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Key Takeaways
1. A fixer upper house is a real estate property that requires some extent of maintenance, ranging from cosmetic updates to significant rehabilitation.
2. Learn the seven factors you should be considering before buying a fixer upper.
3. Get to know the steps to take in order to achieve success when buying a fixer upper home.
Buying a fixer upper has become a popular entry strategy for real estate investing, especially in the last few years. Attributable, in part, to the rise in popularity of “fixing and flipping” reality television, acquiring and rehabilitating undervalued properties has provided an accessible route to property ownership for many. Government-subsidized programs, such as the FHA 203K loan (to be discussed shortly), have added to this accessibility. Read on to found out if buying a fixer upper house is the right investment strategy for you, and how to achieve success should you decide to pursue it.
What Is A Fixer Upper House?
A fixer upper house is a real estate property that requires some form of maintenance attention, which can range from cosmetic updates to significant construction. Buying a fixer upper is a popular entry strategy for many real estate investors, or even someone buying a fixer upper first home, because these types of properties present an opportunity to buy at below market value, and add significant value by updating it to meet or exceed current market standards.
7 Factors To Consider Before Buying A Fixer Upper
Buying a fixer upper house can be a great strategy for buyers who want to buy property in a specific market, but within their own budget. Making improvements to a property in poor condition and with outdated features can be a lot more affordable than purchasing a turnkey property in a great neighborhood. However, many of today’s popular reality television shows have made buying a fixer upper home look a lot easier than in reality (ironically). Renovating a fixer upper can become quite sticky and expensive, if the buyer does not go into a project prepared. Here are seven things to consider when buying a fixer upper house:
Amount of structural work: The most expensive renovations that can quickly eat up someone’s budget are structural. Buyers should always shell out the money for a property inspection to make sure there will be no costly surprises, such as cracks in the foundation.
How much renovations will cost: A professional property inspection can help uncover the real costs of renovating a fixer upper that a normal individual cannot evaluate just by looking around a property. Be sure to get an accurate estimation of just how much renovations will actually cost.
Permitting costs: Buyers should find out exactly what projects might require a permit, and how much it will cost to obtain said permits. Find out permit requirements and costs by inquiring with your local government.
Which projects have the strongest ROI: One of the main guidelines for choosing how to add value to your fixer upper is to figure out what type of projects will bring the property in line with neighborhood comparisons. However, it is often impossible to entertain every possible project or idea. Here, it is important to evaluate and choose the projects will add the most value to your property.
When to DIY vs hire a pro: It might be tempting to go the do-it-yourself (DIY) route on projects that might seem easy at first, but it is imperative to know when it is best to go with a contractor. Even if you do an okay job on a project, hiring a seasoned professional will ensure the project is completed correctly. Before buying a fixer upper, be sure to factor in the costs of hiring a professional on certain projects.
Ability to find a good contractor: Working with a contractor can either make or break your renovation. Before diving in, make sure to have a game plan in place for how you will go about hiring a contractor. Some methods include asking for referrals, visiting job sites in the neighborhood, or looking for recommendations online.
Likelihood of going over budget: Paying for renovations can be expensive and tricky, and many have learned from experience that going over budget is a strong likelihood. When making your estimations and creating a budget, make sure to factor in some “wiggle room” in the likely case that projects go over budget.
Buying A Fixer Upper Financing
One of the trickier challenges of buying a fixer upper is figuring how to finance renovation projects. As if making a down payment and paying a mortgage were not expensive enough, how does one find the extra cash for projects? Some individuals will choose to put expenses on a credit card, but what if that option does not cut it? Two of the most popular options for buying a fixer upper financing include conventional financing and the FHA 203K loan. The following sections provide an overview for each:
Conventional Financing
Conventional lender financing is perhaps the most popular choice among fixer-uppers. Often referred to as a renovation mortgage, conventional financing provides buyers with the option to combine their property mortgage with an additional amount required for repairs and upgrades. Typically, the buyer will draw up contractor estimations based on their proposed scope of work (SOW.) The lender’s appraiser will then use this information to create an after-repair value estimate, helping to determine how much the buyer will be permitted to borrow. However, it should be noted here that lenders may be more critical of fixer upper mortgage financing due to the increased risk.
FHA 203k Loan
The Federal Housing Administration (FHA) and U.S. Department of Housing and Urban Development together created the 203k loan, that seems to have been designed specifically to encourage the revitalization of older homes. The 203k program combines a primary mortgage with funds needed to renovate a property. These loans can be up to 110 percent of the estimated after-repair value of the home, as determined by a certified appraiser. The loan also adds an extra 10 to 25 percent as a contingency, in case any unforeseen circumstances occur. Furthermore, buyers can apply for an added 6 months’ worth of mortgage payments to their loan if they do not plan to occupy the property while renovations are being executed. Before applying to an FHA 203k loan, be sure to know your limitations.
Buying A Fixer Upper Home In 7 Steps
Buying a fixer upper home is no easy feat; not only does one have to acquire the property, they must then be able to successfully execute property renovations. This includes creating detailed project scopes, hiring a quality contractor, and overseeing that each project is properly completed. Here are the seven key steps to completing a fixer upper renovation project:
1. Preparation
2. Scope of Work Creation
3. Contractor Selection
4. Document Management
5. Project Management
6. Final Confirmations
7. Home Staging
Buying a fixer upper can be a highly rewarding experience for those who are able to properly execute renovations as they had envisioned. Although there are sure to be some challenges along the way, the reward can come in the form of a significant value-add to the property, and also in the form of pride and satisfaction. However, it is important to take several factors into careful consideration, as discussed above, before making the decision to buy. In addition, buyers should have a specific plan for how they will finance their projects, as well as what tools and human resources they must implement in order to execute their vision. The guide above outlined seven key steps to successfully implement a fixer upper project.
Have you ever considered buying a fixer upper as a part of your investment strategy? Share why or why not in the section below:
Provided by FortuneBuilders.com