Pros and cons of buying a fixer-upper

The idea of buying an older property and renovating it into your dream home to live in or to sell as a new source of income is appealing to many people. But that excitement can also come with a lot of potential problems.

It's important that you know what you’re getting yourself into. You may want to first learn how to buy a house. Then, look into these tips for buying a fixer-upper. Consider if it's the right type of property for you and what it will take to renovate.

What is a fixer-upper?

A house needing renovation is known as a “fixer-upper” because the home needs some amount of “fixing up.” However, the required labor presents an opportunity: Fixer-uppers typically sell at a lower price than a similar property not in need of significant repairs. This often makes them a great option for people looking for a more affordable way to become a homeowner or for those seeking an opportunity to flip a property and generate a profit through the sale.

Consider if a fixer-upper is right for you

• Length of renovation — depending on the size of the renovation, a fixer-upper can take anywhere from a month to more than a year to complete. Be aware that you and your family's lives may be disrupted by the renovation, which may take a significant amount of time. If this doesn't work for your lifestyle, consider a different type of property.
• Cost involved — renovations can be very costly. You may want to consider another kind of property in your budget if you’re short on renovation funds after paying a down payment and closing costs. Whatever you decide, keep in mind the potential for extra expenses no matter how carefully you plan.
• Time in residence — major consideration is how long you plan to stay in your fixer-upper home. Do you see this as your forever home or only your home for the next few years? The answer could result in a very different plan for engaging in repairs. For a shorter period of time, extensive repairs might be a bigger or more ambitious project than you want to attach yourself to.

What to consider when looking for a fixer-upper

• Location — it’s the golden rule of real estate and also applies to fixer-uppers. Do your research. Check average home prices and schools in the area. Take a stroll around the neighborhood to see if the homes are well-maintained. Buying the least desirable house in the most desirable neighborhood that you can afford can be a great option, and you may find these house hunting tips helpful to do just that.
• Condition — this can vary widely from a house requiring cosmetic repairs to a total gut rehab. If you want to minimize renovation costs, look for a home that has “good bones” — a solid roof and foundation, natural light, good floor plan, quality construction and a coherent design. As a precaution, consider including contingencies in a home offer as it gives you the chance to back out if any major problems to the home reveal itself during a home inspection.
• Layout — many older homes are divided into several rooms and their layout may not work for you. While it's possible to knock down walls and rearrange the floor plan, it can sometimes be expensive or impractical. Keep this in mind when thinking about your renovation budget.
• Configuration — search for houses that have the approximate square feet and number of bedrooms and bathrooms you desire. If you decide to expand the footprint of a house, evaluate how renovations will add up to your initial costs and if they will fall within or exceed your budget.

Repairs and remodeling

• Budgeting — try to determine what you can fix yourself and when you need a professional. Part of this estimation will also mean figuring out the cost of required materials, tools and labor. A reputable contractor can also assist in the renovation process. If you decide that a contractor would be beneficial to the project, brush up on how to avoid contractor scams.
• Permit requirements — you might have an exciting idea on how to perfectly remodel or add on to your fixer-upper. But, don’t forget a crucial step in any construction project: Checking to see which, if any, permits are required to make it happen. It’s counterproductive to begin or finish a project only to find out you’re in violation of an ordinance or zoning law.
• Minor renovations — add up the cost of minor renovations. These can include:
  • Patching and painting walls
  • Refinishing floors
  • Laying tile or carpet
  • Installing light fixtures and switches
  • Fixing broken windows
  • Installing new or refacing existing kitchen cabinets
  • Replacing doors
  • Painting the exterior
  • Adding a deck
• Major renovations — tally up the cost of any necessary major renovations. These can include:
  • Upgrading HVAC systems or adding central air
  • Fixing foundations
  • Replacing the roof
  • Installing new plumbing, sewer lines or wiring
  • Renewing windows
  • Remodeling the kitchen and baths
  • Building garages and additions

Financing options for a fixer-upper

If you’re looking into loans for fixer-upper homes, there are some specific options available. These range from smaller-scale fixer-upper loans for repairs to different types of mortgages.

Federal Housing Administration (FHA) 203k loans

The FHA offers a 203k loan that allows borrowers to purchase a property while also financing the cost of rehabilitation.

• Limited 203k mortgage — the Limited 203k allows a homebuyer to finance up to $75,000 directly in their mortgage for home repairs or improvements. This could be the right option for those seeking additional cash upfront for renovations.
• Standard 203k mortgage — the Standard 203k is aimed at major rehabilitation of homes, which can be perfect for a fixer-upper depending on the property you’re considering. It does have a $5,000 minimum requirement on the cost of repairs, so bear that in mind when considering this as an option.

Fannie Mae HomeStyle renovation loan

National mortgage financing company Fannie Mae offers a loan structure known as the HomeStyle Renovation loan aimed at simplifying the purchase of fixer-upper homes by combining the costs of renovations and mortgage payments into a single loan arrangement. This loan also does not require the purchased property to be the buyer's primary residence, which is good news if you're planning to flip and sell or rent to tenants.

VA renovation loan

Veterans and service members have the option to apply for VA renovation loans, low-cost loans with no down payment to purchase fixer-uppers. These renovation loans let borrowers finance the purchase of a home as well as the repairs. It’s worth noting that these loans aren't commonly offered by lenders. The loan is limited by an estimation of the home's "as-completed" value — the projected market value of the home after renovations are completed. Determining a home's as-completed value requires itemized quotes from the contractors for all planned repairs. Submit your quotes to a VA-approved appraiser for review to calculate the property's future value.

The U.S Department of Agriculture (USDA) renovation loans and grants

The USDA offers loans and grants as an option for those house hunting in a rural area. Worried about what constitutes a “rural area” in this case? You may be surprised at just how much land across the U.S. qualifies under USDA guidelines. If you’d like to verify a property for yourself, the USDA offers a property eligibility tool that allows users to check which areas it considers rural for the purposes of the renovation loan.

For eligible recipients, the USDA renovation loan doesn’t require a down payment. However, eligibility generally depends on being within a specific range of household incomes, which varies by county. It’s important to note that the USDA Renovation Loan is exclusively for primary residences – properties in which the purchaser(s) will reside – and can’t be used for rental or investment purposes.

Pros and cons of buying a fixer-upper home

While buying a house that needs work can present distinct opportunities, they can also come with additional obstacles.

Pros

• Lower purchase price — while renovations are an added expense, fixer-upper houses are typically priced lower than an otherwise equivalent home in good condition, leading to a comparatively lower down payment and an overall lower price barrier to overcome. This reduced price may be helpful in reaching your goal of owning (or selling) a fixer-upper home.
• Customization — repairs and remodels can be a lot of work, but they can also give you the chance to design a home you love. As the homeowner, you can customize your property according to personal preferences or to add value to your home if you’re looking to sell the property and gain profit from it.
• Quality — renovations give you the opportunity to choose materials, contractors, brands and more. Dedicate more of your budget to improving the features you care most about and avoid overpaying for the features you won’t use that may be included in the cost of a non-fixer-upper.

Cons

• Unexpected expenses — new costs may pop up seemingly out of nowhere when renovating your fixer-upper. Determining just how much you’ll need to budget for these unexpected expenses can be tricky. This uncertainty can be daunting, especially when paired with the hidden costs of buying a home. This Old House recommends adding a 20% cushion for unintended expenses.
• Extended construction — home renovations may be an exciting prospect, but it certainly isn’t a quiet one. If you buy a home and plan to live in it while renovating, keep in mind the potential frustration it can cause during an extended period of construction.
• Budgeting difficulty — those unexpected expenses we mentioned can make budgeting a headache. Even when you try to account for unknown factors in your budget, there’s no limit to the number of unforeseen costs that might actually occur. This can be a non-starter for those considering a fixer-upper. If this is a concern, you may find our tips on budgeting for home maintenance useful.

Don't over-improve

Before investing in high-end upgrades, consider the finishings of neighboring houses. If most nearby homes have lower-end finishings, it might be unwise to spend your money on granite countertops, copper bathroom fixtures and marble floors. Your fixer-upper renovation choices should be in line with or just slightly above the standards of homes in the neighborhood. Consider consulting a real estate agent who’s familiar with the neighborhood to help you understand the typical cost of homes in the area.

Purchasing a home can be one of the biggest decisions you ever make. And while it may seem overwhelming, a fixer-upper can be a great way to get good value for your money. Do your homework, talk to professionals you trust and make smart, informed decisions.