How to Gauge the Total Cost of Buying a Fixer-Upper
You can gain serious value in a home if you buy a fixer-upper and renovate it yourself. But like any other type of investment, you’ve got to make sure the numbers add up first.
The idea of landing a shabby house in a decent neighborhood for under market value, putting in some money to upgrade it, then winding up with a home that’s worth a lot more than what you paid for it sounds great. Regardless of whether or not you choose to make it your home or even flip it in the near future, investing in a fixer-upper can be a very lucrative deal. However, there are a number of factors to consider first to make sure you don’t end up being sucked into a money pit.
Evaluate What Needs to Be Done
Find out if the home you’re looking at needs just a few aesthetic improvements, or if more in-depth work needs to be done. Some jobs will be pretty cheap to accomplish, such as repainting the walls or planting a few flowers. Other jobs that are more extensive in nature – such as adding a bathroom or replacing the insulation – are more involved and more expensive.
Take a contractor through the home with you to identify what type of work needs to be done to improve the home, and how much effort and time will need to be poured into it. Get the contractor to give you a written cost estimate on all the jobs required so you can determine if the investment is worth it.
In general, you’ll want to have a close look at the following:
- Structure
- Membrane/roof
- Foundation
- Electrical
- Plumbing
- Heating
- Doors and windows
The first three on the above list can end up costing a good chunk of money, and take a really long time to bring it up to snuff. The others will require a reliable estimate from your contractor regarding their costs.
Identify Any Potential DIY Projects
Is there work that you think you can tackle on your own without paying a professional? If so, you can save some serious cash. You don’t necessarily have to be super handy, either. There may be plenty of jobs that even the layman can handle, like ripping out cabinets, sanding, painting, stripping wallpaper, and so on. If there are any tasks you think you can do yourself, make sure you’ve got the time and the desire to do so.
Of course, other tasks such as electrical work can be too technical and even dangerous to do on your own, and should be left to the experts. Attempting a challenging job that you don’t have the skill set to do will not only take longer, it can also lead to shoddy results that will do little to boost the value of your home.
Choose Projects That Bring in the Biggest ROI
The best fixer-uppers you can find are those that only need some cosmetic updates. Refacing kitchen cabinets, sanding and staining hardwood floors, painting, landscaping, and adding a few new light fixtures, for instance, are all easy, affordable jobs that can totally transform the look and feel of a home.
However, as soon as any deeper issues need to be rectified – such as repairing major foundation, rewiring the whole house, or adding another bedroom – you’re looking at spending a lot more money and taking a lot more time before the home is move-in ready. Jobs like these need to be considered carefully, as they can cost just as much or more than the return you’ll get in market value.
At this point, you need to determine if the cost to make these improvements are in line with the current market. Even if you get a good deal on the purchase price of the home, you could end up spending a lot more than the home will even be worth if major renovations are needed to bring the home up to par. Don’t buy a home that needs major structural repair unless you get it at a hefty discount, you’re sure you are aware of the extent of the issue, and you know it can be fixed.
Determine if the Purchase Price is Just Under Market Value
The price you pay for the home plays a key role in how much equity you can gain almost immediately after buing the home. Ideally, the price you pay for the property should be well under the market value for a home that’s been brought up-to-date.
To determine the maximum price to pay for the property, subtract the cost of repairs and upgrades from its fair market value (if it was in decent condition and upgraded to modern tastes).
Let’s say there’s a similar home in the neighborhood that’s fully upgraded, and sold a couple of weeks ago for $350,000. If your contractor estimates that it will cost about $50,000 to bring the home up to standards, you should not pay any more than $300,000. If you do, you’ll be spending more money than what the home will potentially be worth when all is said and done.
Ideally, you should pay even less than $300,000, because there is always the likelihood of discovering other issues along the way that could mark up your repair costs. In addition, if you plan on flipping it shortly after, you’ll want to factor in real estate commissions, lawyer fees, and other costs associated with selling. Account for all of these costs to come up with the maximum amount you should be paying for any fixer-upper.
The Bottom Line
Only after you’ve gone through these steps should you consider putting in an offer on a home that needs some TLC. What might seem like a good deal at the onset might end up being a real dud. Don’t let your assumptions cloud reality. Make sure you get the professionals on your side and crunch the numbers to make sure you get the most ROI for your investment.
