What is a Fixer-Upper?
The definition of a fixer upper is a property that is for sale and in need of repairs - whether major or minor. Because the property is not in good condition, it will most likely be listed at a discounted price.
Buying Fixer Upper Homes - Know the Process
Buying fixer-uppers may seem similar to other traditional purchases. There are, however, some specific areas that need a buyer’s attention. Areas that if overlooked could cost thousands of dollars.
Before Buying a Fixer Upper
There are some subjects that need to be addressed before an offer is put on a fixer upper for sale. These decisions will help lower investment risk and financial surprises down the road.
Some fixer uppers are move-in ready, whereas others could take months to repair. You need to know your repair timeline before you put in the offer.
- First time home buyers, can you afford to continue renting while completing the renovations?
- Are you selling your home and buying a fixer upper? If so, the buyer of your home will most likely want to take possession right away. Can you move into the home while you are working on it?
- What additional living and/or holding costs must be calculated into the total project price? These can include utilities, insurance, taxes, mortgage payments etc.
Before you put an offer on a fixer upper foreclosure, make sure that you have accurately calculated the repair costs. Miscalculating the renovation costs can lead to a loss of capital, loan default and/or foreclosure.
If you are buying a fixer upper with the intent to flip the property for a profit, you will need to accurately calculate the holding costs. During the time of the renovation and relisting period, you will only have money going out, none will be coming in.
Can you realistically afford to financially see the repairs to the end?
- How much financial risk will this put on you?
- Are you really willing and able to accept that amount of risk?
- Are you prepared or willing to rent the property if it does not sell quickly?
During the Purchase of a Fixer Upper
So you have found a bargain fixer upper home that is for sale and that meets your investment criteria, what now? There are some specific items that should be made part of the purchase agreement.
Home Inspection Contingency
Having a home inspection completed on fixer upper properties is absolutely critical. It doesn’t matter if this is a bank foreclosure or a fixer upper for sale by owner. In your eagerness to find a good deal, it is easy to overlook something as small as a crack in the foundation or termite damage. These could cost you thousands down the road.
Putting a satisfactory home inspection as a contingency in your offer will help you get your escrow deposit returned if the home fails inspection and you back out of the deal.
Obtain Financing and Accurate Repair Estimates
There are some home financing programs, like the HUD 203(k), that allow a buyer to wrap the renovation costs into their purchase loan. In order to receive enough financing, make sure that your have accounted for all planned repairs and renovations.
Understand Your Return on Investment
Not all renovation projects are going to give you a 100% return on the money you spend. Make sure you accurately count the costs before you start the renovation. Of course, some projects have a much higher return especially in properties that were sold substantially below market.
How to Find Fixer Uppers in Your Area
There are lots of ways to find cheap houses for sale. Some of these can be found locally and others can be found online. Here is a list of the top sources investors use to locate good deals:
- The local Multiple Listing Service (MLS) will contain new listings of fixer upper homes for sale. These properties will require you to go through a real estate agent.
- Tax Auctions/Sheriff Sales are good places to pick up houses at a discount. Make sure you do your research before bidding as auctions do not always guarantee a clean title. Additionally, many states have a lengthy redemption period.
- Drive around and look for distressed properties, vacant and run down rentals or other unsightly and unmaintained properties. The state of the property indicates a disinterest by the owner. You can then go to the county records to get contact information.
- CraigsList and FSBO.com are good online sources of for sale by owner listings.
- Online databases that contain pre-foreclosures, foreclosed homes, REO, short sales and auction properties are excellent sources since it puts all the data in one spot. Avoid free sites since their data tends to be out of date and unverified.
Government lending institutions also have foreclosure listings which include homes that need repairs. These listings can be found as part of other online databases or directly on their websites. These organizations include VA, FHA, Freddie Mac, Fannie Mae, FDIC, HUD and USDA.
How to Get a Loan for a Fixer Upper Home?
Getting a fixer upper loan depends on how you intend to use the property. If you are buying a fixer upper as your own homestead, there are loans available that can wrap the purchase price and the repair costs into one long-term loan with competitive interest rates.
Investors and homeowners can use traditional financing to purchase the home and then use other sources to pay for the repairs. These sources may include personal savings, home equity loans, rental income, hard money loans or partnership funds.
Buying a bargain home can be an awesome deal for many resulting in thousands in savings. A buyer must know what he is buying, how much the repairs will cost and how this purchase will fit into their long-term financial goals if they want to make this buying and selling a fixer upper house a success.