First thing’s first: What’s a fixer upper?
A "fixer upper" home is a property that might need significant repairs, renovations, or remodeling. These homes tend to be priced lower than other properties in the area due to their condition, making them an attractive option for buyers looking for a lower-cost housing option or an opportunity to make a profit. The appeal of fixer uppers lies in the potential to transform a property into a personalized dream home while also potentially increasing its value when it’s time to sell.
In this guide...
- Why fixer upper homes are popular
- Pros of buying a fixer upper
- Cons of buying a fixer upper
- Alternatives to fixer upper homes
Why buying a fixer upper home has become so popular in recent years
In recent years, fixer uppers have surged in popularity due to several factors. Firstly, the rise of home improvement and house-flipping shows on television has sparked a growing interest in the idea of renovating and transforming a property. Such shows have made the process look exciting, creative, and potentially lucrative, inspiring many to take on the challenge of tackling a fixer upper themselves.
There is also potential for profit in fixer uppers, though many buyers underestimate the amount of effort, money, and expertise needed to remodel and resell a home. This can quickly eat away at any potential earnings, making a fixer upper a risky choice for most people. Today we’ll explore the pros, cons, and alternatives to buying a fixer upper home.
The Pros of buying a fixer upper
Lower down payment and mortgage payment
As distressed homes or “fixer uppers” tend to be priced lower or subject to more negotiation due to their condition, the amount of money required to purchase, and therefore the monthly payment is lower. In a competitive market, move-in ready homes often have high demand, driving prices upward, making the price tag of a fixer upper seem like an enticing opportunity for motivated DIY-ers.
There are several creative loan product types designed for home owners to purchase, renovate, and refinance a primary residence. These products often come with low down payment requirements and lower interest rates.
There can be plenty of upside when you’re ready to sell
Purchasing a property with potential gives room for value to be added by the owner through construction. There is often a margin between value and total cost invested in the home - this is called sweat equity. Sweat equity is the equity built in home ownership through the effort and risk of renovating a home, both physical and financial.
Appreciation is the correlation between time, demand, and value. Over time the more demand there is in a given area, the greater the value will increase.
The profitable portion of this strategy comes in when you sell the property for more than the cost to buy and renovate the property.
You have the opportunity to design the exact home you want
Purchasing and renovating your own home gives you full control to make interior layout, finish, and design decisions that you are not allowed in a turnkey home. There are services available to help guide you through this process, and determine the level of customization suited to your home and budget.
The Cons of buying a fixer upper
Repairs and renovations can be extremely expensive
The biggest consideration in renovating a home is the true cost associated with the scope of work. Often, certain costs of construction are overlooked or arise unexpectedly as the project progresses. Aligning with the right contractor early in the project is the best way to avoid this misstep and ensure that these hidden costs are avoided when possible.
The home value will only increase if renovations are done well
As discussed above, the reputation and ability of your selected contractor is key. Realistic costs today are better than surprises tomorrow. Particularly in the functional aspects of the home such as HVAC, plumbing, and electrical, the cost of repairing after the home’s completion will quickly turn the deal upside down. If you're going the DIY route, beware of the final quality of the finished product, as it may not bode well for resale value.
You won’t have a move-in ready home to live in
When purchasing a fixer upper, there is often a period of time during which the ability to live in the home is interrupted or impossible due to active construction. It is important to consider the scale of renovations you are going to be completing before starting construction. Do you have somewhere to stay in the meantime? Have you factored that into your cost and how it'll affect your margin when it's time to sell?
The market is unpredictable, so buying strictly as an investment is always a risk.
There is always a risk associated with every upside, and real estate is no exception. When evaluating a fixer upper for purchase, be sure to take into consideration the current and future market possibilities, location, and potential cost increases. Even if the worst case scenario comes to be, the deal should still make sense if you are to move forward with it.
What are the alternatives to buying a fixer upper?
Buy a new construction home
Purchasing a new home with optional customizations from a developer mitigates the risk while allowing for creative influence over certain areas of the home’s design. The buyer does not need to close on the home until complete or accept its condition until satisfied. This is a softer approach with a similar result to buying a fixer upper. You can even buy a home that's currently being built and offer your design input to the developer - read about the experience of a client of ours who did just that!
Buy a move-in ready home in an up and coming area
This investment strategy does carry some risk, as you're taking a bet on the neighborhood you're buying in. Be sure to research the area and the real estate market, and consider working with a real estate team that specializes in up and coming neighborhoods. The benefit to this alternative is that you'll have a home you love right away, and you won't be on the hook to renovate before you resell. If the market does work in your favor, you have the opportunity to turn a profit without the extra effort of making home improvements.
Buy a home that’s good quality, but could use a few major upgrades over the years.
This is what we call a cosmetic renovation. It allows for the homeowner to live in the home during various stages of construction as it is often restricted to small areas of the home at a time. By slowly executing the renovations the financial commitment is also spread out over time, making it a more budget friendly strategy while still increasing the value of the home.
Fixer uppers: The bottom line
While there is potential for profit and the possibility to create your dream home on a budget, buying a fixer upper is no walk in the park. If this is the route you plan to take, here is our best advice to approach the task:
- Leave room in your budget for the unexpected, and have a plan B if the market takes a turn and you can't turn a profit right away.
- Partner with professionals that you can trust. This will take stress off your plate and gives you a better guarantee that work is high quality when it comes time to sell.
- Be realistic about why you want to buy a fixer upper, and talk to your real estate agent about alternatives that might make sense for you.
Looking for a real estate team you can trust in the Philadelphia area? Get in touch with MUVE | PHL - we help buyers find or design homes they love.
