Is Buying a Fixer-Upper Worth It?

These days, true fixer-uppers are few and far between. A more exuberant housing market has severely depleted the post-recession inventory of foreclosures and distressed homes. Still, there’s a chance you’ll stumble upon a property whose appearance is not quite as dreamy as its price tag. Here are some things to consider if the affordable home you’re eyeing needs some work.

1. Location, Location, Location

The first thing to consider when buying a home is location. If you’re considering a home in a favorable location, don’t immediately be turned off if the property needs some work. Instead, determine if this work is cosmetic. Potential repairs indicative of a good value home include, but are not limited to:

landscaping
new roof
new appliances
new paint
updating the interior

These repairs can add up quickly, but are not fundamentally unsafe to live in. You want to avoid houses that need major structural work (which are more reflective of distressed sales properties which, remember, the market has very little of.)

2. Price vs. Cost Of Repairs

Making a low-ball offer on a house that needs a new roof, for example, might not be the best approach. The market might otherwise support the list price of the house, especially if there are other interested parties. All homes will need a new roof at some point. It’s one ulterior cost you will incur as a homeowner over the longer term.

Other repairs can hit your pocketbook. How bad are the repairs? Say the roof has an economic life of five more years. The price of the home is very affordable, and the front yard needs a bit more upkeep and the interior of the home is dated. Look beyond the cosmetic repairs. Is the home quiet? Does it have a big yard? What’s the neighborhood like? What is the school district like? Can you live in the property and make the repairs over time as your finances allow and permit? Can you better afford the repairs with a home warranty?

If the answers to these questions are predominantly “no” it would probably be best to pass on the home, as you’ll probably be biting off more than you could chew. However, if you can make the repairs over time and the property is safe and inhabitable, the house may be worthwhile.

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3. Taking Out a Construction Loan

Though not as popular as they were pre-housing crisis, construction loans allow you to finance the repairs of the property. Of course, you’ll need to be able to support your mortgage as well as the debt associated with the repairs. Construction loans also generally have tighter credit requirements — lenders typically look for good credit scores and require down payments of at least 20%.

You can see where you credit stands by viewing your two free credit scores each month on Credit.com.

4. Lowering Your Down Payment

If the cost of the repairs of the property can be cash-financed, you always have the option of buying the house with less money down. Let’s say you’re buying a home and you have $50,000 for the down payment. The house needs repairs totaling $20,000. Instead of buying the home using $50,000 for the down payment, you use $30,000. The difference in the mortgage payment would be about $100 per month, depending on the house location and term of the loan.

Remember, the market for housing prices and interest rates will continue to evolve, changing your equity and potentially creating opportunities to re-structure your mortgage.

If you have the option to refinance in the future, you may be able to lower your payment or cash out your equity to replenish the cash put towards repairs. Still, avoid buying a home with the automatic expectation of refinancing in the future. Put simply, buy a home you can afford even if you cannot refinance later on.

Remember, houses can be money pits, especially re-sale homes over 25 years old. Consider working with a sharp real estate agent and loan professional to determine if a house that needs some work really makes sense for you.