Worst House – Best Block

Keep in mind that real estate is all about location. If you buy a home that needs a lot of work on a block where all the homes need a lot of work, the remodel just won't pay off. Buyers are not likely to pay top dollar for a fixed-up home next to neighboring homes with flaking paint, decrepit steps or oil-stained driveways. Instead, buy the worst house on the best block that you can afford. Such locations will already have an established record of buyers willing to purchase fixed-up homes at attractive prices.

Best Returns on Investment

Aim for a house that looks bad but has upgraded systems: a modern furnace, copper plumbing, circuit breakers instead of fuses and a newer roof. These features are expensive but, surprisingly, do not increase the value of property substantially. Buyers will look for these however, so starting with a property that includes one or several of them will allow you to concentrate on making less-expensive improvements that return more on your investment.

Some of the simplest projects bring the best returns:

• Replacing the front door, for instance, can bring a profit of 30 cents on the dollar beyond the cost.
• A fresh coat of paint is also always a worthwhile investment.
• Best of all are homes that are structurally sound but simply dirty. These can be sold at a profit with only a thorough cleaning.

The Ideal Fixer-Upper

The perfect fixer-upper is the home that everybody will want in the future but that nobody wants right now. Most homebuyers, especially first-timers, demand a home in pristine condition, a turnkey property that's ready for occupancy. The irony is that many imperfections that turn people off such as: peeling paint, worn carpets, or dated fixtures, are easily correctable. Yet because they're tough to see past, a home suffering from them often stays on the market for a longer time period.

Remember, if you make a purchase offer for a fixer-upper at the right price, you start making money the day you close escrow. And that's even before you consider the potential for big resale profit. The time to think about selling is the day that you buy, even if you have no immediate plans to move.

Note: Not all fixer-uppers have potential so take your time to carefully consider which home to renovate.

The Location

As the real estate saying goes: Location, location, location!

Location is always king. After all, you can change a lot about a home, but you usually can’t move it. Look for homes in popular areas and/or good school districts. If possible, choose ones that offer privacy from busy roads and commercial structures.

Don't buy a fixer-upper situated on a busy intersection, next to a school, or across the street from an entrance to a landfill. In other words, the sort of undesirable locale that sinks even houses in tip-top shape. Do seek out fixers in desirable or up-and-coming neighborhoods. Examine the surrounding homes and how they are maintained. Do they look well-cared-for and mostly owner-occupied?

The Home configuration

Search for houses that have the approximate square feet and number of bedrooms and bathrooms you desire. While it is possible to add these things when renovating, they can significantly increase the cost of the renovation, especially if you expand the footprint of a house.

The best type of fixer-upper to buy is one that will appeal to the largest pool of buyers: a three-bedroom with more than one bath. Of course, say a two-bedroom home can be profitable, especially if that's the dominant size of homes in the neighborhood, but a three-bedroom house is better. If three bedrooms are better, four might be better yet: Three-bedroom buyers often will trade up to a four.

The layout

If the home is chopped up with a bad layout, realize that it can be expensive or impractical to move walls. Bedrooms at opposite ends of the home will turn off buyers with young children, as will a two-story with the master bedroom upstairs and all the other bedrooms downstairs. Kitchens with more than one entrance are desirable. Avoid places whose dining rooms serve as the central focal point of the home.

Many older homes are chopped up into several rooms and their layout may not work for you. While it is certainly possible to knock down walls and rearrange the floor plan, it can sometimes be expensive or impractical. Keep this in mind when thinking about your renovation budget. The better bet is to focus on finding a layout that allows you to keep things more or less the same.

Structurally sound

Sloping floors, cracks in the walls and water spots are major red flags that the home will need extensive and expensive structural repairs. Unless you have experience with this type of work, it may be best to look elsewhere.

Budgeting

When considering a property, you want to prepare a detailed budget to give you a rough estimate of renovation costs. A reputable contractor can also assist in the process.

Prepare to go over budget

Once you have quotes in place, the next step is to take a long, hard look at the budget you can allocate toward this renovation. With any project, you want to add a budget cushion in case you encounter an unexpected expense. This is especially true when you’re planning on buying a fixer-upper. You never know what surprises you’ll encounter once work starts.

You should use your contractor’s estimate as a starting figure. Usually, it’s recommended that you pad the estimate by around 10% to cover these incidental costs. However, when you’re looking at a home that needs a lot of work, it’s advisable to raise that buffer to 15% - 20%. This way, you’re covered in the event of one or two major setbacks. If you can’t put that amount aside, you may want to keep searching for a more affordable option.

Buy a fixer-upper based on resale value

You don’t want to buy just any fixer-upper. You want to buy one that makes sense. While everyone’s priorities will be slightly different, resale value is often a great starting point. Whether you plan on flipping the home or living in it for a while, it’s worth hedging your bets to have your investment pay off once you’re ready to sell.

Inspections for Fixer-Upper Homes

In any real estate transaction, always get a home inspection by a credentialed home inspector before committing to complete the sale. There are many types of home inspections that you may want to consider before buying a fixer-upper. Consider these the cost of getting a good deal:

Home Inspection: A home inspection is an objective visual examination of the physical structure and systems of a home, from the roof to the foundation. The standard home inspector’s report will include an evaluation of the condition of the home’s heating system, central air conditioning system, interior plumbing and electrical systems, the roof, attic, and visible structure. If problems are found, the inspector will refer you to the appropriate specialist or trades person for further evaluation.

Roof certification: If the seller hasn't already provided evidence as to the age and condition of the roof, obtaining a roof certification at the seller's expense is good business practice.

Pest inspection: Not every state has a pest problem, but if your area deals with damage from beetles, termites, or ants, ask for a pest inspection and make your purchase offer contingent on your approval of the inspection and any seller-paid repairs.

Sewer line inspection: As properties age, so do their sewer lines. Have these and septic tanks checked out.

Engineering reports: An engineer can make natural hazard or geological disclosures. Pay attention to landfills nearby, contamination reports, and other detrimental resale hazards.

NOTE: Not all fixer-uppers require equal fixing – and what needs to be fixed is somewhat subjective. A major rehab for one homebuyer is a walk in the park for another. Consider your expertise, your finances, and to what extent you want to tackle a home that requires serious renovation to make it habitable.

Decide what is right for you

Pros and cons: While a lower sales price, potential for resale profit, and a sense of personal satisfaction are certainly possible, there can also be a lot of unseen costs associated with buying a home that needs repair. 

Patience is required: Depending on the size of the renovation, a fixer-upper can take anywhere from a month to more than a year to complete. Be aware that you and your family's lives may be disrupted for a significant period of time. If this doesn't work for your lifestyle, it's best to think about a different type of property.

Money: Renovations can be very costly. If you won't have much money left over for renovations after your down payment and closing costs, you may want to consider a house you can live in while it's being fixed up. Whatever you decide, remember that there will be extra expenses no matter how carefully you plan.

Some other things to keep in mind

Financing: FHA (Federal Housing Administration) offers a 203k loan that allows borrowers to purchase a property while also financing the cost of rehabilitation.

Don't over-improve: Consider how adjacent houses have been finished. If most have lower-end finishing’s, it's probably not best to spend your money on granite counter-tops, copper bathroom fixtures, and marble floors. Your fixer-upper should be in line with or just slightly above the standards of homes in your neighborhood.

Hire your contractor before buying: Conventional wisdom states you shouldn’t worry about hiring a contractor until after you’ve purchased the home. But we suggest you have someone on hand before you even submit an offer. This way, as you go through your inspections, he or she can start providing you with estimates for the work required by the inspector, as well as any envisioned improvements. You can then use those estimates when making your decision on whether or not to continue the purchase.

NOTE: When seeking out a contractor it’s advisable to find someone who specializes in working with older homes or major renovations. Do your due diligence: read reviews online, ask for references and to see examples of their work. Above all, make sure you go with someone you trust to work cooperatively with you throughout the length of your project.