With the housing market in a downturn, there’s a frightening number of bank-owned properties and properties obtained through a tax lien coming onto the market. Many of these need work, but are selling considerably below the market value. A lot of people are suffering and losing their houses, but then there are many people who are excited and taking advantage of their chance to jump into the market, buy low and eventually sell high or rent, and rack up loads of money!
Should you buy that fixer upper?
This can be a daunting experience for even the experienced investor. We’ve all seen ‘Flip That House’ at one time or another. I’ve only watched it maybe twice.
The basics:
Add up the cost of buying the home, with closing costs, with various costs on repairs, and hopefully you fall below the market value of the house. Hopefully you fall SIGNIFICANTLY below the market value of the house.
The first time investors should try to stick with places that do not have structural damages, and just need ‘updates’ such as new paint, central air installed, new electrical, etc… Having to totally gut the place can open up a can of worms.
Gutting and replacing everything can cost upwards of $80,000. Most of the time, however, you won’t save anything, and it could could cost you more time than anything else to get these repairs done. You are better off avoiding it altogether unless you got a deal you cannot refuse. If the fix is mostly cosmetic/updating, then you can realistically do a lot of the work yourself, saving you lots of money on labor. Gather friends and family, buy some kegs of beer and pizzas, and you can have a renovation party!!
Either way you slice it, you may or may not have the cash to fund these renovations (and parties). If you don’t have the cash, one option is a home equity loan. You can borrow against the value that your house would be worth once you do these renovations. Another option is a renovation loan, where the purchase price and the price of renovations are mixed into one loan, and this too is based off the increased value of the home after the renovations. This is not a financial blog, but this is probably the best option as it usually offers the lowest interest rate.
So as you can see, there are a lot of things to consider when deciding whether to purchase a fixer-upper. It is not easy, otherwise everyone would be doing it! But, you can make some great money, or find some excellent deals. It could also be a huge headache if you have not done your research. Have an inspector or two view the property with you so that you know what you are getting into. Also, seriously consider the do-it-yourself route for all your minor and intermediate repairs. Home Depot and Lowes hold classes all the time. I’ve never gone to any, but they are probably good. I just dive right in with my can-do attitude. If I can see it on TV/Video, I can do it. So far… so good!
Good Luck!!