June 20, 2022
What You Need to Know about Fixer Uppers
If you follow the news at all, you would know that the housing market has reached an all-time high in 2022. With so many buyers competing to enter the market, choosing cheaper yet lower quality housing has become an increasing trend. For both aspiring homeowners and investors purchasing a fixer upper can offer a multitude of benefits.
However, before purchasing a fixer upper there are a few things you should know. Read along to understand that you are aware of all the good and bad elements of a fixer upper before deciding.
- Fixer Upper is a real estate investment strategy to buy low-value homes and add value, causing the home price to rise
- Before investing, break down the costs and see if the payout is worth it
- Fixer Uppers do not guarantee positive investment return
What is a Fixer Upper?
Just by reading the term you probably can figure out the general idea of what a fixer upper is. A fixer upper is a home bought with the knowledge that there are serious upgrades that need to be done to the property. There are many things a house can lack, and fixer upper issues can have a wide range of severity. Some are relatively simple things, such as changing the layout or changing a few cosmetic aspects of the house allow for quick and cheap upgrades. But if there are structural or mechanical issues, they can cause the fixing process to take an excessive amount of time as well as money. However if one performs the needed due diligence, the rewards can be worth the risk. By renovating a house through the lens of an aspiring homeowner, you may just be able to create a house perfectly suitable for your needs along with being able to up the value of your home for any future value. Through the lens of an investor, you will be able to make a profit giving you extra capital to repeat the process in the future.
The economics of a fixer upper are quite simple. Let's say you purchase a house for $600,000, and then make changes investing $50,000 in upgrades. It's possible that with this investment the value of the house increases to $750,000 or more. Depending upon the motivation, your investment can now be sold for a $100,000 profit, generating a handsome return. Or, you can now live in a house that is customized to meet your needs.
Yet the process is not as easy as it sounds. Without the proper knowledge and experience you can very quickly find yourself months into the process without progress, and severely over budget. To manage such risks, it is essential you familiarize yourself with all aspects of the process of getting into a fixer upper in order to prevent any possible losses or headaches.
The most attractive aspect about a fixer upper is the price. In comparison to surrounding and similar houses a fixer upper can be significantly cheaper. Importantly, it may be the only way for you to purchase a house in a desirable neighborhood. This can be for a myriad of reasons. In some cases a house has deteriorated due to old age, leaving various problems that can lead it to be unsuitable for buyers. In other cases, it may be suffering from neglect and lack of regular maintenance by the previous homeowners. However age of the property isn't the single determining factor. There are many things aspiring homeowners look for, and a house lacking in any of those aspects can label it a fixer upper. This price buffer allows for the profit to be gained on the home. For investors the scope of improvements needed and the potential profit can be easily understood based on the surrounding homes. With the price difference, they are able to easily identify how much their budget is for repairs and can allow them to complete the fixer upper process.
Another advantage of seeking a fixer upper in the housing market is the lack of competition for the house, in comparison to a house in pristine condition. Many aspiring homeowners tend to stay away from fixer upper houses due to the time, money, and planning needed in order to have the house ready to move into. This leads to a much smaller market for fixer uppers, and the ability to maneuver the market with less stress and a lower chance of overpaying.
With complete freedom over renovation and construction of a home, a fixer upper allows for the owner to customize their house however they would like. An investor will likely model the home to be popular with the general buyer, and add any amenities which would correlate to an increase in the value of the house. Aspiring homeowners will be able to create a house directly to their dream image, and build their house without any prior instructions. Along with the freedom afforded in a fixer upper, the house will also consist of all new material, rendering it stylistically and technologically ahead of the majority of competing homes.
Finding a Loan
Depending on the fixer upper, a significant amount of money is likely needed to be invested into the home. With home prices already being so costly, finding the money in order to renovate your home can be worrying. Beyond just the mortgage on the house, you will likely also have to take out another loan in order to finance the repairs without doing the proper research into the loans available. Loans such as the FHA 203 (K) loan and the VA renovation loan allow for the loans for renovation and ownership to be combined into one. And furthermore, loans such as a homestyle and choice renovation loan offer specific benefits and leeways when borrowing specifically for a fixer upper.
Renovating a fixer upper has a volatile timeline, and renovations have a wide range for completion. Assuming everything goes right, you will be able to have a generally accurate sense of how long it would take to renovate your home. However, any hold ups in the renovation or discovery of further problems can lead to the process being extended. The timeline for renovation also depends on whether or not you choose to live in the house during renovation. Living elsewhere while the renovation occurs would allow for the process to be completed as quickly as possible, but living in the house and having construction worked around can cause the process to take exponentially longer. For investors, completing the house renovation as quickly as possible is essential in order to possibly take advantage of the market, and in order to receive the profit as soon as possible in order to continue investment. For aspiring homeowners, completing renovation as quickly as possible will allow them to enjoy their home without distraction sooner.
The greatest danger when attempting a fixer upper is preventing the budget from spiraling out of control. Construction on its own is expensive, and any further problems can cause the expenses to quickly increase. While estimates are generally accurate in future pricing, there are always problems that emerge when committing a deeper dive into aspects of the house. For investors, you run the danger of spending too much to where you do not gain any profit on the house. When budgeting for a renovation, always aim for the high side as you can very easily be caught out .
An inspection is essential when attempting to renovate a fixer upper. When it comes to the cosmetic aspect of a home, much of the work can be done without an inspection. However, an inspection is necessary in order to scope out any structural or mechanical repairs. When it comes to issues with the foundation, HVAC, plumbing, or electrical a home inspection is needed to find any issues. Without a home inspection, you will have no scope on potential construction and would be unable to create an accurate budget.
After the inspection has been completed you will now have a general idea of what you need to renovate within your house. Soon after, an estimate for the construction is essential in order to start forming a budget for the renovations required. The best course of action when requesting estimates is to employ specialized professionals to get an accurate estimate of the exact problem wrong within your house. When receiving estimates, always budget for the higher side, as you are much more likely to end up with extra costs than be under budget when renovating a fixer upper.
Once the above have been finalized, and the profit margins and chosen house are to your liking, you will now most likely begin the process of purchasing a fixer upper. When buying the house it is important to both maintain contractual securities, and to not overpay. When buying the house you should ensure there are agreements in the purchase that allow for you to back out if there are major undiscovered problems within the house. And in order to keep your profit margin, it is essential you are smart when offering and do not overpay no matter the circumstances. After the purchase is finalized, finding the right loan for your house is important.
A fixer upper is an effective investment and can allow you to live in the house of your dreams, as long as you are aware of the process. Many people are quickly in over their head when attempting to complete a fixer upper. Housing is expensive, and committing to an expensive investment such as a fixer property without prior research into the process and the house itself can lead to dangerous outcomes. Beyond just time wasted, the budget for a fixer upper can quickly spiral out of control. Having a proper inspection and estimate can allow for investors to quickly make a profit, and aspiring homeowners to invest and own the home of their dreams.