What First-Time Homebuyers Need to Know About Fixer-Uppers

Is It a Good Idea to Buy a Fixer-Upper?

Buying a home is expensive, and can feel very overwhelming, especially for a first-time homebuyer. While first-time homebuyer loans, grants and other programs can save you some money, another place to look for savings is at a home’s list price. A lower price tag can signal an opportunity, the home may not be what you pictured in your dreams but it may have potential as a lower entry cost fixer-upper. Opening your eyes to this option may present an opportunity for you to make it into what you want and need with a slightly lower price tag than a turn-key or new construction property.

Typically, an updated or new construction home will be more expensive than a fixer-upper. Does that mean fixer-uppers are always a first-time homebuyer’s best choice? In some cases, yes, but they are not for everyone.

Arriving at your answer will depend on a number of variables regarding cost:

• How much are similar homes selling for in the area?
• How much would you save purchasing with a fixer-upper?
• How much will the renovations cost?
• What are the loan implications of buying a fixer-upper?
• Will your home be the most expensive on the block once the renovations are completed?

Find answers to questions like these and you’ll likely be on your way to determining if fixer-uppers are right for you.

Is Fixing up a House Worth It?

When asking if a fixer-upper is a good deal or not, begin by looking at comparable homes in the same neighborhood. Find homes that match the amenities, square footage, and other specifications you will achieve AFTER renovations to your fixer-upper is complete. Keep in mind that landscaping will likely improve the curb appeal, but it doesn’t necessarily play a role in the appraised value. So while that $20,000 hand-stacked boulder wall may increase curb appeal, it may not directly impact the value of the home. The monetary amount added to the appraised value is not always equivalent to the cost of the project.

Next, determine how much you would need to invest in the fixer-upper to make the necessary updates. When doing this, consider what skills you have, what projects you will need to hire out and what are the prices for the materials you will be using. You will want to price the exact materials you will be using and get contractor bids for the projects you are intending to complete.  If the improvements needed are outside of the budget of funds you have on hand then you will need to consider a renovation loan, which uses the future value of the home after the work is all completed for loan qualifications. If you will be using a renovation loan you will need to work with a contractor to gather bids and get project plans in place; these types of loans will not allow you to do the work yourself.

In an ideal scenario you will get the home for a lower acquisition cost (or purchase price) since the current state of the home is in need of some TLC. This looks very appealing on the surface but it’s important to ensure you have all improvement costs considered when making your decision on putting in an offer as your total investment and loan payments will be based on the purchase price PLUS the renovations. Ensure that you have considered this before making an offer.

Buying a Fixer-Upper to Live In

Renovating your first home sounds like an exciting opportunity, and it can be. But fair warning, it can also be a disaster if you jump in unprepared; the mess, noise and inconvenience of living in a construction zone is not exactly what most people dream of. Not to mention unexpected costs surfacing if you cut open that wall and something is lurking beneath the surface.

You should first consider whether the projects are needed vs. desired; be honest with yourself about which projects need to be done for you to live in the home, the timelines, and your capabilities. There’s a big difference between seeing something on HGTV or YouTube and doing it yourself. No two projects are alike and you’ll need to be able to account for your particular situation.

If you are doing a standard, non-renovation loan you won’t always need to hire professionals. In fact, it’s a great opportunity to develop your own handyperson skills. That said, don’t push beyond your comfort level. When in doubt, contact a professional or contractor. If you suspect a project could be outside of your expertise, it is great to have a professional or contractor come out to inspect the project prior to finalizing your offer on the home.

On top of having the right knowledge, you’ll also need the proper tools. Don’t plan on laying an oak hardwood floor using a traditional claw hammer. Be sure you account for tool purchases or rental fees as part of your estimating process.

There are also permits that need to be pulled for many projects. Trying to avoid permit fees might save you a little cash upfront, but it can also backfire when you attempt to sell the house, or worse, it could even cause a fire. You should also realize that some work may make your home uninhabitable for a period of time, this is important to consider the cost and hassle of.

What Kind of Loan Do I Need To Finance the Home Improvements?

Finding the right home loan program is always an important step for any homebuyer. When your loan officer identifies the right program for you, it can be a real money saver. And guess what, there are loan programs designed especially for fixer-uppers.

Loans tied to renovations and updates come with more strings attached. Before signing any loan papers, work with a personal loan officer to understand all the requirements. Just as you did when comparing the cost of the home with the cost of renovations, you’ll want to compare the financial ramifications of various loan programs.
Should you need it, a renovation loan can often be used to cover mortgage payments if you need to live elsewhere while the work is being done. Plus, there are often extra funds available to account for cost overruns which happen often during a renovation project.

Here are common renovation loans for homebuyers and current homeowners:

• FHA 203(k): Developed by the Federal Housing Administration, this program can be used for renovation projects and offers lower income and credit score requirements than conventional mortgages.
• VA Renovation Loan: Offered by the Department of Veteran’s Affairs, this program is geared toward both the purchase and renovation of a home. Requirements stipulate the type of projects that are eligible and that a VA-approved contractor is used.
• HomeStyle: A product guaranteed by Fannie Mae, this type of mortgage requires a higher credit score than an FHA 203(k) loan, but allows for almost any type of improvement including pools and landscaping.

Borrowing Tips on Buying a Fixer-Upper

Check, double-check and re-check that you will have enough money to make the down payment. There will be a time, date, and place where you are expected to deliver the down payment. If you can’t deliver, the entire home deal can fall apart. This is the case in any purchase agreement, but it’s even more important when factoring in your renovation budget.

If your strategy is to use either a home equity loan or a home improvement loan vs. cash on hand or a renovation loan, make sure your primary loan allows for this and it’s considered in your approval; you need to do this before making an offer. Assumptions can lead to disappointment. Make sure the lender(s) agrees with your plan.

It is important the your contract reflects accurate information, such as the exact type of loan you are getting or whether you are trying to obtain a first mortgage and a home equity line. Ensuring this is correct allows for more protection on your end of something happens and you aren’t approved for the loan for some reason; make sure to discuss financing contingencies with your realtor prior to submitting an offer on a home.

Pro Tip: If the amount of renovation money you need is less than $75,000, you might want to consider a streamlined 203 (k) program loan. It’s simpler and easier to obtain than the standard 203 (k) program. The streamlined 203 (k) loan will provide up to $75,000 toward renovations on top of the existing mortgage.

Create a Fixer-Upper Checklist for Finance Requirements

After you qualify for a renovation loan program, you’ll need to meet its requirements. Renovation loans do require extra oversight which can include consultations and inspections specific to the improvements being made; these are put in place to protect the investor, the lender and the homebuyer. This is where a checklist can come in handy!

Of course, these conditions will vary by loan program, but a qualified personal loan officer will be able to tell you what to expect and help you create your checklist. For example, an FHA 203(K) loan may require a Department of Housing and Urban Development (HUD) Consultant to review and approve the renovation plans and costs of the improvements to ensure that they are within reasonable ranges.

While these types of stipulations are meant to protect the lender, ultimately, they benefit you, too, by ensuring the work is done correctly, as planned and within budget.

What Should I Look for When Buying a Fixer-Upper?

It’s common practice to make your offer on a home contingent on inspection. This is not an opportunity for a family member, friend or coworker to give the home a once over. A proper home inspection is done by a professional who knows exactly what to look for, can identify the telltale signs of problems, and will provide a detailed document of the home’s condition. When purchasing a fixer-upper, this step is an absolute must. Please note that an inspection does not determine or validate the value of the home, it is solely intended to identify the home’s condition.

The home inspection should confirm all the work you think needs to be done. However, it is likely to reveal other work that should, and may need to be, completed. This new information could impact if you want to purchase the home and how much you want to pay for the home.

Often you will share the pertinent findings of the home inspection with the sellers during the inspection period. This can result in an opportunity to renegotiate terms if you have written in an inspection period into your contract. This could include you asking for repairs to be completed prior to closing or requesting a reduction in purchase price or contribution of the sellers funds toward your closing costs. The seller is not required to agree to the terms you request but may do so if they don’t want to have to start their home selling process over with someone new.

Is It Better to Buy a Cheaper House and Renovate?

Everything in a home can be fixed, but is the cost, time and effort worth it? Some issues (such as structural issues) can come with a very high price tag and may be necessary but they may not add a huge amount of value; these are red flag items – proceed with caution. If the cost investment is much higher than the return seen in the appraised value then you may be losing money. Ensure you do your digging into project costs and whether they are necessary or preferred.

Structural work is complicated and costly. A structural engineer is often needed to make a proper structural assessment. That alone can cost upwards of $700. Of course, that is often money well spent. Just because a crack in a foundation or a load-bearing beam has been there “forever” doesn’t mean it’s not causing issues or on the verge of breaking. We are not suggesting a seller would mislead you on a home’s condition, but often, they just don’t know how serious a crack might be. If you do discover a structural issue, you’ll need to discuss your options with the engineer and determine if it’s worth fixing. Sometimes, these are minor fixes, but in many cases, the solution requires a lot of labor and expense.

Another red flag is mold. If not addressed and handled properly it can cause many issues in the home but also to the health of the people living in the home. When mold or elevated moisture levels are identified it is essential to get a professional involved who is familiar with mold abatement or mitigation. This person will be able to properly identify the presence of mold or elevated risk factors for mold to form, they will be able to identify the type it is and the extent of the damage that has occurred; they will work to find the source and get the mold handled. If handled properly by a professional it can become a non-issue but if it isn’t handled it can cause ongoing issues that may be lurking below the surface.

Is it Worth Buying a Fixer-Upper?

Few things are as gratifying as finding a fixer-upper and shaping it into a home you are proud to own. More than a wise financial decision, a renovated home becomes a personal expression of your taste, family and lifestyle. That’s something that’s impossible to put a price on. What’s also gratifying about a fixer-upper is knowing you did it the right way and didn’t waste money making the wrong moves when selecting or financing it. Often, that means the first call you made was to a local, personal loan officer. Want to get started now? Complete our Quick Start Form and we’ll connect you with a loan officer that matches your specific needs. They’ll provide a free consultation and guide you through every step of the loan application process. Working with a personal loan officer can arm you with the answers, opportunities and loan programs you’ll need to succeed.