Here’s what you need to know before buying a fixer upper

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When Breanna Reish decided to buy a home, she didn’t have a lot of extra cash on hand, so she looked at foreclosures. She found an older home that had been virtually stripped to the bone, but that didn’t deter her.

“You name it, [the previous owners] took it,” says Reish, owner and financial planner of Wealth of Confidence in Riverside, California, who bought her home in 2009. “We were left with a shell of a home that needed a ton of work, but we were able to lower the asking price down $27,000 and the bank also put in $18,000 worth of repairs in order for us to qualify for a loan.”

Reish wanted to do most of the work herself, but some of the projects (like new hardwood floors) were hired out to professionals. Although it took extra time and sweat equity, Reish says she’s happy with her fixer-upper.

“We paid so little compared to what we would pay to live anywhere else,” she says, adding that the home has since appreciated in value — an added bonus.

Buying and renovating an existing older home that needs substantial work isn’t for the faint of heart. A fixer-upper can come with a host of obstacles, both financial and logistical, but the rewards can outweigh those challenges. Here are tips and considerations to make.

5 tips for buying a fixer-upper

1. Get into the right mindset

When figuring out how to buy a fixer-upper, it’s crucial that you have a plan going into it. It can take a considerable amount of time and money to renovate a home, which could extend your timeline and blow up your budget if you’re not careful.

Donovan Reynolds, a licensed real estate agent with Redfin in Atlanta, suggests budgeting an extra 20 percent into your homebuying budget. That means that if you buy a home for $100,000, expect to spend at least $20,000 to repair it. In more expensive markets where you might pay $300,000 or $400,000 for a fixer-upper, you’ll need $60,000 to $80,000 for repairs.

Although you might plan to do many of the repairs and renovations yourself, you could need to hire a professional for projects beyond your skillset, like electrical and plumbing work, so you’ll want to incorporate that into your budget, as well. For example, rewiring a 1,500-square-foot house costs an average of $4,000.

According to Mina Starsiak Hawk, half of the mother-daughter duo on HGTV’s home renovation show Good Bones, preparing your mindset for inevitable issues is key.

“Even in the best-case scenarios, there can be factors out of your control, like delays in city permits or repairs that come to a halt because of weather conditions,” Hawk says. “So when looking at fixer-uppers, approach it like there will be problems down the line.”

2. Expect your life to be disrupted

Aside from the timeline and budget, consider your lifestyle. Do you intend to live in the home while it’s being renovated, or do you want something that’s move-in ready? If you work from home or have young children, for example, living in a home that’s under construction for several months might be a deal-breaker.

“Like the saying goes, the true test of any relationship is if you can live in a renovation together because there are lots of things to consider like your usual habits and standards of living,” says Karen E. Laine, Hawk’s mother and co-host of their HGTV show. “Think carefully about whether you can live without things like a bathroom or a fully functioning kitchen when you’re fixing up your home.”

If living through the hum of chainsaws and bangs of hammers isn’t appealing, you can spread out the remodeling projects over time to minimize the disruption.

3. Focus on location

Location, location, location. It’s the oft-repeated mantra in real estate, and for good reason. You can always fix up a home, but you can’t change its location. An ideal fixer-upper is in a desirable neighborhood that you love. The same goes for future buyers if and when you sell.

You might be able to score a great deal on an older, dilapidated home, but if you end up hating your surroundings or property values are struggling in the area, you might be left with buyer’s remorse.

“Seek the help of an experienced [real estate agent] to help you understand the neighborhood,” Reynolds says. Putting the work into a shabbier home in a sought-after neighborhood, he adds, means you get to “live in an area you might otherwise not have been able to afford.”

One of the best ways to find fixer-uppers is to drive around your target neighborhoods and make note of any properties that look like they might be in need of some TLC. Other, less hands-on methods include looking online for listings that have been on the market for a while and researching local property auctions.

When looking for a fixer-upper, consider the neighborhood’s attributes, such as the school district, crime statistics and proximity to shopping, dining and parks. Are the surrounding homes well maintained? Is the fixer-upper located on a busy intersection or close to places like a railway or a landfill?

Reynolds also suggests considering whether the renovations you plan on making will make sense for the area.

“Pay attention to the after-renovation value (ARV) so you can estimate whether or not these improvements will give you a return on your investment,” Reynolds says.

In other words, your home could increase in value after you renovate, but you might not be able to recoup all of the money you put into repairs. An experienced real estate agent can help you determine the ARV by comparing properties in the local area to estimate the value after the repairs you want to make.

4. Get the right type of inspection

Laine, Hawk and Reynolds all agree that when you’re ready to put in an offer, it’s a wise move to bring along a trusted home inspector or contractor. That’s because these professionals can point out potential flaws or other critical issues that could present problems later on.

“You want to have someone look at things like the overall structure of the home, crawlspaces, insulation and especially the foundation,” Hawk says. “If the property doesn’t have a good foundation, it may not be the right one for you because it can end up being a money pit.”

It’s also important to not let cosmetic flaws deter you from a home you love. Things like broken windows, paint, fixtures and trim, to name a few, can be easily fixed.

Instead, focus on the major components of a home so you can anticipate how much you might need to budget and how long it might take to make repairs, such as:

  • Electrical, plumbing and sewer systems
  • Air conditioning and heating (HVAC) systems
  • Roofing
  • Driveway, decks or steps
  • Extensive work needed on bathrooms and kitchen
  • Foundation

Before closing on a fixer-upper, consider a specialized home inspection for a detailed report on the house. Here’s what to consider getting done, in addition to a standard home inspection:

  • Pest inspection: If a home has sustained damage from pests like termites, ants or beetles, it can cause major headaches for you down the line.
  • Sewer lines: Getting a sewer line scope and septic tank inspection can help you figure out if they’re in need of repair or replacement, especially with older properties.
  • Thermal imaging: With thermal imaging, a home inspector uses infrared light technology to identify potential issues that might not be apparent to the naked eye. This includes heat loss and air leakage, insufficient insulation, moisture damage and abnormal electrical components.

There are additional services your home inspector might offer, as well, so speak with a reputable professional to see if you might need more specialized inspections.

5. Find the right financing

Remodeling a fixer-upper can get pricey, so it’s critical you have the right financing lined up. Some home renovation mortgages even allow you to roll remodeling costs into your loan amount with a single mortgage. Here’s an overview of some of these programs:

Fannie Mae HomeStyle loan
  • Funds go directly into an escrow account to pay contractors
  • 5% down payment requirement
  • Lower interest rate than HELOCs and home equity loans
  • Can be used for primary residences, vacation homes or investment properties
  • Can refinance existing mortgage while borrowing money for renovations
Freddie Mac CHOICERenovation loan
  • 5% down payment requirement
  • Lower interest rate than HELOCs and home equity loans
  • Can be used for primary residences, vacation homes, or investment properties
  • Can be used to repair a home damaged by natural disaster
FHA 203(k) loan
  • Combines cost of buying and renovating the home into one loan
  • Lower credit score requirement
  • Can refinance existing mortgage while borrowing money for renovations
VA renovation loan
  • Combines cost of buying and renovating the home into one loan
  • Might be subject to construction fee
  • Must use VA-approved contractor

Fannie Mae HomeStyle Loan

Fannie Mae’s HomeStyle Renovation loan is a conventional mortgage that allows borrowers to either buy a home that needs repairs or refinance their existing home loan to pay for improvements. A certified contractor must prepare and submit a cost estimate and detailed scope of work. The money for the projects goes into a separate escrow account that’s used to pay contractors directly, so you won’t have direct access to the money.

Freddie Mac’s CHOICERenovation Mortgage

This renovation loan, guaranteed by Freddie Mac, is another conventional mortgage option to roll remodeling costs into a single-close mortgage. The loan can also be used to renovate or repair a home that’s been damaged by a natural disaster or to prevent future damage from a disaster.

FHA 203(k) loan

The Federal Housing Administration Section 203(k) loan helps homebuyers purchase a home — and renovate it — with one mortgage. Homeowners can also use the FHA 203(k) loan program to refinance their existing loan and add the cost of renovation projects into the new one. FHA loans in general have lower credit score and down payment requirements than conventional mortgages.

VA renovation loan

The U.S. Department of Veterans of Affairs guarantees loans for military borrowers and their spouses. Borrowers can use a VA loan to purchase a home in need of repairs and improvements and combine the cost of those projects into their loan amount. Borrowers must use a VA-approved contractor, and lenders might charge a construction fee.

Other options to fund home renovations include taking out a home equity loan or line of credit or a personal loan. An experienced mortgage lender can help you narrow down your choices and decide on the best type of financing for your needs and real estate goals.

Bottom line

There is no such thing as the perfect fixer-upper — it’s a matter of a fixer-upper that’s perfect for you. Each property is different, and the choice depends on your budget, timeline and lifestyle preferences. Be realistic about whether you want to take on a major project or one that requires a few fixes here and there before taking the leap.

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Written by
Sarah Li Cain
Insurance Contributor
Sarah Li Cain is an experienced content marketing writer specializing in FinTech, credit, loans, personal finance,and banking. Her work has appeared in Fortune 500 companies, publications and startups such as Transferwise, Discover, Bankrate, Quicken Loans and KeyBank.
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