How to Buy a Fixer-Upper Without Getting Burned

For those who love renovation projects, the idea of buying a fixer-upper — either to keep as a BRRRR or to flip and sell — is intriguing. Buy low, sell high, and all that.

Except it doesn’t always happen that way. Before investing in a fixer-upper home, consider all the costs and understand how you can successfully flip a house while being financially smart.

What Is a Fixer-Upper?

At the risk of pulling a Captain Obvious, a fixer-upper is a real property that needs, well, fixing up.

That could mean anything from cosmetic updating to a complete gut of the building, and everything in between. On the cosmetic side, you may be able to make home improvements yourself on weekends over the next year. But for mechanical or structural repairs, plan on pulling permits and hiring licensed contractors.

And, of course, the more work the property needs, the greater the discount you can expect on the purchase price.

If this is your first home or investment property, stick with cosmetic improvements for your first rodeo. Trust me, you’ll still have more challenges than you expect.

How to Buy a Fixer-Upper Without Losing Money

At the end of the day, you want this investment to be of profit, not become a money pit. Here are some ways to purchase a fixer-upper successfully without the financial loss.

Cost Analysis

Everything comes down to the numbers. Luckily, the math is quite simple. Add up all the costs to renovate and fix the property, including all carrying costs, by completing a thorough assessment of the property. Within this analysis, make sure to include the cost of all materials and labor needed.

Once all costs are added, subtract that from the market value you aspire the house to have once fixed. Consider the prices of the homes in the surrounding area for a solid estimate. When calculating costs, you would always rather over-estimate than spend much more than anticipated. Deduct an additional 10-20% for hidden costs and unforeseen problems during your initial inspection.

Start with Cosmetic Renovations

If the home needs significant repairs or work, many real estate experts suggest novice investors steer clear. Start with properties needing only cosmetic repairs, and avoid mechanical or structural problems such as roof repairs or foundation problems.

Ideally, you want to find a fixer-upper that contains a solid core, meaning all “invisible assets” are working and the only renovations will include paint jobs or other minor details. Not only do these improvements cost significantly less than updating an entire room, but mechanical and structural repairs come with far more risk of hidden extra costs. That includes both legitimate surprises and contractors simply looking for excuses to raise their quote midway through the renovation project.

For that matter, starting with smaller, cosmetic renovations lets you build trust and rapport with contractors. You can weed out the bad seeds, and scale only after building trust with a few reliable contractors.

Consider DIY When Possible

Whenever renovation is required, DIY (do-it-yourself) projects often prove the most cost effective.

Contractors are not only expensive but sometimes take considerably more time than what you could accomplish yourself. Although you can usually negotiate with contractors, they are not always reliable and projects can end up taking twice as long, therefore costing you more.

If you do not consider yourself handy, reach out to friends or family that could help.

Have an Exit Strategy

Like any investment, it is only successful once you receive your money back, plus a profit. You must have an exit strategy before buying, so you don’t end up in debt or another financial crisis.

That could mean flipping the property immediately for a profit, of course. Or it could mean following the BRRRR method (buy, renovate, rent, refinance, repeat) to keep the property as a rental and start earning cash flow from it. (See our free rental property calculator to run the numbers.)

Or you could keep the property as your primary residence. Live in it for at least two years so that when you sell, you can avoid capital gains taxes on the first $250,000 in profits ($500,000 for married couples)!

What the #%& are real estate syndications, and do they really earn 15-50% returns?

Why Buy a Fixer-Upper House?

Before knocking the idea of investing in a renovation project, consider all the benefits.

1. Lower Buying Price

As you probably guessed, fixer-upper homes tend to sell at a much lower purchase price than “move-in ready” or turnkey properties. If you are handy, or have any construction experience, fixing a home yourself would save you tremendously compared to spending your money on a home that is in perfect condition.

That can also let you buy into a better neighborhood than you’d otherwise be able to afford. With a lower price comes a lower loan amount and monthly mortgage payments.

Lastly, a lower purchase price also means lower closing costs. Points and transfer taxes both cost less when you pay less for a property.

2. Fast Equity or Profit

Whether you buy a fixer-upper to live in, to keep as a rental (the BRRRR method), or to flip, you can “force equity” quickly through renovation.

And if you do choose to flip the property immediately, the profit can help you expand your real estate portfolio. Use the profit as a down payment toward your next rental property purchase, which will then start generating monthly real estate cash flow for you.

3. Customization

When you buy a property already in move-in condition, someone else has picked out all the finishes, which may or may not reflect your taste or priorities.

When you buy a fixer-upper, you get to customize it however you like when renovating it. You can design your dream house, with your ideal kitchen, bathrooms, flooring, and more.

4. Lower Initial Property Taxes

Your local county charges property taxes based on each property’s assessed value. A house that clearly needs updating means a lower assessed value, at least at first.

Eventually, the county assessor will figure out that your property has been updated. But that could take years, during which you benefit from lower property taxes.

Cons of Buying a Fixer-Upper

While flipping homes offers several pros, there are a few drawbacks to consider.

1. Risk of Hidden Renovation Costs

Like your parents always told you: you can’t judge a book by its cover. The same goes for housing investments.

A home could look as if it needs some light sprucing up, maybe a quick paint job or some new bathroom tiles. But after you get into the property to start renovating, you discover it needs new framing, or wiring, or plumbing, or any number of other, much more expensive fixes.

If you aren’t careful, a fixer-upper can quickly become a financial burden. It could even cost you more time and money to fix than the property is worth.

2. Risk of Delays

When you hire out renovations to contractors, they could drag their feet and fail to complete the project on time. Or, if the property legitimately needs more work than you expected, that too prolongs the project.

Those delays cost you money in the form of carrying costs and lost rents.

If you plan on fixing up the property yourself, your own time is a factor. And you run the risk of unforeseen issues preventing you from working on the property as planned, causing delays and higher costs.

3. Risk of Theft

Your contractor could run off to Mexico with your materials deposit. Or dodgy neighbors could steal your copper pipes or appliances or tools.

For that matter, squatters could move in and turn your renovation site into a crackhouse. And you know just how long the eviction process then takes, given their squatters’ rights.

4. Property Taxes Spiking

Although catching a break on property taxes at first sounds appealing, the assessor might get overly optimistic about your property’s assessment value and overcharge you on taxes. Sure, you can appeal the assessment, but that doesn’t mean your county will see reason rather than dollar signs.

Keep in mind, the more upgrading you do, the greater the value of the house and therefore the greater property taxes will cost.

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Want to compare investment property loans?

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Fixer-Upper Mortgage Options for Homebuyers

If you are in the market to buy a fixer-upper, you can’t expect a traditional mortgage.

Still, you have several options for renovation mortgages. Those loan options depend on your exit strategy for the property, and homebuyers planning to move in after renovating have the following options.

FHA 203(k)

Through the Federal Housing Administration, an FHA 203(k) loan offers mortgages to those with lower income and lower credit scores. It remains among the most popular loans for homes needing improvement, with its 3.5% down payment for borrowers with credit scores over 580.

However, this FHA loan comes with a few drawbacks as well. It requires the owner to hire a Department of Housing and an Urban Development consultant to pre-approve the plans to the property. As an FHA loan, it also requires you to pay mortgage insurance (MIP) for the entire life of the loan — even after you pay the balance below 80% of the property value.

VA Renovation Loan

This was recently updated by the Department of Veterans Affairs to include home investments and renovations. However, a VA-approved contractor is required on these loans and the lender has the ability to charge you a construction fee. Keep in mind, lenders find this riskier and therefore will want to charge a higher down payment on the property.

HomeStyle

Although a better credit score is required, Fannie Mae HomeStyle renovation loans allow luxury improvements such as landscaping or pool renovations. You can remove mortgage insurance after the loan balance drops below 80% of the home’s value.

CHOICERenovation Loans

This mortgage offers improvements that assist properties with standard upgrades as well as natural disaster protection. If you are considering purchasing a fixer-upper in an area that is prone to severe weather events, this loan, guaranteed by Freddie Mac, may be the smartest option.

Fixer-Upper Loan Options for Investors

Whether you’re looking to flip the property or keep it as a rental, you’re probably looking at a hard money loan.

These purchase-rehab loans tend to be short-term, usually 6-18 months. Often, they charge interest only, with no amortization. Once you complete the renovation, you either sell the property as a flip and pay off the loan upon sale, or refinance the property as a BRRRR and pay off the loan that way.

For a wide range of options compared by interest rate, LTV, and loan requirements, see our Investment Property Loans page. A few reputable purchase-rehab lenders include:

• • Kiavi (Best Perks: High LTV, Moderate Interest Rates)
  • Lending One (Best Perks: High LTV, Moderate Interest Rates)
  • Civic Financial (Best Perks: No Minimum Credit Score)
  • RCN Capital (Best Perks: Low Loan Minimum)
  • Lendency (Best Perks: High LTV, Allows Low Credit, No Cash Reserves Required)

Alternatively, you can also contact local and regional banks in your area to ask about renovation-perm loans that don’t require a refinance upon completing the renovations.

Final Thoughts

Buying a fixer-upper, while a risk, also offers great reward if planned and financed strategically. Make sure to know exactly what you are getting yourself into and learn how to handle a fixer-upper before pulling the trigger.

Most importantly, generously estimate all costs because projects such as home renovation or improvement, more often than not, come with hidden costs or mishaps that we don’t see coming.♦

What do you wish you knew when you were learning how to buy a fixer-upper? If you haven’t bought one yet, what are your biggest questions about how to get a fixer-upper without losing money?

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About the Author

Emma Dudley is a data marketer by day and financial writer by night, early on her journey to financial independence. She lives in Baltimore but loves international travel, and enjoys the challenge of cutting-edge fashion on a cut-down budget.

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