Estimating the true cost of a fixer-upper
Everyone loves a bargain, but when you are talking about homes, how wise an investment is a fixer-upper?
The answer is, it depends.
Here are some key considerations.
- How much of the work can you do yourself and how much will you need to contract out? If you can’t do a quality job, don’t attempt it. Repairs that have obviously been done by an amateur do not increase the value of your home. True professionals earn their money, but the expense of hiring them strips away some of your intended savings.
- Get solid estimates for labor and materials before you make an offer. If you will be hiring a contractor, get him or her to tour the house with you and give you a written estimate. Then add 10-20% to allow for unforeseen problems. They are as certain as the sunrise.
- Research permit costs and requirements. Remodeling without the mandated permits may save you time and money in the short-run, but you are likely to pay for it down the road. In addition to possible safety hazards, unpermitted work can hurt your resale value, if not squelch a deal altogether. Also, if you are on a tight timeline, a lengthy permitting process can cost you money, and create headaches.
- Think twice about homes with structural problems. If you are considering an older home (built 50+ years ago) or one with obvious structural defects, spend the money to hire a structural engineer to give you a written assessment of the existing and foreseeable problems.Then get a binding, written estimate for the repairs before you make an offer. You may want to tack on another cushion for potential cost overruns. In my opinion, unless you have money to burn, homes needing major structural work should be left to investors and contractors.
- Determine the cost of financing. If you will be borrowing money to make the purchase, get pre-approved first. If you will not be occupying the home, you may be required to borrow as an investor. These loans carry a higher interest rate. Keep in mind that a typical home loan will not include additional funds for renovations, so you will need savings, a second loan or some other source to pay the costs of remodeling. A home renovation loan, such as a 203(k) loan, may be at least a partial solution. However, these loans are notoriously difficult to get and administer, and are not likely to cover the full cost.
- Work with your real estate broker to determine a fair offer price. Once you have a solid estimate for the renovations you want to make, use that figure to decide what your offer price should be. I.e., if the home were in post-remodel condition, what would it be worth in today’s market? Take that number and deduct your cost for renovation to calculate your opinion of the home’s current value. If this is a number that is acceptable to both you and the seller, you’re in business. If it’s not, you’d best move on to another property.
- Work with an agent who knows how to write a strong offer that will be accepted, while still protecting your interests. The offer should include an inspection contingency that allows you to back out of the deal — with your earnest money intact — if inspections reveal deal-breaking surprises for which the seller is unwilling to negotiate. Don’t forget to have the sewer line or septic system inspected. These repairs, when needed, typically start in the $10K-$20K range. You should also have a financing contingency that protects you in the event that your loan falls through.
If this all sounds like fun to you, then forge ahead and enjoy the ride! If not, I recommend that you find another place to invest your time and money.
Posted Nov. 8, 2015