Dear Egghead: I’m looking to buy a larger house in the same area I live in now. Two houses are for sale at bargain prices but they need lots of repairs. Is it worth it to buy a fixer-upper?
ANSWER: It can be worth it, if you know approximately how much the repairs will cost. You should look for a fixer-upper selling at a 35 percent to 45 percent discount to comparable properties in the neighborhood in good condition.
Fixer-uppers sell at a big discount because most buyers prefer to buy a home that is move-in ready in very good condition. There’s less competition among buyers for houses in poor condition. Many people like the idea of fixing up a house, but when crunch time comes, they opt for buying a house that needs no major work.
On the other hand, a fixer-upper can be a bad investment if the repairs turn out to be more costly than you expected. There are always unexpected problems that arise with a fixer-upper. Those costs could turn a bargain house into a break-even project — or worse, an unprofitable money pit.
A home inspection will be a must, so that you can identify what projects will be absolutely necessary. An appraisal contingency is also advisable.
Can you live in the house while the repairs are being made? Often, living in a house is unbearable while it undergoes major renovations. Is it possible to remain in your current home after you purchase the fixer-upper? If you move into the new place, could you tolerate not having a usable kitchen for six months, for example?
Here are some other points to consider:
- Along with the lower purchase price is a lower down payment requirement. So some of the cash you’ve earmarked for a down payment can go toward repairs.
- Property taxes will be lower with a fixer-upper because taxes are based on the sale price of your house.
- You’ll have a chance to redesign part of the home to suit your preference.
- If you’re handy, you’ll have the opportunity for do-it-yourself work, potentially saving you thousands of dollars. Sweat equity can be a satisfying result of your work.
- For some work, you’ll need to identify reliable contractors who can schedule your projects. Your agreement should specify time limits on how long the contractors can take to complete their work.
- Repairs are expensive. If you need financing, try to find a mortgage that will let you roll the contracting work into the loan amount.
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