Fixer-Upper Or Move-In Ready: Navigating Your First Home Purchase

Buying a fixer-upper as a first-time buyer can be a great way to save money, buy sooner, live in your ideal town, make your home your own, and build equity fast. However, it is not for the faint of heart – delays, cost over-runs, and plan changes are to be expected.

Fixer-uppers are typically older homes that require extensive repairs, from cosmetic fixes to structural work. The poor condition of these homes usually makes them less expensive, but the lower upfront cost is also attractive to first-time buyers.

There are several advantages to purchasing a fixer-upper. There are dozens of financing options available, from down payment assistance to loans that bundle renovation spending with your original mortgage. Fixer-uppers usually cost less and are more customisable than turnkey properties. You may also have less buyer competition and be able to build equity faster.

However, there are also challenges. Homeowners must wait until renovations are complete before they can move in, and they must meet standards and deadlines set by their lender. Renovations can be expensive and difficult to budget for, and unexpected issues can always arise.

Financing options

There are dozens of financing options available to first-time buyers of fixer-uppers. The Federal Housing Administration's 203(k) rehabilitation loan is one option. This type of loan is backed by the federal government and can be used to pay for structural alterations, plumbing, roofing, flooring, and more. The minimum loan amount is $5,000, and the maximum is the value of the home plus the cost of improvements, or 110% of the home's value after improvements.

Another option is the USDA renovation loan, which is designed for people living in rural areas. This loan can be used to finance up to 100% of the expected value of the home after improvements, with no minimum repair costs. However, there is a maximum loan amount of $35,000 if you want to avoid the need for a qualified inspector.

The Fannie Mae HomeStyle Renovation Mortgage is another option that provides more freedom in the types of improvements you can make. However, this loan requires a higher credit score than the FHA 203(k) loan.

If you're a veteran, you may qualify for a VA renovation loan, which allows you to include the cost of approved repairs in your total loan amount.

For smaller renovation projects, the Freddie Mac CHOICEReno eXPress loan may be a good option. This loan streamlines the standard renovation process and has a lower maximum renovation cost of 10-15% of the value of your home.

In addition to these loan options, first-time buyers can also take advantage of down payment assistance and closing cost assistance programs offered by local nonprofits or governments. These programs can provide grants or loans to help with the down payment and closing costs associated with buying a fixer-upper.

The pros of buying a fixer-upper

There are several advantages to buying a fixer-upper as a first-time buyer. Here are some of the pros:

Lower Purchase Price

Fixer-uppers are usually available at a lower price than turnkey, move-in ready homes. This is because they require major maintenance work and are often older homes without modern upgrades or safety standards. The lower price point can make fixer-uppers an attractive option for first-time buyers on a tight budget.

Less Competition

Many homebuyers prefer move-in ready homes, so there is typically less competition for fixer-uppers. This means first-time buyers may have an easier time securing their desired property and may have more bargaining power with the seller.

Customization and Creative Control

Fixer-uppers offer buyers the opportunity to customize their homes according to their preferences and lifestyle. Buyers can make structural changes, such as remodelling the kitchen or expanding the living room, or add cosmetic touches like painting and applying a backsplash. This creative control allows buyers to build their dream homes.

Increased Equity

Purchasing a fixer-upper at a lower price and then completing structural and cosmetic renovations can quickly increase the home's value. This increased equity can lead to savings, provide borrowing options, and potentially cover the down payment for a more luxurious home in the future.

Financing Options

There are various financing options available for first-time buyers interested in fixer-uppers, including renovation loans and down payment assistance programs. These options can help buyers bundle their home and renovation loans into one monthly payment and provide assistance with down payments and closing costs.

The cons of buying a fixer-upper

Fixer-uppers are not for the faint of heart. They require a significant amount of time, money, and effort to bring up to a livable standard, and even then, there may be issues that are difficult and expensive to address. Here are some key considerations:

Delays, Cost Overruns, and Plan Changes

Delays are common in renovation projects due to unforeseen issues, supply chain problems, unexpected weather, and other factors. It is important to expect and plan for these delays to avoid additional stress and disappointment. Renovation projects can also easily exceed the initial budget due to unexpected issues and mistakes. It is crucial to have a comprehensive plan and budget in place and to be prepared for potential cost overruns.

Need for Additional Funds

Fixer-uppers often require a lot of cash after the sale to fund renovations, especially if there are major issues such as roof problems, foundation issues, water damage, or non-functional heating systems. It is important to assess the true cost of renovations on a case-by-case basis and ensure you have the necessary funds available.

Living in a Construction Zone

Living in a home that is undergoing major renovations can be incredibly chaotic and disruptive. If the renovations are extensive, you may need to pay for alternative accommodation during the construction period. Even if you remain in the home, you will have to deal with noise, dust, and a lack of access to certain rooms or amenities. This can impact your productivity and quality of life, especially if you work from home or have young children.

Non-Value-Adding Work

While structural repairs and updates are critical to making the home livable, they may not necessarily add value to the property. On the other hand, cosmetic touches and upgrades that create "wow factor" kitchens, bathrooms, and bedrooms are often what increases the home's value. This can be a trap for buyers who spend most of their budget on essential repairs, only to find they don't have the funds left to create the Instagram-worthy home they envisioned.

Difficult to Fully Estimate Repairs

It can be challenging to fully understand the extent of the repairs needed in a fixer-upper, especially for those without a construction background. Unforeseen issues such as foundation problems, unpermitted work, code violations, rot, mold, or dangerous substances can cause the renovation budget to skyrocket. A thorough home inspection is crucial to identify potential issues, but even then, there may be surprises during the renovation process.

How to find a fixer-upper

Finding the right fixer-upper is all about knowing where to look. Here are some strategies to help you find the perfect fixer-upper property.

Drive Around Your Target Neighbourhoods

A tried-and-true method for finding fixer-uppers is to drive around your desired neighbourhoods and look for properties that appear to be in need of some TLC. Keep an eye out for telltale signs such as neglected lawn care, broken or boarded-up windows, peeling paint, and uncollected newspapers on the porch. If you find a property that fits the bill, make sure to write down the address so you can find out who owns it.

Use Online Tools and Databases

Take advantage of online tools and databases such as Zillow, Trulia, or Mashvisor, which allow you to search for homes below market value or specifically for fixer-uppers. You can use keywords such as "fixer-upper", "needs work", or "TLC" to narrow down your options.

Additionally, you can access the Multiple Listing Service (MLS), which is an online database of homes for sale across the country. However, only licensed real estate agents have access to MLS, so you may need to work with an agent or broker to find potential fixer-uppers in your desired areas.

Work with a Real Estate Agent

A local buyer's agent can be a valuable resource in your search for fixer-upper homes. They often have insider knowledge about homes that are about to hit the market and can give you a heads up before competing buyers even know about the property. Agents also have a good understanding of neighbourhood dynamics and can advise you on whether a home is being offered below market value.

Attend Auctions and Search for Foreclosures

Real estate auctions and foreclosures are excellent places to find fixer-upper properties at discounted prices. Homes often end up at auctions due to owners defaulting on their mortgage payments or failing to pay property taxes. You can find auction listings in your local newspaper, on county websites, or on sites like Auction.com.

When considering foreclosures, keep in mind that these properties are usually sold "as-is", so disclosures and inspections may not be available. Make sure to budget for any surprise issues that may arise.

Explore Bank and Lender Websites

Financial institutions often possess foreclosed properties that they are motivated to sell at a discount. You can find these listings on bank and lender websites, typically under "REO" (Real Estate Owned) or "Bank-Owned Homes".

Check Tax Records for Delinquent Taxes

Delinquent taxes are a sign that property owners are in financial trouble and have likely delayed maintenance, resulting in a fixer-upper situation. You can obtain a list of tax-delinquent properties in your area from your local tax assessor's office or their website.

Renovation costs

• Assess the upfront cost of the home and the potential material and labour costs of renovations. Consider both big and small expenses, such as plumbers, electricians, carpenters, and any new doorknobs or light fixtures.
• Hidden problems, such as dry rot, pests, or foundation issues, can add tens of thousands of dollars to the total renovation cost. It's important to hire professionals, such as a home inspector and a licensed general contractor, to identify these issues and provide accurate estimates.
• Consider the interest on any loans you may need to take out to pay for the renovations. If you're planning to put expenses on a credit card, for example, you could end up owing significant amounts in interest.
• Account for any extra living expenses if you're unable to use certain parts of the home during renovations, such as the kitchen or laundry area.
• Factor in the cost of your time if you need to take time off work to oversee or work on the project.
• Always add a buffer to your budget to account for unexpected expenses and delays. It's recommended to have at least 3% to 5% extra in your budget to cover additional costs, and to allow for wiggle room in your timeline.
• If you're planning to hire contractors, remember to include the cost of their services in your budget.
• If you're considering a DIY approach, be realistic about your skills and the time commitment required. While DIY can save you money, it can also cost more in the long run if mistakes are made.
• Be cautious of hidden damage. A thorough inspection is crucial, but even then, there may be issues that are difficult to identify until you start the renovation.

To estimate the maximum price you should offer for a fixer-upper, start by calculating the value of the home if it didn't need any work. Then, subtract the estimated cost of the needed repairs and renovations. This will give you a logical price to offer for the property.

Frequently asked questions