By Joseph Johnson
A fixer upper can be irresistible to the do-it-yourselfer, who has a natural inclination towards painting and plumbing and flooring. But just as the siren’s song is a trap for the unwary sailor, so peeling paint and an overgrown lawn can be a trap for the unwary homebuyer. Here’s how to make sure you find yourself in a charmer that will return something for your investment of time and money and avoid a devious siren of a home that would do nothing but bleed you of money and energy.
You probably already know you have to look around for a good fix up prospect, but be prepared to look longer and harder than you expected. You know to look for the magic words and phrases: “handyman special”, “needs TLC”, or “diamond in the rough.” Look beyond those phrases for descriptions such as “charming”, “lived in”, sometimes even the phrase “great starter home” means “needs work.” Most fixer-uppers command very little attention, and if they are in bad enough shape, the seller is not usually advertising it heavily. Look at foreclosure sales, government seizures and estate sales. Vacant homes, particularly those that have been on the market for a long time, often sell below market value and only need minor cosmetic work. When looking to purchase a fixer upper don’t be put off by inattention from the seller or real estate agents, this is probably a good thing.
You may have to search far and wide for a good fixer-upper, but you don’t want to cast too broad a net. You should only be looking at properties in good neighborhoods because when looking for a fixer-upper location matters just as much as it does when buying a new, problem-free home. The most valuable homes, even those in need of sprucing up, owe a good portion of their value to being located in safe neighborhoods with good schools and infrastructure (look for clean parks) and neighbors who care enough to mow their lawns and petition for speed bumps.
Accordingly, it is always better to buy a smaller house in a good location than it is to buy a larger house in a bad location. For that matter, it makes good sense to buy a smaller house; doing so leaves room for you to expand the house if you like or to allow your investment to increase relative to the surrounding properties or to allow you the chance to recover your money if you have to resell quickly. On the other hand, unless there is room to expand, you should avoid a fixer-upper that doesn’t fit in with its neighborhood such as a two bedroom, two-bath house in neighborhood full of three and four bedroom homes. Even if you have the resources to add the extra rooms and do so in a way that maintains the natural look of the house, it is likely to take a long time to recover your investment.
It is also very important that the houses you’re looking at do not need to be fixed up too much. You want to avoid houses with major structural problems and instead choose ones with cosmetic issues. Be especially wary of a cracked foundation or a leaky roof or plumbing as these can cause myriad other structural issues that you may not discover until after you have bought the house and begun work on it. You can find clues as to whether the house is structurally sound by examining the ceiling and the basement. There is only a certain amount of monetary return you can get on home improvements, and it is unlikely that you will recover the cost of rewiring or re-plumbing. However, you will make money on putting on a fresh coat of paint, inside and out, modernizing kitchen appliances and planting privacy hedges.
When evaluating whether the necessary fix-ups are worth it, always keep in mind that repairs and improvements that can’t be seen are unlikely to bring you any money. If you overhaul the plumbing, buyers are likely to see your work as simply doing what is necessary to bring the house up to par. This is so, even if you did more than just fix leaky faucets, but actually installed state of the art copper plumbing. Don’t go to the opposite extreme either. That is, put too many bells and whistles on a house. If all it needs is a good coat of paint, then just do that. You want to be sure not to over-improve the home and price it out of its neighborhood. You will not sell the house later and you will not recover the cost of the renovations.
One thing you never want to take on because it is not fixable is a property with environmental issues. Walk away from properties that may have environmental issues as you could end up having to pay millions for the clean up of the property, even if you did not contaminate it and did not know it was contaminated, even if you only owned it for a month and sold it to someone else. It doesn’t come up much, but avoid homes built on old industrial sites particularly dry cleaners and manufacturing plants.
Once you find a property that seems acceptable, have a home inspection company check it out to make sure you didn’t miss any major problems or that the problems you did pick up on are not larger than they seem. Sometimes, peeling paint is just peeling paint and sometimes it’s a sign of water damage. Knowing which it is can keep you from making a costly mistake. Another great way to determine if there are any hidden problems with a house that might turn out to be more than you can handle is to check court and insurance records. Check to see if the builder has ever been sued or if there has been any other claims pertaining to the home. Have their been any claims against the homeowner’s insurance? What was the nature of those claims? If someone needed a broken window replaced, that’s one thing. A flooded basement is quite another.
The last thing you have to do is make the right offer on the property. To figure out what kind of offer is appropriate, first add up the cost of all renovations you will do based on the condition of the house. Subtract that from the likely resale value and then subtract about five to ten percent for contingencies and inflation. If you can’t cover at least those things, don’t by the house.
Buying a fixer upper can be fun, but it can also be a trap for the unwary. Go into it with all the information you can get and with your eyes wide open and you should be able to make a profit and have a great time fixing up the house.