In October 2020, Mike and Bea Francis-McRae bought a five-bedroom, two-bathroom Victorian mansion an hour outside of Chicago for only $72,500. With 3,688 square feet, a spiral staircase, and amazingly detailed wood trim, the couple was thrilled to become the owners of such a grand home.
With a leaky roof, deteriorating woodwork, and a family of raccoons nesting in the carpet, the Francis-Mcrae’s new mansion had an estimated $200,000 worth of needed repairs. Despite the high renovation costs, the price was still lower than nearby similarly-sized homes.
Many homebuyers like the Francis-McRaes invest in fixer-uppers because of their affordability. These homes present an opportunity to either house flip for a profit or create a forever home designed specifically to your tastes.
In 2022, the average house flipper made a gross profit of $67,000. While renovating a fixer-upper can be profitable, it’s important to be fully informed before investing in a fixer-upper. A fixer-upper can quickly become a headache and a financial burden for homeowners without a strong plan for renovations.
Learn how to renovate a fixer-upper house without breaking the bank or losing your motivation. The following tips and tricks will teach you how to buy a fixer-upper and renovate it for a great ROI.
- Buying a fixer-upper is hard work, but it can be rewarding for homeowners who enjoy the ability to customize their houses.
- In 2022, 82% of millennial home buyers said they would be willing to buy a fixer-upper, which is a 14% jump from 2019.
- 22% of buyers who purchased fixer-uppers regret the purchase.
- 77% of homeowners find issues they don’t anticipate within the first year of home ownership.
- A good home inspection, a solid renovation plan, and a realistic budget can protect you from the risk of your fixer-upper becoming a money pit.
What Is a Fixer Upper?
A fixer-upper is a home that will need repairs and renovations after purchase. It’s common to find water damage, leaky roofs, old electrical systems, and corroded pipes in fixer-uppers. Despite the downsides, fixer-uppers allow buyers to access homeownership at a significantly lower cost. Foreclosures, former rentals, and homes built over 50 years ago are often fixer-uppers.
Is Buying a Fixer-Upper a Good Investment?
In 2022, 82% of millennial home buyers would buy a fixer-upper, which is a huge jump from 2019, when just 68% of millennials said the same. The rise in popularity of fixer-uppers is largely driven by the sharp rise in home values and the decrease in inventory over the past few years. Here’s why homebuyers like run-down houses:
- Affordability: Many homebuyers don’t know how to get into real estate with the current high home values. Fixer-uppers allow homebuyers to begin building home equity and get the size and location they want without going over budget.
- Less Competition: In 2021, 55% of offers to home sellers were above the asking price, and the average home got four offers. In some of the most competitive markets, it was common to see dozens of offers per home and offers of $100,000 over the asking price. With fewer interested buyers, fixer-uppers provided relief to homebuyers who couldn’t compete with dozens of other buyers.
Although the housing market has slowed down in 2022, the most desirable homes can still sell quickly. Fixer-uppers allow buyers more time and more negotiation power during the process of buying a house.
- Customizable: Many people enjoy making design choices and turning their fixer-upper into their dream home. As the owner of a fixer-upper house, you’ll have the final say in all decisions. Your home can be customized perfectly to your tastes.
Although a rising number of buyers are willing to purchase run-down houses, 22% regret the purchase. Here’s what makes owning a fixer-upper difficult:
- Challenging budgets: The 2022 U.S. Houzz & Home Study found that 34% of homeowners went over budget during their home improvement projects in the past year. The study says, “The reasons are that products or services were costlier than expected, projects were more complex than anticipated, and unexpected issues that needed to be addressed were discovered.”
- Living in a home under construction: If your fixer-upper is your primary residence, you’ll likely have disruptions to your daily life while working on renovations. It can be difficult to go without full access to a kitchen, bathroom, or bedroom for any length of time.
- Unexpected issues: While the effort you initially expect to put into a fixer-upper may seem reasonable, many issues in a home are not immediately obvious. “The reality is, problems do come up. When you go to address something, it creates an issue where something else has to be done . . . [It’s] this domino effect where you’re spending more and more money on things that you hadn’t anticipated to start with,” explains Southern California real estate agent Jeb Smith.
4 Tips for Buying a Fixer-Upper Home
1. Set a Realistic Budget
Before you buy a fixer-upper, you should set a budget for how much you’re willing to spend. Be sure to allow some wiggle room in your budget. Home renovation magazine, House Method, recommends budgeting at least 20% over the estimated renovation costs. Home Advisor reports the following cost range for common projects:
Whether your project lands at the high or low end of these ranges depends on the size of your home, the quality of materials you use, and the market you’re in. For maximum budgeting accuracy, break down your budget into smaller categories. Get quotes from contractors for cabinetry, flooring, demolition, paint, and any other feature you plan to update.
Real estate investor and experienced house flipper Ryan Pineda says, “If you get a property in contract or you’re close on a deal, you should absolutely go walk it with a [general contractor]. In fact, I recommend walking it with three [general contractors]. That way, you have a for sure number on what it’s going to cost you, and they’re going to be able to see things that you might miss.”
2. Look for Properties With Permanent Desirable Features
While shopping for a fixer-upper, you may see a lot of homes with ugly aesthetics, terrible floor plans, and run-down appliances. But you can change each of those things to be more desirable. Property features like lot size and location, however, are permanent. If you purchase a home with a beautiful view next to a great school, you’ll always have a competitive advantage when it’s time to sell. On the other hand, a home next to a freeway will be slow to increase in value, no matter how many renovations you do.
Similar to location, lot size is important to consider when looking at fixer-uppers because it cannot be changed. A lot without space for parking or a yard will always be worth less to buyers, even if the home on the lot has been completely upgraded.
In addition to this, real estate expert Leneiva Hill tells Talk of the Town to look for:
- The house’s curb appeal in the neighborhood it is located in
- Structural issues such as cracking in the foundation or a bad roof
- The amount of space in the home
- Load-bearing walls that might prevent you from opening up a floor plan
3. Anticipate the Unexpected
Ridley Wills, the owner of the design-build firm Wills Co., explains why homeowners need to be prepared for issues they didn’t plan for. “You don’t know what you’re going to find before you start tearing down walls. Electrical work may not have been done to code. There could be asbestos or mold hiding behind plaster. You just don’t know,” he cautions.
Other factors like weather conditions or city permit delays can impact both your timeline and your budget. When you expect the unexpected, these issues won’t deter you from being able to complete your renovations.
In 2021, insurance firm Hippo surveyed over 1,000 homeowners nationwide, finding that 77% had house issues requiring repairs that they didn’t anticipate within the first year of home ownership. Furthermore, 53% of those homeowners spent between $1,000 and $5,000 repairing unexpected problems.
While you might experience unpredicted issues, catching them early will prevent even costlier problems in the future. Owner of contracting company Emerald City Dream Homes Liem Tran advises, “It’s only a problem if you see it as one. When unexpected repairs arise, it’s an opportunity for the homeowner to repair the issue before further damage spreads to the rest of the home.”
4. Explore Financing Options for Buying a Fixer-Upper
The easiest way to finance a renovation project is with cash, but that’s often not an option for owners of fixer-uppers. Remodeling a fixer-upper can cost tens of thousands of dollars, which many people don’t have available in cash. Luckily, there are financing options available, such as the ones listed below.
A renovation mortgage allows borrowers to fund the purchase of a property and the renovation costs with one loan. Here are a few options:
- HomeStyle: Borrowers must have a credit score of at least 620 and a debt-to-income ratio of 45% to qualify for this renovation loan.
- FHA 203(k): The lending requirements for an FHA 203(k) loan are less strict, allowing borrowers with lower credit scores to obtain the funding they need.
- ChoiceRenovation: This loan can be used for traditional renovations as well as upgrades to protect against natural disasters. It also allows buyers to finance the construction of accessory dwelling units (ADUs) on their properties.
Home Equity Financing
If you’ve owned your fixer-upper for a few years, you may be able to tap into your equity to finance renovations. If you have at least 25% equity in your home, you could use a cash-out refinance, HELOC, or home equity to access enough cash to complete your remodel.
In 2021, 35% of homeowners financed a renovation project with a credit card. But with interest rates typically between 14% and 25%, this can be an expensive option, especially if you aren’t able to quickly pay off the charges.
If you choose to finance renovations with a credit card, look for a card that offers an introductory period with no interest. Additionally, make sure you have a plan for paying off the charges before the no-interest period ends.
Who Should Invest in Fixer Uppers?
Fixer-uppers are best for buyers who:
- Are looking for an affordable primary residence.
- Can put up with the inconvenience of living in a home under construction.
- Have done the research necessary to avoid purchasing money-pit homes.
- Want to begin building equity through real estate.
Many fix-and-flip investors are eager to buy fixer-uppers to renovate and sell the home for a profit quickly. While skilled and experienced house flippers can earn money with this strategy, it’s generally best to choose move-in-ready homes as an investor unless you have a high-risk tolerance and a strong knowledge of house flipping.
Whether you’re flipping a home for a profit or buying a fixer-upper for yourself, Drew Scott, co-host of HGTV’s Property Brothers, says you don’t have to be an expert in construction to invest in a fixer-upper. While some people think they should DIY their home renovation projects, Scott says, “Use professionals. People think: ‘I’m going to save a bunch of money. I’m going to do this myself. I’ll be my own general contractor.’ Nothing will derail a project faster . . . use professionals when you need to use professionals.”
Expect to Invest Sweat Equity When Buying a Fixer-Upper
Sweat equity—the unpaid labor and mental effort you put into your home—is a major part of the life of every owner of a fixer-upper. Remodeling a property takes tons of time, energy, and money. But it can be rewarding to see your efforts transform a property from a disaster to a beautiful, well-loved home.
Joanna Gaines, a New York Times bestselling author and the co-host of HGTV’s Fixer Upper, gives homeowners advice on tackling a home remodel without getting overwhelmed. “I always say just start small. It’s kinda like anything in life—like you can dream really big, but to really start getting things moving and make things a reality, you just gotta kinda look at the smallest thing. Tackle that. Then go to the next thing and just start getting your rhythm,” Gaines says.
To take the first steps in purchasing a fixer-upper:
- Get in touch with an agent
- Speak with a lender
- Evaluate your financial and time capacity to contribute to a home renovation
If you’re not sure buying a fixer-upper is for you, check out “Best Investment Properties to Start With as a Real Estate Investor“ to learn about other types of properties that can help you get started in real estate investing.
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- Fortune. “7 months into the pandemic, a British millennial couple bought a run-down Victorian mansion for $72,500. Now they’re turning it into their dream home. Take a look inside.”
- Zillow. “3590 S Melon Dr, Saint Anne, IL 60964.”
- Real Estate Witch. “Millennial Home Buyer Report: 2022 Edition.”
- Houzz. “2022 Houzz & Home: Overview of U.S. Renovation in 2021 & 2022.”
- Jeb Smith Channel. “Do NOT buy a FIXER UPPER.”
- HomeAdvisor. “How Much Does A Kitchen Remodel Cost?”
- HomeAdvisor. “How Much Does It Cost To Remodel A Bathroom?”
- Home Advisor. “What Is The Average Cost Of Remodeling A Basement?”
- Ryan Pineda Show. “Top 5 House Flipping Mistakes – I’ve Lost Thousands From Them.”
- Talk of the Town. “Expert advice for what to look for when buying a fixer upper.” https://www.youtube.com/watch?v=EDRwxnwtgvs
- House Method. “How Much Should You Really Be Budgeting for a Home Renovation?”
- Washington Post. “How to set your budget for a big home improvement project.”
- Federal Deposit Insurance Corporation. “HomeStyle® Renovation Mortgage.”
- U.S. Department of Housing and Urban Development. “203(K) REHAB MORTGAGE INSURANCE.”
- Freddie Mac. “CHOICERenovation® Mortgages.”
- The Drew Barrymore Show. “Chip and Joanna Gaines Share Key to Tackling a Big Renovation: Start Small | Drew & A.”
- Hippo. “Hippo 2021 Homeownership Report.”
- Seattle Mag. “Expert Tips for Your Next Remodel Project.”