Fixer-Uppers: What You Need to Know Before You Buy
If you are in the market to purchase a home and are looking for ways to save some money, purchasing a fixer-upper might be the way to go.
By purchasing a fixer-upper, you often can buy a home below market value. It could be a type of home, either in size or location, that you otherwise could not afford. Or you might just be a very particular homeowner who has a specific vision in mind for how you want your home to look. Either way, purchasing a fixer-upper can be a very smart investment.
However, there are important factors to consider before purchasing a fixer-upper that if ignored, can turn your dream home into a nightmare.
Know Your Limits
The first factor you should consider before deciding to purchase a fixer-upper is to know your limits when it comes to what you are willing and able to take on. You also should keep in mind what you are willing to endure in the effort to renovate your new home. How much of the labor could you handle yourself? Can you give the house a new coat of paint, inside and out, on your own? How about replacing drywall and floorboards? It is important to not overestimate your handyman skills when it comes to purchasing a fixer-upper.
Additionally, what living conditions can you handle? Can you survive eating take-out night after night while you renovate the kitchen? Can you share a single bathroom with your family of four while you remodel the second bath? Renovating a fixer-upper takes patience and a high tolerance for a certain extent of discomfort, especially if you plan to save money by doing many of the fixes yourself. In this case, you don't want to underestimate your tolerance for living in a partially completed home.
Do the Math
The best way to not lose money on purchasing a fixer-upper is by ensuring that you pay just the right amount for the home. If you have your eye on a particular fixer-upper, you first should determine how much it would cost to renovate the home. In order to come to an accurate figure, you will need to secure multiple inspections for the home, from a general home inspection to a pest inspection.
Next, you need to determine what the home's market value would be following the renovations. You can determine this number by collecting comparable figures from other homes in the neighborhood. Once you have the projected home value, you then subtract the estimated renovation costs from that figure.
But you're not done quite yet. To be safe, you should take that number and deduct at least another 5 percent to 10 percent. This step will provide some financial cushion for those unforeseen expenses that always occur during home renovations.
Secure the Funding
Before moving forward with your purchase, you should take the time to ensure that you have the funding to make your planned renovations. Often a down payment and closing costs can leave one cash poor following a home purchase. However, there are some loans specifically designed for home remodeling.
Aptly named renovation loans, these loans can work in one of two ways. First, you can acquire a line of credit based on the equity you will have in the home following the renovations. For example, if you purchase a home for $200,000 and project that the home will be worth $400,000 after all renovations have been made, you can demonstrate that you will have $200,000 in equity.
Generally, these types of home equity lines of credit will let you borrow up to 90 percent of the projected equity, so theoretically you could secure up to $180,000 to use toward your remodeling efforts. In addition, the interest on such a loan is tax deductible up to $100,000.
The second way in which to secure funding is by having the renovation loan tied to your first mortgage. The loan works in the same ways as the equity line of credit, but all of the interest is tax deductible up to $1 million.
