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The Ins and Outs of Buying a Fixer Upper A-Z Guide

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Regardless of whether you are buying a fixer upper to live in or to flip as an investment there are some very important aspects that you must first be aware of and require concerted consideration:

  • Is this going to be your home or are you going to flip it as an investment?
  • Do you need a mortgage and will it need to include the costs of the repairs?
  • Can you get the job done? Who will do the work, you or a professional?
  • Have you chosen a good location; is the neighborhood on the decline or on the rise?
  • Accurately estimate the cost of repairs and the properties overall value before and after you do any work.
  • Are there any local zoning restrictions or municipal ordnances that would apply to the renovations you wish to complete?
  • If you are buying this fixer upper to live in, will you need to live in it before the work is complete?
  • How long will the repair and/or renovation work take?
  • Are there any other reasons the prospective house may be selling for less than others in the same neighborhood?

As you can see there is a long list of issues that must be quantified well before you purchase a fixer upper and begin the work required to make it a livable or marketable. A fixer upper should cost less to purchase than a new home, or one in good condition, and after you have paid to have the repairs and/or renovations done it should still be costing you less than a comparable home in a similar neighborhood.

A simple formula that fixer upper investors have been using to help them decide on a property is this: 70% times after repair value minus repair cost is equal to the maximum amount you should pay for the property.

Example: $300,000 after repair value x 70% = $210,000 - $50,000 cost of repairs = $160,000 is the maximum you should pay for the home.

If you are looking towards a fixer upper strictly as an investment, and not your primary residence is one matter, but if you are going to live in the home there are many other aspects that need to be addressed, especially if you are looking to reside in the home while the repairs and/or renovations are taking place.

Location is also a very important factor. If the home is for immediate resale is it in a good location? Is the neighborhood a depressed one, or is it OK and your prospective home is one of a very few that is in disrepair? In today’s tight real estate market, that offers so many new or recently built homes that are being sold in distress and short sales, you do not want to be stuck with the one you are thinking about repairing and flipping because the location is not a desirable one to buyers. Just because a property is not expensive does not mean that it’s a good deal.

If you are looking to live in the home and it is a distressed property in a new restoration area, where there are dilapidated houses that with enough care and investment can eventually be restored, do you see the neighborhood on the rise? Will the area be a good one when you finally choose to sell? Many depressed neighborhoods are undergoing a rebirth and you if happen to have found a good value within such an area by all means consider it. But do your research well and contact all the local authorities and real estate agents to get a very good idea of where the neighborhood is headed and what the future values should be, and how long the transformation is supposed to take. Does the municipality have rehabilitation project planned or already implemented in your location?

If you are capable of doing the repairs yourself you will save a lot of money and the only concern at this point would be if you are prepared to make the commitment in time and energy to get the work done. If you are not capable of doing the work yourself do you have a competent professional who can complete the work to spec, on budget and within the specified time?

If the prospective home requires major repairs, especially ones that are structural or involve its working systems such as HVAC (heating, ventilation and air conditioning), plumbing or electrical, you might want to forgo this property for another. All of these things are expensive to remedy, and require professional skills and in many places licensing to get done and approved. If you are going to live in the home and the expense is one you wish to incur fine, but if you are looking to flip the home as in investment many of these major repairs may prohibit you from realizing a profit.

Do you need a mortgage and will it need to include the costs of the repairs?

When buying a fixer upper and you are going to secure a mortgage loan to do that, there are many things to consider that have little to do with the actual repairs other than paying for them. Use the formula shown above to determine if a home is worth rehabilitating so you will be able to arrive at the proper offering price and then determine if that price is commensurate with the area where the home is located. If not, move on to the next prospect.

If you feel you really want the property, but you feel that it will demand a lot of work then you should consider hiring a contractor to perform the inspection and bid on the project. Then if all goes well you can hire the same contractor to perform the work. 

If you are entering into a sales contract to secure the property always make certain that there is a clause that states that the agreement is subject to the buyer obtaining a satisfactory inspection report and satisfactory repair bids within a specified amount of time. In this way if the inspection report and the estimate of repairs are not satisfactory you are able to cancel the agreement and have your earnest money refunded.

Should you get a home-improvement loan to make the needed repairs?

The rule of thumb is that repairs, whenever possible, should be paid for in cash. If it is estimated that the work can be completed for $5,000 dollars or less, do not borrow the money if you will have to pay interest on it. If you do not have the funds to accomplish the repairs without taking out a loan then you may want move on to the next prospect or wait until you have saved the money needed. However, if the house is the one you must have, and you are able to get a home-improvement loan always remember that regardless of how great a deal you think you are getting for the loan, the loan will cost you money and become a debt liability.

In a few cases some investors are able to get government backed loans for a very low interest rate and leave their savings for something else, especially if they are drawing a higher rate of return from that interest.

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