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Buying A House That Needs Renovation

Without a home inspection, you may have no idea that the home needs new plumbing, the septic tank needs to be replaced or the foundation is cracked. A home inspection helps you avoid unpleasant surprises as well as budget for and prioritize projects.

buying a house that needs renovation

If at all possible, you should avoid overpaying for a fixer-upper. The whole point of buying a house that needs work is getting a good deal on it. Make an offer that strikes a balance between a good deal and the cost of necessary repairs.

The right decision on buying a fixer-upper house depends on your unique situation. A fixer-upper house may be a good option for one house shopper and a bad idea for another. Consider your budget, needs, preferences and lifestyle before moving forward on a fixer-upper purchase.

Falling in between structural and cosmetic renovations are major additions needed to bring the house in line with its neighbors, such as a family room or third bedroom in a community of three-bedroom homes. Such projects usually cost as much as or more than they return in market value (the exception to this is adding a bathroom, which can be worth twice as much as its cost).

By far the most popular funding choice for a fixer-upper is a renovation loan, either through a home equity line of credit or a mortgage. Home equity lines can generally be borrowed against 90 percent of the equity that the homeowner will have in the house after the repairs and remodeling are completed.

To illustrate: If a person buys a $250,000 fixer-upper with a down payment of $25,000, and the house will be worth $425,000 post-renovation, the homeowner will have $200,000 in equity. Even before the work is done, the borrower is eligible for a $180,000 home equity loan. The interest rate on a home equity loan is about the same as for a mortgage, but only up to about $100,000 in interest is tax deductible.

The current state of the housing market may have you expanding your options to try to find a home that you can afford. A fixer-upper that needs some updating and a little love can feel like a welcome alternative to move-in ready houses that go off the market before you can even take a tour.

But buying a fixer-upper requires more careful consideration than a house built or renovated in the last decade. Before you put in a rushed offer on a fixer-upper, know that how you finance the purchase and renovations, plan updates and structure your timeline for construction all play a major role in making your choice the right one. Here's what you need to know.

Before you put your life savings into the run-down house down the block, you need to make a few decisions about your end goal, how you plan to make renovations and what you'll do if problems arise, as they often do.

If you're buying a house knowing that it needs some work, you need to have a clear idea in your head as to whether you see the purchase as an investment that you'll sell or rent out as soon as renovations are complete, or as the house you'll live in for at least a few years.

"People will purchase (a house) like an investment, but treat it like they're going to live in it. You need to know the end goal or exit strategy before you buy it," says Matt Lavinder, president of New Again Houses, a real estate investment company that primarily flips houses, based in Bristol, Tennessee.

If you're buying a fixer-upper to make it a house you'll enjoy living in for at least a few years, the renovations you make can be more personalized to your preference. You can trust that in the long term, real estate appreciates in value, even if you've over-improved compared to the rest of the neighborhood.

Qualifying a house as a fixer-upper could mean anything from it needing a few cosmetic updates to being on the verge of collapse if it doesn't get immediate attention. Before you start shopping for a fixer-upper, determine the extent that you're willing and able to go for the right location and price.

Before putting in an offer on a fixer-upper, you need to have an idea of how you'll finance both your purchase and renovations. You should also know how renovations will be completed, whether that means dedicating all your spare time to working on the house, or hiring a contractor to do the entire project.

To finance any construction on your home, your lender will only be interested in providing the funds if the work is going to proportionally increase the value of the property. While the inspection is important to help you determine the total amount of work that needs to be done, the lender uses the appraisal as a major deciding factor if the work you plan to do will be a good investment.

Buyers shouldn't automatically presume that the listing price has already been adjusted due to the place needing work, but most sellers already realize that the home they're selling needs repairs or updating, and they've likely accounted for that when pricing it.

With some cases, a lender may require a repair escrow that will hold funds designated for repair or renovation projects. Specific requirements vary depending on the lender and the nature of the repairs. When required, the funds will not be disbursed until the repairs are complete.

A fixer-upper can save you weeks (or months) in your home search as you find the right property. Recent research from the National Association of Realtors revealed that 56% of all homebuyers from every demographic commented that finding the right property was the hardest part of buying a home. Avoiding homes that require renovations could make your house hunt considerably harder.

We were surprised when Keller Williams real estate agent Marc Hagerthey insisted that we ought to consider buying a "Grandma's house." And we were even more surprised that we were excited by the idea.

A Grandma's house sits at a middle price point on the spectrum of fixer-uppers, somewhere between a move-in ready flip and a major renovation. The nice thing about buying a Grandma's house is that, often, this kind of historic home has never gone unoccupied or fallen into disrepair. Though it might need some updates, a good Grandma's house will be structurally sound and well-maintained.

The most fundamental (and often most costly) renovations will include roof/gutter replacement, windows, and HVAC replacement. In most cases, these are the kinds of issues that will cause your offer to fall through during your inspection, so it's best to weed out these homes at the get-go.

A couple of years ago, Hagerthey found a buyer the perfect "Grandma's house" that had been on the market for about 90 days. Most buyers were not able to look past the original kitchen, rooster wallpaper, and Elvis clock. But this particular buyer was interested in gaining equity through renovations. The home was a brick duplex they got under contract for $120,000, while a comparable brick duplex with all the bells and whistles had recently sold in the neighborhood for $220,000.

The buyer saved $100,000 on the initial purchase, yet it only took $60,000 in renovations to make both properties equal in market value. The buyer made $40,000 in equity that he would not have had access to if he had simply bought a move-in-ready home.

This example shows how a Grandma's house is often priced too high for an investor or developer to make a significant profit, but low enough for an average buyer to gain some considerable equity if they manage the renovation properly.

You should also look at comparables in the neighborhood to get a sense of how much the home could sell for after improvements. Ideally your home will be worth more than what you paid to buy and renovate it once all the work is done. Generally, homes that only need cosmetic improvements are easier to turn a profit on than houses that require structural changes.

Often, if the seller is motivated enough to sell the house, they might work with you and include fixes and light renovations as a stipulation in the contract for the sale of the house. Making sure you have inspectors and independent contractors to inspect the house for any major issues can help save you a headache in the long run.

Buying a home that needs renovations takes a bit more than if you were to purchase a move-in-ready home. You will need money for the down payment, closing costs, and your monthly mortgage payment, as well as money to cover the costs of home repairs and renovations.

Taking on a fixer-upper house is appealing to many people because of the advantages that can come with doing the project right. The challenges of such a project require careful consideration, so make sure you weigh both the pros and the cons of buying a fixer-upper home.

Add up what it would cost to renovate the property. Be generous on this estimate. Take into consideration all the materials and labor it will take to make this house your home. Subtract that from what the value will be after renovation.

Personally, when I committed to buying a home that was under construction a few years ago, I ran into this very issue. The project was supposed to be completed by June 1 and ended up not being done until mid-October.

Buying a fixer-upper can be a great way to hack the current market and turn an OK house into an amazing one. Fixer-upper loans help simplify that process by allowing you to buy the house and renovate it with a single one.

If you have the money to hire a handyman for every household woe, go ahead. But if you want to hang on to your cash and exercise some self-sufficiency, check out these clever products that solve a million and one little problems around the house. Go now!

Other options to fund home renovations include taking out a home equity loan or line of credit or a personal loan. An experienced mortgage lender can help you narrow down your choices and decide on the best type of financing for your needs and real estate goals.

If you're buying a house that needs some love, you've got some work to do. Whatever you're planning - updating the kitchen cabinets, replacing the roof, adding a master suite - it's going to take a bite out of your wallet. So before you run out to buy that first gallon of paint, take some time to consider a couple of home loan options that can help you get the job done. In this blog, we'll compare two popular mortgages: a conventional loan and the FHA 203(k) - a renovation loan that can help you finance remodeling and renovation projects. 041b061a72


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