great article by Deborah Ziff and thought you’d find it helpful.
One thing architect Murray McPhillips knew for certain as he looked for a Chicago home in late 2015 was that he wanted to live in a very specific area. One thing he was not so set on was the condition of the home. So when two condominium units came up in a building he liked in his desired neighborhood – one freshly renovated, the other with more dated bathrooms and kitchen – he chose the fixer-upper.
“I did this because it had those qualities about it that could never be changed: preferred view, big square footage, and a better overall layout,” he explains. “Perhaps most important, I was still in a great neighborhood. I knew that I could put a little bit of money into the improvements, to really personalize the space and make it my own, instead of inheriting someone else’s taste in design.”
Many home buyers face a similar choice as they navigate the house hunting process: Should they purchase the move-in ready home with a higher price tag, or look for a less-expensive fixer and plunge themselves into the world of hardware shops, hammers, and home contractors?
While home renovation shows often make major home restoration projects seem affordable, attainable and, yes, even fun, it’s important to think through all the implications of buying a house in need of serious repairs. With a move-in ready home, “there’s a lower risk tolerance to it,” says Arielle Turover Cohen, a real estate consultant with @Properties in Oak Park, IL. “You’re not going to have to stress, wondering, ‘What if I put in a $50,000 kitchen – am I going to get my money back?'”
On the other hand, if you’re willing to take on a home in need of some TLC, you could get a bargain in a highly desirable neighborhood with loads of potential. “One benefit is you get to personalize it to your own tastes, and as long as it’s livable, you can phase in those renovations based on your preferences,” says Scott Rodgers, a Realtor with Group 46:10 Denver at Keller Williams Integrity Real Estate.
Here’s what to keep in mind when deciding whether to buy a fixer-upper or a move-in ready home.
Do your research
A recent study from Zillow Digs, which analyzed nearly 70,000 listings from around the country, found that the average fixer-upper listed for just 8 percent less than market value, saving buyers only about $11,000 for renovations. That likely wouldn’t be enough, for, say, a full-scale kitchen renovation, which is why experts recommend home buyers do their due diligence before taking on an outdated home.
“You want to be armed with as much information as you can before you start any project,” Turover Cohen says. “Understand the extent of work needed, your market, and your potential return, and figure out if the work makes sense. And just remember to ask yourself, what is my goal? Is this work worth it?”
To determine how much you should offer on a fixer-upper, first try to figure out how much the rehab will cost. Will you do the work yourself or hire a contractor? Talk to contractors to get a rough estimate of project costs, or use online tools, like those offered by HomeAdvisor* or Houzz*, to get an idea of the going rate for projects in your zip code.
Also research what fixed-up houses are selling for in your neighborhood. If your purchase cost plus renovation cost is still under the market rate for comparable move-in ready homes, you may have found a contender. “What’s your cost to buy?” Rodgers says. “What’s your cost to improve? What does the marketplace value that after the fact? A good Realtor can help show you some fixed-up homes in the area and help you with the comparable sales valuations.”
Before you sign on the dotted line, make sure to include an inspection clause in your real estate deal and hire a knowledgeable inspector to conduct a thorough review of the house. “The inspection report can serve as your potential project to-do list,” Rodgers explains, adding that you should focus on health and safety items first, such as an electrical panel with fire risk.
Determine which home improvement projects pay off
There’s usually no shortage of projects when you buy a fixer-upper, but deciding which ones to tackle isn’t always so easy to prioritize. There’s room for debate on which home improvement projects get the best bang for your buck. According to Remodeling Magazine’s 2017 Cost vs. Value Report*, “curb appeal” projects such as changes to doors, windows and siding tend to have the best individual return on investment. Yet according to a 2015 report* by the National Association of Realtors, kitchen and bathroom renovations are also often high on the list of things likely to add value to a home.
You may also want to think about how long you’re planning to own the home. If you’re looking to turn around and sell it in two to three years, the cost of remodeling may be more important. The longer you stay in your house, the more likely you are to recoup your costs, as property values generally go up over time.
Prepare for the unexpected
As anyone who’s taken on a renovation project can tell you, it never hurts to plan for unforeseen costs. In fact, experts suggest adding a contingency fund of anywhere from 10 to 30 percent to your project estimate.
That’s a lesson Turover Cohen and her husband learned the hard way when they began a full gut rehab on a brick bungalow in Berwyn, IL. They didn’t account for a $10,000 plumbing project that required them to widen a pipe to have enough water pressure for the number of fixtures. “Buffer, buffer, buffer,” she says in retrospect. “I think that the more novice you are, the higher that number is. Delays happen. You end up coming across unknown factors. You open up a wall and all of a sudden there’s mold you did not account for.”
Also don’t forget to consider closing costs, work permits, and the time it will take to finish the renovation. If you don’t plan to live in the home while construction is going on, figure out whether you’ll need to carry two mortgages or pay both rent and a mortgage until the work is done.
Decide how to pay for home renovation projects
How to pay for repairs can be one of the trickiest questions to answer if you’re in the market for a fixer-upper. If you’ve exhausted your savings on the down payment for the home, there are several options for borrowing the money. You can borrow from the equity in your home, either through a home equity line of credit or through a home equity loan. Online calculators can help you to decide how much you can borrow based on the equity in your house and your potential monthly payments.
You may also want to consider applying for a special rehab loan, called an FHA 203(k) mortgage. This allows you to wrap in renovation costs to your conventional mortgage as long as you use designated builders that are part of the program. Other options include borrowing from your retirement account or paying for projects with credit cards, though they generally come with high interest rates and penalties if you miss a payment.
No matter how you fund your renovations and which projects you choose, perhaps the most important thing for homeowners to consider is whether they have the desire to put the time and effort into a fixer-upper. “If they don’t have much home improvement knowledge and do not want to put in some effort to learn about it, then move-in ready is probably the better approach, the safer approach,” Rodgers says.
Deborah Ziff is a freelance journalist based in the Chicago area who writes about a range of topics, including higher education, personal finance, and business.