If you're looking to buy a house, you may be torn between a home that's move-in ready or a fixer-upper. As the name implies, a fixer-upper needs work -- sometimes a lot of it, whereas move-in ready homes allow you to unpack, relax, and enjoy your new abode. Here's what you need to know if you're thinking you might buy a fixer-upper.
Benefits of buying a fixer-upper
A fixer-upper can be a smart real estate investment for first-time homebuyers and seasoned owners alike. It pays to consider one for these reasons:
1. A lower purchase price
Fixer-upper homes tend to sell for less money than homes that are move-in ready. If you're extremely handy and think you can handle an extensive renovation project, then the amount you spend to buy your house and fix it up may be far less than what you'd pay for a home in the area that's in better shape.
2. The chance to get into a neighborhood that's otherwise unaffordable
If your target neighborhood is one where homes generally sell for far more than you can afford, a fixer-upper is a great way to get into the zip code you want without having to stretch yourself too thin financially. Or, to put it another way, a fixer-upper could be your ticket to great schools, attractive amenities, and conveniences like public transportation.
Some people buy a fixer-upper to live in themselves, but if you're looking for an investment property, a fixer-upper could be a good bet. This especially holds true if you have experience flipping houses and know what it takes to do so successfully.
4. The opportunity to customize your home
When you buy a move-in ready house, there's generally not much work to be done, and that's actually a bad thing if you're hoping to make your living space your own. The upside of buying a fixer-upper is that if you're willing to spend the money on renovations, you have a chance to turn that property into your dream home. You can build the trendy kitchen you've always wanted or enjoy a finished basement with a theater room and wet bar.
5. Low property taxes
Property taxes are determined by taking a town's local tax rate and multiplying it by a home's assessed value. A house that's in bad shape won't have such a high value, at least not at first, so you may get a break on property taxes when you first move in.
Drawbacks of buying a fixer-upper
Clearly, there are plenty of good reasons to buy a fixer-upper. But before you do, consider these disadvantages:
If you're not careful, your fixer-upper home could easily turn into a money pit. Sometimes, even experienced real estate investors get burned when they buy fixer-uppers and discover that those properties have more problems than an inspection reveals. And if you wind up with a lot of work -- and costs -- on your hands, you could wind up spending way more on a fixer-upper than you'd spend on a move-in ready home a block away.
2. The time it could take for that house to be livable
Many buyers look forward to closing on a mortgage and settling into their new homes. But if you buy a fixer-upper, it could take quite some time for that home to be in good enough shape for you to enjoy living in it.
3. Shocking property tax hikes
When you first buy a fixer-upper, you may get a break on your property taxes. But once that home is renovated and reassessed, you may find that those taxes jump substantially, thereby making that house less affordable. And while you can use up-to-date homes in the area as a benchmark for what your taxes might climb to, keep in mind that if your finished project is more upgraded, you'll pay the price tax-wise.
How to get the money to renovate a fixer-upper
There are different renovation loan options you can look at when you're buying a home that needs work. One option is the Fannie Mae HomeStyle loan, which is a mortgage that includes the cost of home repairs. Another option is an FHA 203k, which is similar to the HomeStyle loan, only it's available to homebuyers whose credit isn't as great. The latter, however, could be more expensive from a borrowing perspective than the former.
Another route you can take is to sign a conventional mortgage, and then take out a home equity loan or line of credit to fund your renovations. That option, however, assumes that you've made enough of a down payment to have at least 20% equity in that property.
How to find a fixer-upper
A good way to find a fixer-upper is to work with a real estate agent who specializes in them or who knows the area you're looking at really well and is apt to learn of homes in not-so-great shape that come onto the market. Another option is to look at short sales or foreclosures. Often these homes are neglected when their owners lack the funds for upkeep, so remember, that may mean taking on the risk of more problems than you might anticipate.
Is a fixer-upper right for you?
Clearly there are pros and cons to buying a fixer-upper, so you'll need to weigh the good against the bad to see what makes sense for you. Consider how you feel about the risks involved. If the idea of buying a home with known problems keeps you up at night, then a fixer-upper may not be right for you. But if you're a handy person who enjoys a challenge and you like the idea of sinking your own time and creativity into a house, then buying a fixer-upper could end up being a great decision that serves you well logistically and financially for a very long time.