Want to Buy a Fixer Upper? Five Tips to Help You Decide If You’re Ready

*******

These days, do-it-yourself shows are running rampant. Inspiring many people to try their hands at DIY projects – from upcycling end tables to renovating houses. If you’ve got the DIY bug, or if you’re considering whether to buy a fixer-upper home, you should know it’s a big deal.

A fixer upper can be a fun project, a great investment, or even a good way to settle into your forever home. All without spending a fortune to get what you want. But before you sign on the dotted line, read these tips to help you decide whether or not you should get into all that.

Understand What a Fixer Upper Takes

Know your own home buying goals. And understand what it really takes to fix up a home. If you love to renovate or don’t mind construction dust hanging around your new home for months, a fixer upper might be for you. Fixer-upper homes are often foreclosures or short sales that can be bought at bargain prices. They are also great for those who want to invest in a property to resell, rent, or live in for a few years before moving on to a better home.

No matter what your goals or expectations understand this – 90% of the time, rehabilitating a fixer upper will take more time, and cost more money, than you originally anticipated. If you’re in a hurry to be in a home that’s 100% ready to live in, you might consider a home that just needs paint touch-ups instead.

Get an Inspector

If you have some imagination and have seen a few shows on the DIY Network, it’s easy to start dreaming as soon as you walk into a fixer upper. You might immediately see how new paint and flooring, great marble countertops, and new appliances could take the home from drab to fab. But if the foundation under that flooring and the drywall under that paint isn’t in good condition, you could be getting into more of a mess than you bargained for.

While some REO or bank-owned properties don’t always allow for a proper home inspection, hiring a home inspector is ideal. Even if it costs you a few bucks, it can help avoid getting trapped. What if a home needs more work than you can afford to do?

Be sure that the foundation is sound. Have a qualified inspector check expensive essentials like wiring, plumbing, A/C lines, roofing, and windows. Before you get to those new countertops, you’ve definitely got to be sure the basics are sound.

Have to do it yourself, here are more tips for what to look for.

Check Out your Financing Options

Of course, financing a fixer upper is different from financing a move-in ready home. If your home is move-in ready, you can get a traditional mortgage. Later you could sink a few hundred dollars into new paint to personalize the look. But what if you need a several thousand dollars to turn that fixer upper into your dream home?

There are several different financing options. Here are few:

• Go Slow and Pay on Your Own.

This is the most basic (and probably most practical) way to get the job done. But it may take more time (and time is money). If the home is essentially livable but just needs some updates, this may be the way to do it. Especially if you’re going to do lots of projects DIY rather than contracting them out.

• Use a Credit Card.

If you’re in a bit more of a hurry and don’t have tens of thousands of dollars’ worth of repairs, fill out a couple of applications for credit cards with low interest rates. These cards can help you pay for your remodeling little by little. Credit is another one of those good options if you’ll be remodeling slowly on your own. It’s also nice to have a low interest card if you need to pay a lump sum for larger purchases. (Granite countertops and new appliances don’t come cheap.)

• Refinance as You Do Repairs.

If the repairs and upgrades you’re planning for the fixer upper will dramatically increase the value of the home, you may be able to refinance as you go. Basically, ask the bank to write a couple thousand extra dollars into your mortgage. That is – above the appraised value of the home. Then, use that money to do one repair. Once that’s finished, have the home re-appraised, and go through the process again. This can be a somewhat lengthy process fraught with paperwork. But it can help keep you from overextending repairs beyond what your home will appraise for.

• Check Out the FHA 203(k) Loan.

The FHA’s 203(k) rehab loan is meant just for fixer uppers. With this loan, you can actually take out more than the home’s current appraised value.  Getting money in cash, you can then make the repairs. One caveat is that the repairs must be made within a certain amount of time, and you must have a contractor write an estimate for the cost of repairs. You may do the repairs yourself, but any money you save by doing that has to be reapplied to your mortgage when your home is re-appraised at the end of the rehabilitation period.

Here’s an article from Bankrate.com for the very latest.

Decide What You’ll DIY

If your real goal in buying a fixer upper is to save money, it’s best to do at least some of the repairs yourself. Leave the difficult things – like replacing drywall, installing hardwood and tile, and fixing plumbing and wiring – to the experts. But try to do things like installing new appliances and painting on your own to save money. You really can learn how to do a lot of things online these days. So you might even take care of weatherstripping, insulating your attic, replacing windows, or even installing new countertops on your own with a little help from the world wide web.

For more on deciding when to call a pro (an Essential DIY Skill) – When to Call a Pro.

Figure Out if You’ll Get Your Money Back if you Buy a Fixer Upper

Many homeowners buy a cheap fixer upper with the idea that they’re making an investment. Even if they’re planning to live in the home, they assume that by making certain repairs, they’ll get more than their money’s worth out of those repairs.

This is sometimes, but not always, true. The best way to accomplish this is to buy a foreclosed or short sale property in a nice area. Somewhere where your home appraises for much lower than the homes around it. Buying a fixer upper in a less-nice area and fixing it up too much can actually leave your home harder to sell. Since people aren’t likely to buy a $200,000 home in a neighborhood where most of the other homes are only worth $100,000.

If you’re buying a home that you’re nearly certain you want to live in forever, it may not matter, though, if you’ll get your money back. Of course, you don’t want to sink tens of thousands of dollars into a property only to find that you can’t get any of that back. What if you have to move for a job in five years? You never know. But buying a fixer upper as a retirement property can be a great way to get your dream home without spending a fortune.

Lastly, Be Prepared – When You Think You’ve Finished Your Homework, Do More

This is the most important tip. Look at all the angles. Talk with realtors who know the market in your area. Get quotes from various contractors. Enlist help from friends who are good with do-it-yourself projects. Do all your homework before you decide to buy a fixer upper, especially if you plan to use it as an investment.

*******

Note from the Editor: Daniela Baker is a blogger at CreditDonkey.com. She hopes this article will help you decide whether to spend money on a fixer upper. Mrs. Moxie and I have researched many and even have bought a few fixer uppers. Falling into at least of few of categories above. Most have been both satisfying and largely profitable. That said, trust when I say this statement from above is very true – “90% of the time, rehabilitating a fixer upper will take more time, and cost more money, than you originally anticipated.” Godspeed. ~jb

* Photo Credits (in order):

http://www.flickr.com/photos/iluvcocacola/6136083819/

http://www.flickr.com/photos/picken/5331162459/

http://www.flickr.com/photos/22746515@N02/4375854224/