What to Know About Buying a Fixer-Upper
Buying a fixer-upper property has become popularized thanks to home improvement shows. But buying a fixer-upper–either to keep or resell–isn’t just for TV.
Why purchase a fixer-upper?
There are many reasons to consider purchasing a fixer-upper, such as:
· Profit potential–If you choose to rent or sell the home, you have an opportunity to earn an income or make a profit.
· Build equity–If you plan to occupy the home, you can build equity over time and eventually pass the home to family members.
· Reduced competition–Buyers may be reluctant to purchase properties that require extensive renovations. A smaller competition pool may increase your chances of acquiring the property at a lower cost.
Because there are many potential benefits to buying a fixer-upper, it’s important to understand the process and the potential problems that can come with it.
Location, location, location
Location is key when purchasing any piece of real estate. Look for properties in desirable areas or where property values are on the rise. The renovations needed could elevate the home to the level of the neighboring houses. Updating a home in an undesirable neighborhood may leave you with a property that costs more to renovate than you would make by reselling it.
What about foreclosures?
Purchasing foreclosed properties has become increasingly popular for those looking to profit from real estate; however, buying bank-owned property can come with many possible drawbacks. In many instances, homes owned by a bank cannot be fully inspected prior to purchase, and the bank may be unable to provide information on the condition of the home. This can lead to some unwelcome surprises when you finally get to see the property you’ve purchased. When purchasing a foreclosed home, anticipate some setbacks and create a contingency reserve for unforeseen costs.
Easy vs. expensive fixes
Whether you’re planning to do the work yourself or hire an expert, you need to know how difficult, time-consuming, and expensive the improvements will be.
Easy fixes include painting walls, removing wallpaper, replacing light fixtures and fans, and refinishing floors. More expensive fixes include replacing a roof, plumbing, electrical, or windows; an extensive kitchen or bath remodel; and replacing HVAC systems or adding central air.
Some renovations add more value to the home than others. When making renovation decisions, consider both the estimated cost and the home’s projected resale value. Less expensive renovations may generate a higher profit margin, while more expensive renovations might leave you with a minimum return on the money you spent.
While renovations are one of the most important (and exciting) aspects of owning a fixer-upper, also consider the potential tax consequences that come with buying any piece of real estate. The tax implications will vary depending on whether you live in the home, rent it out, sell it right away, or hold on to it for a while for resale. Talk to your tax professional to learn more about the tax consequences for your specific situation.
Financing your fixer-upper
Both the Federal Housing Administration (FHA) and Fannie Mae offer loan programs specifically for people renovating a home.
The FHA 203(k) Rehab Loan is a government-funded loan that can help you finance both the purchase of the home and the projected cost of renovations in one mortgage. This loan program is limited to the rehabilitation of homes that will be owner occupied, and therefore might be a good option if you want to invest in a fixer-upper that will stay in your family. (Source: U.S. Department of Housing and Urban Development, 203(k) Rehab Mortgage Insurance)
Unlike 203(k) loans, the Fannie Mae HomeStyle Loan is not limited to the renovation of homes that will be owner occupied; therefore, this loan program can be used by homebuyers who wish to renovate a fixer-upper into a vacation home or rental property. There are no restrictions on the types of repairs allowed except that all repairs must be on the property and must add value to the home. (Source: Fannie Mae HomeStyle Renovation Mortgage Fact Sheet, August 2014)