When done right—and with understanding of the risks involved—a fixer upper can be worthy investment that's also a fun side project. To measure the risks, make sure you understand these 4 things to know about fixer upper home value, neighbourhood, and true costs of renovation.
The Home's Structural Condition is the Most Important Aspect
You must know what you're really buying before you invest in a fixer upper. A thorough home inspection can tell you whether the house's problems exceed what meets the eye. If you skip this step, you could wind up with a house in need of a pricey service, such as foundation work or mold remediation.Once you understand the home's condition, ask yourself whether you're comfortable proceeding. While mold in homes can be mitigated, for instance, treatment isn't always successful.
If the inspector suggests the home needs structural improvements—e.g., new plumbing—consider finding another fixer upper. Such improvements rarely raise home value since they're invisible to prospective buyers.
The Risk of Underestimating Renovation Costs
If hiring a contractor to renovate your fixer upper, buyers need realistic estimates of the work involved in renovating. All too often, home buyers shy away from hard numbers and end up covering renovation costs out of pocket.
To get an idea of the renovation costs, get estimates that include materials and labor from contractors, then add 5 to 10 percent for problems, inflation, and work delays. Next, gauge what the home should be worth when renovated, using comparable homes in the neighbourhood. Deduct the renovation costs from the estimated value to determine what you can offer for the home.
Timing is Everything in Real Estate
Be critical about the neighbourhood you're shopping in, whether it's a hot market like Cranston or elsewhere. If home values have peaked, or seem about to, you may not come out ahead. If you buy a fixer upper in a neighbourhood that's reached peak value, you could wind up selling the home at a loss as prices correct.
The same logic applies to real estate bubbles: If property everywhere is overinflated, it's better to wait than rush into buying a home. If you buy in a bubble, prices across the area will fall or flatline, and you won't recoup what you spent fixing up the home until the real estate market improves.
Be Realistic About Tackling DIY Projects
Since any work you can do yourself will save money and add to the value of your home, many home buyers are eager to get their hands dirty.
Home improvement shows make renovating look easy, but renovation requires precision and skill. If you're thinking of DIY-ing a home improvement, be realistic about what you can do. If something is done poorly, it will detract from the value of the home. You may be able to pull up carpet, but can you lay down hardwood flooring underneath? If you wind up taking on more than you can handle in home improvement, you'll need to hire a contractor to help you out. The unanticipated expense can max out your budget.
When looking to buy a home and fix it up, be rational. Keeping emotions out of it can help you critically assess whether something is a good opportunity. If you take your time and consider these variables, you can wind up with a soon-to-be fabulous home at a great price.