Buying a Fixer-Upper Home: Know the Pros and Cons
If you’re looking to save money when buying a home, you might consider buying a fixer-upper home. Some individuals choose to renovate an older home or one that needs repairs and flip it to make a profit, but are these homes really worth your money? Take a look at the pros and cons of buying a fixer-upper home
What to Know When Buying a Fixer-Upper
A fixer-upper home is a property that needs extensive repairs or updates. In some cases, the total cost of repairs may equal or surpass the total value of the home. These homes generally have a discounted sale price to account for the property’s shortcomings. You may save money upfront but you will need to spend additional time and money fixing up the home. Depending on the extent of repairs needed, you may not even be able to move in until the home is considered livable.
It’s best to calculate the full cost of renovation before making an offer so you know the total cost of buying the home. Decide which repairs you can do yourself and which need to be completed by a contractor. You may even need to take out a loan, often a personal loan, to help cover the cost. Like all homes, you should have it inspected by a licensed home inspector to help identify potential issues.
Buying a Fixer Upper Home: Pros
Pay Less in Interest
Buying a fixer-upper can help you save money over time. You may not have to borrow as much money to purchase the home, which means taking on less debt. Most mortgages are fixed 30-year mortgages. If you buy a less expensive home with a 30-year fixed mortgage, you should have a low monthly payment. You can switch to a 15 or 20-year mortgage or pay more than the required amount each month to pay off your mortgage as fast as possible. The faster you get out of debt, the less you have to pay in interest.
Starting from Scratch
Many homes on the market tend to look alike because sellers want to appeal to as many different buyers as possible, but this can lead to a space that lacks uniqueness or character. Renovating gives you the chance to design the home of your dreams. You can update the features of the home that you don’t like and keep the things you do. If you like to get creative or use your hands, this is your time to shine. Choose materials and designs that will ultimately add value to the home, especially if you plan on selling it within the next ten years.
Making a Profit
If you renovate a fixer-upper, you may be able to sell it for a profit. Renovations and updates can help increase the appraised value of your home and may help you recoup some of the cost of the renovation. If you are flipping a house to make money, try to limit the cost of repairs. Some investors may choose to do work themselves or choose lower-cost materials. However, you should never sacrifice safety or cut corners to get the job done with a lower budget, or the home may fail inspection. If you don’t feel comfortable making the repairs, hire a professional.
Consider hiring a tax professional or accountant when flipping houses for a profit. They will help you go over the potential cost of repairs as you put together a budget. If you flip houses for a living and are self-employed, any profit you make in the transaction is taxed as regular income. If you are simply selling your house as an investor, you may also have to pay capital gains taxes. You may be able to deduct certain repair expenses from your income tax depending on the situation.
Buying a Fixer Upper Home: Cons
Renovating a home can be more expensive than you might think. The home inspection is designed to uncover potential issues that you might not have noticed. Hopefully, the inspector identified these issues ahead of time, but you can still run into surprises along the way. The cost of labor or materials can also change over time, which makes it hard to predict exactly how much the repairs will cost.
Be sure to pad your budget when buying a fixer-upper house to avoid falling into debt.
Slow Buying Process
In early 2022, our housing market continues to be red hot. Many communities have a shortage of homes and finding the right property can be tough. Even older homes are seeing increases in value. You may find yourself in a bidding war even if the home needs extensive repairs. If you are competing for a house, you might have to make a quick decision on putting an offer down. This competitive market makes it hard to calculate exactly how much you will need to repair the house. Use a mortgage payment calculator to determine if the mortgage will fit your budget before you consider renovation costs.
Try to keep a cool head when buying a home and do as much research as you can ahead of time, so you can make an informed offer when the moment is right.
Taking on such a project will be time-consuming. Even if you plan on having a professional do the repairs, you will need to coordinate with different teams, calculate the costs and monitor their work.
Set aside plenty of time to manage the process. If you have a full-time job, consider hiring a construction manager that can oversee the operation while you’re away. If you plan on flipping the house, hire a real estate agent that can help you maximize the home’s appeal.
There are so many factors to consider when deciding on a fixer-upper. Keep these pros and cons in mind to avoid falling into a money pit.