How to Know When NOT to Buy a Fixer-Upper
Do you see past the flaws of a “fixer-upper” and imagine what is possible? Do you get that giddy feeling knowing you can turn a home's imperfections into something beautiful?
Home improvement certainly means something different to each of us. Some people like the idea of tearing down a house to its foundation and starting over. Some folks just want to spend a few weekends pounding nails and painting.
Nine out of 10 home buyers today use the internet as their primary source of research for properties, lenders, real estate agents, you name it. It’s never been this fast and easy to buy a home.
Not only is housing hunting faster, but you can also make it less risky, too. Whether you want to fix the general look of a home or get into some serious reconstruction, no one wants to get stuck with a lemon. Here’s what you can do to avoid a money pit, for each phase of the home buying process.
HOME SEARCH PHASE
One of the best things you can to ensure smooth house hunting is to get a loan pre-approval from a lender.
A pre-approval is just an evaluation of things like your credit history, credit score and income to determine how much you home you can afford. Knowing what you can spend saves a lot of time during your search; you’ll narrow your focus to houses you can actually afford.
In fact, many real estate agents insist that their clients are pre-approved before showing properties. It is one of the first steps in buying a home.
When you start searching homes for sale online, develop a shortlist of properties you want to view in person. It's smart to vet Realtors at the same time. Certainly, you will want to make sure the Realtor you work with understands fixer-uppers. They'll be able to make great suggestions along the way.
For example, we asked Ryan Fitzgerald the best place to buy fixer-uppers and he recommended Cary, Apex, Downtown Raleigh, North Raleigh, and Downtown Durham. "These five areas have become the starting point for almost every home search. They are receiving the best press from national publications, and with the influx of buyers moving to Raleigh, these are the areas people want to be!"
Property History Report
Here’s the first opportunity -- in the search phase -- to reduce your risk of buying a money pit. Pull a Housefax property report for each home that made your shortlist.
Property reports include several things that can tip off buyers about potential issues.
- Incidents like fires, structural collapses, meth lab activity.
- Building permits. See construction history and know if any activity was not legally recorded.
- Transaction history.
- Natural hazards like proximity to fault lines or flood zones or regional hail exposure. You’ll even see a history of severe storms in the area.
- Warnings about potential lead-based paint or asbestos in older homes.
If any home looks like a dud, you can simply remove it from your shortlist. You won’t have to waste any time viewing houses that are sketchy.
Property visits represent another opportunity to do your own "mini" inspection. It doesn’t require any expertise on your part. All you need is a good set of eyeballs (and maybe a good nose).
Here is a checklist of things to take note of during your viewing.
- Roof - look for any patches of off-colored tiles (indicates a repair job) or missing tiles. You should have a zero-tolerance policy for any moss.
- Deck - do you see any rotted wood? Jump up and down a little. Does it feel sound and sturdy?
- Interior Walls - are there any brown water stains on the sheetrock?
- Electrical panel - are there any weird wiring splices, jury-rigged with electrical tape?
- Attic - you should not find rotted wood or water stains on the joists.
- Foundation - small hairline cracks may be normal (and an inspector can verify), but large splinters should raise some concern.
- Smell - one thing a listing photo will never convey that you must check out in person: funky odors.
Now you need to decide which house makes the final cut, the home you want to buy.
Make an Offer
Your real estate agent will help you put together an offer. Their negotiation expertise will be very important at this stage.
Offers typically include contingencies. Meaning, your offer will only be good if certain conditions are met. The most popular contingencies are based on the appraised value (coming in at an expected value) and inspection results (no major repairs required). These things are important if you’re just looking for a DIY project where mostly cosmetic fixes will be made (paint, carpet, minor repairs, appliance upgrades, etc.)
If you’re thinking of a more extensive project (adding a room, repairing the roof, structural changes, etc.), FHA 203k loans are a great financing option. That’s because they are all-in-one loans that finance the purchase as well as the cost of the property’s rehabilitation or repair. The caveat on FHA 203k’s is that any major repairs must be made by licensed and approved contractors. So this is not the best set up for DIY-ers. In this situation, perhaps the compromise is to fund the home and major repairs with the 203k and then finish the more cosmetic stuff on your own.
Order an Appraisal
With the exception of a few types of loans, like VA and FHA Streamline refinances, home buyers will need an appraisal of the property’s value. That's because lenders don't want to underwrite loans that exceed what the property is actually worth.
Beware, an appraisal is not the same as an inspection. Appraisals deal with the value of a property. Inspections assess the condition of a property.
Order an Inspection
This is one of the last safety checkpoints for you when buying a home (and a crucial one).
The trained eye of a professional inspector is reassuring, especially when you’re making the biggest investment of your life. Inspectors know how to find common structural issues or other potential problems with major systems like electrical or heating.
Make sure you share your property history report with the inspector! It will give him or her additional clues and help quickly identify any big problems. While inspectors are well-trained professionals, they are indeed human. It never hurts to add any information and data you have about the property at this stage of the process.
Order a Survey
Ordering a survey is always a fantastic idea when buying a home even though it may seem pricey. The reason being is that it could save you tens of thousands of dollars down the road. You'll also want to have a survey for the home anyway for when you go to do work on the home whether it's adding a fence or other things that you may want to add to your fixer-upper. The last thing you want to do is buy a fixer-upper that has encroachments or impervious surface limits because it could make it hard to resell without addressing these items prior to listing the home! This is just one of the items to be wary of when buying a fixer-upper.
Close on Your Home
Assuming the appraisal and inspection go well, it’s time to close the deal. There will be a lot of paperwork to sign. No question, your hand will be tired when you are through. But you’ll also feel confident that your new home is not a lemon. Buying a home is not an easy process so when you do reach the closing table you should take a moment to reflect on your journey to get to this point. It's something to celebrate.
Final Thoughts on Buying a Fixer-Upper:
Shopping for and buying a home in today’s digital world is easier and more efficient than ever. You can get a lot done in a very short amount of time by taking advantage of online resources like Zillow and Housefax. You're in a better position than ever to buy a home with increased confidence that it’s not a dud.
One final thought: it's a good idea to have a contractor come out to the house and give you an idea of what the total costs will be to fix it up. If you use an FHA 203k loan, that requirement is built into the loan approval process. If you decide to go 100% DIY, it's good to encourage any contractors you expect to use to overestimate the costs to ensure that you will be buying a property that makes financial sense.
Here in 2020 a lot of folks have asked me about buying a fixer-upper and it's totally up to you if that's something you want to try or if you feel like you will have success with. My personal strategy has always been to buy homes and hold them for as long as possible while collecting rent checks each month. There is a lot of folks in my local market of Raleigh, North Carolina who are doing a ton of business when it comes to flipping homes or buying fixer-uppers and my hope is that if you do decide to go that route you make sure you don't buy one that needs a ton of underlying work!