In today’s red-hot real estate market, it can be hard to find a house in your price range. One way around this problem is to buy a fixer-upper home. Even if you pay more for the renovations than you did for the house itself, the total can still be less than the price of a move-in-ready home.
However, a fixer-upper isn’t guaranteed to be a money-saver. You need to choose the right house and get a realistic estimate of how much it will cost you in total — the purchase price plus the cost of renovations. Then you can compare that total with its final value to make sure you’re really getting a good buy.
How to Buy a Fixer-Upper House
How you shop for a fixer-upper depends partly on what you want to do with it. If you’re hoping to flip the house for a profit, you need to figure out how much you can expect to make on the house once it’s fixed up. If you’re just a homebuyer looking for a bargain, all you need to know is how the total cost compares to a finished home.
But for both types of buyers, most of the steps in the process are the same. It starts with finding the right home, in the right condition, at the right price.
1. Know What to Look For
There are a lot of things you can fix up on a fixer-upper home. Some are simple cosmetic problems, such as peeling paint, an outdated kitchen, or a dead lawn. These skin-deep problems make a house unappealing, but not unlivable.
Cosmetic problems are often cheap and easy to fix. Often, you can do the work yourself rather than hiring a professional. And because they make a big, visible difference, these home improvements add market value to the house. That’s important if you plan to flip the house.
By contrast, more fundamental problems are harder to repair. A house with an awkward floor plan, a faulty foundation, or an outdated electrical system requires major work by professional contractors to become safe and livable. These big, expensive changes don’t always pay for themselves when it’s time to sell the place.
There’s one thing about a house you can’t change at all: its location. Even a house with structural problems can be a good investment if it’s in a highly desirable neighborhood with good schools, low crime rates, lots of green space, access to transit, and other amenities.
But in a lower-value neighborhood, even modest fixes may not pay for themselves in resale value. Buyers aren’t likely to go for a $400,000 house on a street full of $300,000 houses. If they have $400,000 to spend, they want to live among other homes worth $400,000 or more.
When shopping for a fixer-upper, a good rule of thumb is to buy “the worst home in the best neighborhood.” Look for areas where home values are high, then look for houses priced substantially below the average.
When you find one, check it out to see why the price is so low. If the house needs only cosmetic repairs and has good bones, it’s likely to be a good investment — either as your own home or as a flip.
If the house has big-picture problems, like a too-small lot or too few bathrooms, it may be too costly to fix up. However, it could still be a good buy if the price is low enough. A house priced at $50,000 that needs $80,000 worth of work is still only $130,000 total — a great buy in most areas. That could mean a big payoff for a homeowner willing to take on the job.
2. Get an Inspection — or Several
Structural problems in old houses aren’t always visible to the naked eye. For instance, you can see if the kitchen cabinets are outdated, but you can’t tell if there’s rotting plaster behind them. The only way to spot these hidden problems is to get a professional home inspection.
A standard home inspection covers every part of the house, from the foundation to the roof. It can reveal all kinds of issues that aren’t obvious, such as water damage, faulty wiring, or an inadequate HVAC system.
Home inspectors can also test the house for hazards like mold, radon, or lead paint. Knowing about these problems ahead of time is crucial to figuring out the cost of repairing the house and how those repairs could take.
In addition to this standard inspection, there are several kinds of specialized home inspections you can have done for an extra fee. For instance:
- A pest inspection reveals whether the home has damage from ants, beetles, or termites.
- A sewer line scope and septic tank inspection tells you if these systems need repair or replacement.
- Thermal imaging uses infrared light to identify hidden problems like heat loss, air leaks, water damage, or electrical issues.
- A structural inspection by a structural engineer confirms that the foundation, joists, beams, and other load-bearing structures are sound.
- In homes that use well water, a well inspection tells you if the water supply is safe and adequate.
In general, it’s worth paying more upfront for any type of home inspection you think your potential future home needs. It’s cheaper to spend an extra $600 on a structural inspection than to learn midway through a remodel that you need to replace half the foundation.
3. Estimate the Cost of Renovations
Once you’ve had your fixer-upper inspected, you’ll know which structural repairs are absolutely essential to make it livable. And, on top of that, you’ll probably have a long list of other things to fix or update for cosmetic reasons.Your next job is to figure out the cost of all these repairs.
Estimate DIY Costs
In some cases, you can save on the work by doing it yourself. Some jobs, like painting or stripping wallpaper, are simple enough for beginners. Others, like tiling or hanging cabinets, are reasonable for skilled DIYers.
For DIY projects, estimate the cost by checking home stores and websites to find prices for the supplies you’ll need. Also, check with your town to see if any of the jobs requires a permit, and if so, what it costs.
Check With Contractors
Chances are you won’t be able to DIY everything. Some jobs, like roofing or major electrical work, are far too dangerous for an amateur to attempt. If a mistake could kill you or cause major damage to your house, leave that project to the pros.
Find a good contractor to do a walk-through of the house and give you a quote on all the repairs you’re not planning to do yourself. You can also use sites like HomeAdvisor to get quotes from local contractors. Get a written estimate on each job before you make an offer.
When calculating repair costs, remember to factor in the cost of appraisals and inspections. Some home financing options, such as FHA 203(k) and CHOICERenovation loans (discussed below) require extra supervision and appraisals. These appraisals protect both the mortgage lender and the borrower by ensuring that the value of the renovated home is up to par.
Calculate the Total
Add together your contractor’s estimate, your DIY shopping costs, and the costs of any necessary appraisals. This will give you the approximate total cost of fixing up your fixer-upper.
Lastly, take that total and add on about 10% more. That extra padding is to cover the cost of any unexpected problems that pop up once you start working on the house. Surprises like this almost always happen, so you need to plan for them in your budget.
When you’ve added everything up, you may find you can’t afford to repair everything on your list. In this case, you need to set some priorities. Focus on the essential repairs and on high-value home improvements that deliver the most bang for your buck.
4. Estimate the Carrying Cost
If you’re planning to flip a house, renovations aren’t the only expenses you need to worry about. You also have to consider the carrying cost. This is the amount the house will cost you to own while you’re fixing it up.
Carrying costs eat into your profits. Every month you own the house is another month it’s costing you money instead of making you money.
Get a Timeline
The first thing to figure out is how many months you’ll need to spend on the repairs before you can sell the house.
When you talk to contractors, ask them for estimates on time as well as cost. For jobs you’re doing yourself, do an online search for the project name and “time to complete.” Just as you did with cost estimates, add a little padding to these time estimates to account for the unexpected.
Calculate Monthly Expenses
When you have an idea of the total timeline, figure out how much you’ll have to pay toward the mortgage during this time. Factor in other costs, too, such as:
- Property taxes
- Utility bills
- Time you take off from your job to work on the house or meet with contractors
- Care for your kids or pets while you’re working on the house
Think About Where You’ll Live
In some cases, you can save some money by living in the house while the work is being done. You’ll still have to pay the mortgage, but you won’t need to pay rent on a separate home. But this is only possible once the house has all the essentials. It must be structurally sound and have heat, water, and at least one working bathroom.
This can also be a problem if you’re buying a fixer-upper as a home, not an investment. If it’s not possible to live in the house right away, you’ll have to pay rent on another place while the work is in progress. This adds to the home’s total price tag.
And even if you can live in the house, living in a work zone can create extra expenses. For instance, until the kitchen is usable, you’ll have to pay extra for restaurant meals or takeout.
Make sure your budget has enough wiggle room to handle these extra expenses, along with the repair costs. If you’ve already budgeted every penny to pay for the house and the repairs, you’re going to run into problems.
5. Estimate the After-Renovation Value (ARV)
At this point, you know how much your fixer-upper will cost to buy, to repair, and to own while you’re repairing it. Now there’s just one more number you need: the after-renovation value, or ARV. This is the amount the house will be worth once all the repairs are complete.
The easiest way to find the ARV is to look at “comps” — comparable houses in the neighborhood that have sold recently. The average price people are paying for these houses is a good measure of how much you could get for yours once it’s fixed up.
You can get a quick estimate of local house prices through sites like Zillow or Redfin. However, you’ll get more reliable figures if you ask a real estate agent to check the comps for you.
Knowing the ARV is obviously important for flippers. With this number, you can figure out how much profit you can expect to make on your fixer-upper. Just subtract all your renovation and carrying costs from the ARV.
However, this number matters for potential homeowners too. If the ARV is significantly more than the purchase price of the home and renovations, that tells you the house is a good deal. But if the cost to buy and repair the house exceeds the ARV, you’re better off looking elsewhere.
Keep in mind that the purchase price for the home doesn’t have to be the asking price. If you think the list price is too high, you can make a lower offer that will bring the total price with renovations closer to the ARV.
Sellers are more likely to consider a low offer if the house has been sitting on the market for a while. If the seller is hard to convince, showing your calculations for repair costs can help prove that your lower offer is reasonable. Offering cash up front, if you can afford it, is another way to sweeten the deal.
6. Review Your Financing Options
At this point, you have a good idea how much the repairs on your fixer-upper will cost. And chances are, you don’t have enough cash saved up to cover all of them. So, you’ll need some kind of loan to pay for the repairs, as well as for the house itself.
If repair costs are minor, you can get a traditional mortgage and finance the renovations with credit cards or a personal loan. However, there’s a limit to how much you can borrow this way. Also, interest rates can be high, and you don’t get to deduct that interest on your taxes.
A better option for most buyers is a renovation mortgage loan. This is a special type of mortgage loan that lets you finance purchase and renovation costs in a single loan. There are several different renovation loan options that can work well for fixer-uppers.
FHA 203(k)
An FHA 203(k) is a renovation mortgage loan backed by the Federal Housing Administration, or FHA. You can use it either to buy and renovate a fixer-upper or to refinance an existing mortgage loan and pay for renovation projects at the same time.
FHA 203(k) loans are easier to get than many other mortgage loans. You can get one with a credit score as low as 500. You only need a down payment of 10% — and if your credit score is at least 580, it can be as low as 3.5%.
However, these loans also come with some restrictions:
- You can only get one on your primary residence.
- All renovations must be done by a contractor, not DIY.
- For most loans, you must also work with a consultant from the Department of Housing and Urban Development. This consultant approves your plans, manages contractor payments, and inspects the property after each job.
- Only certain types of renovations are covered. You can use the loan to pay for repairs, landscaping, and upgrades to looks and energy efficiency, but not luxuries like a hot tub or barbecue pit.
- You must carry FHA mortgage insurance on the home.
- The total loan amount is subject to FHA loan limits, which vary by county.
VA Renovation Loan
If you’re a member of the armed forces or a veteran, you can qualify for a mortgage backed by the U.S. Department of Veterans Affairs. One type, called a VA renovation loan or VA rehab loan, covers the costs of buying and renovating a house all in one.
VA renovation loans require no down payment. They also have lower closing costs than most other mortgage loans. Restrictions on these loans include:
- You can only get one on your primary residence.
- You must use a VA-approved contractor for renovations.
- Renovations must focus on the function and livability of the home. You cannot fund any luxury additions or upgrades to appearance.
- Some lenders charge an additional construction fee on this type of loan.
Fannie Mae HomeStyle Renovation Loan and HomeReady Mortgage
The HomeStyle Renovation Loan is backed by Fannie Mae. You can use it to fund renovations to a new or existing home. You can also bundle it with a Fannie Mae HomeReady mortgage to pay for both the house and the improvements to it.
This type of bundled loan works much like the FHA 203(k). However, there are a few key differences. HomeReady mortgages require a higher credit score, at least 620. On the other hand, they allow for down payments as low as 3%.
HomeStyle loans also have different rules. You can use them to renovate a vacation home or investment property, not just a primary residence. And you can spend the money on all types of improvements, including luxury items such as a pool.
When you take out a HomeStyle loan, the money goes directly into an escrow account that’s used to pay contractors. The amount you spend on renovations can be no more than 75% of the home’s ARV.
Freddie Mac CHOICERenovation Loan
A final mortgage option for buyers of fixer-uppers is the CHOICERenovation loan backed by Freddie Mac. This type of loan covers your home purchase and renovations all in one. You can also use it to finance renovations to an existing home.
Like the HomeStyle loan, CHOICERenovation works for investment properties as well as primary homes. And, as with the HomeStyle loan, renovation costs can’t exceed 75% of the ARV. In most cases, this loan requires a down payment of 5%.
One difference between CHOICERenovation and other renovation mortgage loans is that you are allowed to do the renovations yourself. You can even earn a sweat equity credit toward your down payment if you do the work prior to closing.
However, if you choose this option, you must go through an appraisal process. The appraiser will check to make sure your work and the materials you used are as promised and that the home value matches the estimated ARV.
Final Word
Buying a fixer-upper home can be a great way to break into the real estate market when prices are high. But it’s not a decision to make lightly.
With any home purchase, you need to think carefully about whether you’re ready for the responsibility of becoming a homeowner. That includes both the costs and the work involved. And that goes double for a house that’s going to need major renovations to make it livable.
Before you take the plunge, evaluate both your finances and your schedule. Think about whether you’re prepared for all the expenses of fixing up a home and the hassles of living in a construction zone. Consider the stress it can put on you and others who share your home.
If you’re sure a fixer-upper is the right choice for you, move forward — but cautiously. Fixer-uppers are full of surprises, and you don’t want to get stuck with a house you can’t afford to repair.
To protect yourself, make sure your purchase contract includes a financing clause that says your deal isn’t final until you’ve managed to secure a home loan. Also, include an inspection clause giving you the right to back out if a home inspection reveals any unknown problems.
There’s no doubt about it: Buying a fixer-upper is trickier than buying a turnkey home. It requires more research and more precautions. But if you do it right, it’s a good way to get the home of your dreams — or a great investment property — at an affordable price.
