Should You Buy a Fixer Upper?

How to Find a Fixer-Upper

Before you go house hunting, figure out your (and your spouse’s, if you’re married) must-haves—including renovation projects you’re willing (and unwilling) to tackle. After that, an experienced real estate agent can help you narrow down your best options. Here are some of the most important things to consider in order to find the best fixer-upper:

Location. You can fix many things about a house, but there’s nothing you can do about a lousy neighborhood or a 20-minute drive to the nearest grocery store. So don’t compromise on those. Look for a house in an awesome community that fits your lifestyle and that future buyers will like too.
Appreciation. This is just a fancy term for home value growth. Look for a fixer-upper that’ll grow in value over time. Research the history of home values and businesses in that area. Are home values rising? Is the number of businesses increasing? Those are good signs! A hip location that’s in high demand is definitely going to help boost value.
Inspection. While a home inspection is important to do before buying any home, you definitely want to pay attention to the results on a fixer-upper. An inspection can confirm issues you already plan to fix, but it can also reveal layout or foundation issues that prove the house to be too big of a project for your budget.

How to Handle Renovations

While you might be picturing yourself laughing uproariously in cute coveralls while swinging a sledgehammer or slinging paint, renovating a fixer-upper doesn’t always look like what you see on TV. In real life, you’ll get ready for work with sawdust on your clothes and paint in your hair. But it’s worth every minute if you enjoy it and love the house.

Here are some tips for planning your fixer-upper renovations:

Make a budget. To prevent costs from spiraling out of control, you need a home renovation budget. Lay out the projects you want done and price them. Get bids and time estimates for each individual project, then rank them according to priority and start a detailed budget for the project you want done first.
Decide to DIY or hire a contractor. Once you know what you want fixed, you can either tackle home projects yourself or—if a project is beyond what you’re willing to handle—hire a contractor. If you start doing DIY and then decide halfway through to bring in a pro, your costs can easily explode outside of your budget—so stick to a plan!
Don't overbuild the neighborhood. Be careful not to go switching everything out for marble or adding custom features. If you go all out and upgrade the house to be the most expensive one in the neighborhood, it’ll be hard to get your money back when it’s time to sell the house to future buyers.
Cash flow project by project. If you don’t have the money to get everything done all at once, it’s okay—move at the speed of cash. Hold off on starting a project until you have the cash to get it finished. That way, you won’t be burdened by debt—and you’ll thank yourself when the unexpected costs of homeownership come your way.

How Much Money Do You Need for a Fixer-Upper?

If you’re able to pay for your fixer-upper in cash, that’s the best way to go! But if you’re getting a mortgage, never buy a home with a monthly house payment that’s more than a fourth of your take-home pay—otherwise you’d be house poor!

That 25% limit includes principal, interest, property taxes, homeowner’s insurance and, depending on your situation, private mortgage insurance (PMI) and homeowners association (HOA) fees. Use our mortgage calculator to enter your down payment amount and try out different home prices within your budget.

As far as the renovations go, they could cost $10–60 per square foot—with some projects costing up to $150 per square foot. In other words, after buying a 2,000 square-foot fixer-upper, you could spend another $20,000–120,000 fixing it up. So you definitely want to have a firm budget in mind about how much you’re willing to spend before purchasing the fixer-upper.

But as a rule of thumb, don’t go crazy spending half the price of your home to renovate a room or two—that probably won’t add a balanced value to the house. The smartest way to decide how much to spend on renovating your fixer-upper is to look at your current monthly budget and go from there. Remember, you’ll save the most money if you cash flow project by project.

Beware of Rip-Off Renovation Mortgages

You can find renovation loans out there that allow you to buy a fixer-upper and pay for improvements at the same time. These loans usually let you buy the home with little or no down payment—but remember, doing that loads you up with huge amounts of interest and extra fees. You’re better off taking your time on repairs by saving up to pay for them in cash.

To safeguard yourself, here are some rip-off mortgages with renovation options to avoid:

FHA 203(k). The Federal Housing Administration’s FHA loan has a 203(k) option that allows you to borrow anywhere from $5,000 to hundreds of thousands of dollars on top of your home purchase loan for renovations. The draw here is that you can buy your fixer-upper and get money for improvements with a down payment as little as 3.5%. But in exchange, you’ll be charged PMI for the life of the loan, extra fees for processing architectural documents and a higher appraisal—on top of all the extra interest you’ll pay and decades you’ll spend in debt for not saving up a big down payment.
HomeStyle renovation mortgage. A HomeStyle mortgage is pretty much Fannie Mae’s answer to the FHA 203(k)—but allows for an even lower down payment of 3%! Again, a down payment that low will crush your financial goals by racking up your interest payments and keeping you in debt for way too long. It’s not worth it.
CHOICE Renovation loan. Of course, Freddie Mac couldn’t let FHA and Fannie Mae hog all the fun, so they came up with another copycat loan to lump home financing and improvements into one mortgage. Again, same problem here: The CHOICE Renovation product allows you to get a house with as little as a 3–5% down payment. Don’t overlook how much extra in interest that will cost you in the end.
VA renovation loan. The U.S. Department of Veterans Affairs’ VA loan also comes with a renovation option that helps veterans get into a fixer-upper and pay for certain types of improvements—with no money down at all! But when you purchase and renovate a home with zero money down and things change in the housing market, you could end up owing more than the market value of your home—yikes! Also, VA loans come with a funding fee that’s 1.4–3.6% of your total loan amount. No thanks.

Ready to Find Your Fixer-Upper?

If you want to buy a fixer-upper in a great neighborhood, an expert real estate agent who knows the area will be able to help you pick the one that’s right for you. For a quick and easy way to find one of the best agents in your area, try our Endorsed Local Providers (ELP) program. Your ELP agent will help you spot great deals with tons of potential.

We would love the opportunity to work with you! Kelly Maves is an ELP in Grand Junction with over 17 years of real estate experience. She is an expert in her field! Curious? Let's chat!