First Steps

How Buying A Fixer-Upper Works

Published on: August 22, 2022

buying a fixer upper

Buying a fixer-upper is an appealing path to homeownership for many buyers. It can be an affordable way to purchase a property, and buyers can tailor the home to their preferences.

However, buying a home that needs TLC requires a lot of time, effort, and patience; often, things don’t go as planned. Before looking at fixer-upper houses for sale, make sure you’ve considered all aspects of purchasing a fixer-upper.

What is a fixer-upper house?

A fixer-upper is a property that needs repairs, remodeling, or renovation. The condition of fixer-uppers can vary greatly; in some cases, the home may need just a little TLC or cosmetic changes. But in other cases, the property requires extensive renovations to improve the home’s functionality and safety. 

Homeowners buying a home in need of renovations may be able to live in the home while it undergoes work. But in some cases, renovations or repairs must be completed before a fixer-upper is habitable.

If you’re thinking of buying a fixer-upper, you may get a good deal on a home since fixer-uppers are priced lower than newer properties or those in better condition. Additionally, it can be a strategic way for new homeowners to compete in a hot market.

Pros and cons of buying a fixer-upper

Buying a fixer-upper can provide many advantages over purchasing a ready-to-move-in property, but there are also some drawbacks to consider. 

Pros

  • Low purchase price. Buyers can usually find fixer-upper houses for sale at below-market home prices because of their condition. After adding in the cost of renovations, homeowners can potentially still come out ahead compared to buying a similar home in better shape.
  • Your budget may stretch further. When buying a home in need of serious TLC, homeowners may be able to purchase more house for their money. For example, you may be able to buy a larger home or one in a more desirable neighborhood than you would if purchasing a newer home.
  • Less competition from other homebuyers. Not everyone is up for the challenge of rehabbing a home. As a result, there may be less competition and a lower chance of getting into a bidding war.
  • Can tailor the home to your preferences. When you purchase a fixer-upper, you’ll be in control of the repairs and renovations and can make modifications according to your tastes and specific needs.
  • Equity increase. Whether you’re planning to flip the property for a profit or are buying a fixer-upper as your first home, the value of a fixer-upper usually increases after completing the renovations, giving you significantly more equity in the home

Cons

  • Competition from investment buyers. When you go this route, you’ll likely be bidding against house-flippers and other investment buyers. They may be paying cash, have deeper pockets, or are willing to purchase the home with fewer contingencies.
  • Can go over budget. Even though you can find cheap fixer-upper homes for sale, there is potential to go over budget on repairs and renovations, driving up the home’s total price above what you planned to spend. That’s why it’s critical to get estimates from contractors so you know what you’re all-in costs will be.
  • Financing options may be more limited. Buying a fixer-upper offers fewer financing options than a traditional home. Additionally, mortgages for fixer-uppers usually have detailed requirements, inspections, and a set timeline for finishing repairs.
  • Inconvenience during renovations. Depending on the condition of the property and the scope of the repairs, you may not be able to live in the home while fixing it up, which may require you to live with family temporarily or get a short-term rental. Or, if you do stay in the house, you’ll have to deal with the inconvenience, traffic, and noise of renovations.
  • Unexpected issues. Once renovations are underway, you might encounter unforeseen problems, increasing the scope, expense, and timeline of the project.

Should you buy a fixer-upper? 5 things to consider

The thought of transforming an old, worn, or dated property into your dream home is enticing, so it’s easy to overestimate what you can take on and underestimate the effort, time, and financial commitment of buying a fixer-upper

While you don’t have to be an experienced DIYer or a house-flipper to buy a fixer-upper house, you should be sure that this path makes sense for your situation and skills. 

Here are five key things to consider:

1. The scope of the repairs

Make sure you understand what repairs and renovations are needed to bring the home up to snuff. Will you need to alter the home’s structure, make aesthetic changes only, or something in between? 

Naturally, the scope of the projects will affect the purchase price, options for financing, timeline, and cost of renovations, so it’s crucial to be realistic about what you can undertake. The best way to ensure you have an accurate grasp of what repairs a fixer-upper needs is to have a professional home inspection before finalizing the deal. A home inspector will provide details on the home’s condition and a list of necessary repairs. Consider getting a professional contractor involved to map out a clear vision for renovations, how long it’ll take, and costs.

2. Your budget

Once you know what repairs are necessary, you can estimate a potential budget for the cost of the home and renovations. Remember to factor in fees for permits, inspections, and additional expenses. 

Keep in mind that renovating usually costs more and takes longer than expected, so consider what will happen if you exceed your budget. Fortunately, if you’re taking out a mortgage for fixer-uppers specifically, the loan terms usually account for exceeding the repair estimate by a certain percentage, called a contingency reserve. But if you use another form of financing, such as a home equity loan, home equity line of credit (HELOC), or cash-flowing the repairs, make sure you can finance additional costs.

3. Timeframe for completing renovations 

Consider the estimated timeframe for fixing the home and how that will impact your lifestyle. Are you willing to live in the house while renovating? Or will you remain in your current living situation until repairs are complete? Again, renovation projects can be unpredictable and often go longer than the estimated timing. Be sure you can handle an extended timeframe. 

4. How the work will be completed

Are you planning to DIY the renovations or hire out the work? If you’re using mortgage financing, check with your lender before making plans to DIY your project. Most lenders require non-related construction professionals to do the work. Be realistic about what you can complete on your own vs. hiring professionals. If you’re inexperienced at home renovation, you consider hiring professionals to handle the more complex aspects of the project, such as structural, electrical, or plumbing work. Also, make sure you know what projects require local building permits and inspections. 

5. Location

It can be tempting to overlook some details of a fixer-upper to get a good deal, but location isn’t one of them. As you look at fixer-upper houses for sale, assess whether the location of the fixer-upper fits your needs and lifestyle. Consider the schools, the commute time to work (if applicable), and the overall desirability of the neighborhood should you eventually sell. Work closely with your real estate agent to determine if purchasing in the area will benefit you in the long term.

How to find fixer-upper homes

Here are a few ways to find fixer-upper houses for sale:

  • Real estate agent. A real estate professional familiar with fixer-uppers will be an invaluable resource in finding these properties and helping you make strategic offers. 
  • Real estate listings. When searching real estate listings, look for terms like “sold as-is” and homes that have been on the market for a while.
  • HUD Homes. The U.S. Department of Housing and Urban Development (HUD) maintains a database of HUD-owned properties for sale. Prospective buyers bid on the homes by working with their real estate agent. Buyers may also find houses on additional databases of government-owned properties.
  • Real estate auctions. Homes sold at public auctions can provide a bargain but are also risky. In most cases, you’ll have to make an offer without knowing much about the property’s condition.
  • Drive around neighborhoods. An overlooked strategy is to drive around the area you want to purchase in and look for properties that appear vacant or worn down. If you pinpoint an address, search the county’s property records online to find out who the current owner is and if they’re willing to sell.

How to finance a fixer-upper

For homeowners buying a fixer-upper, home loan options depend on the extent of the repairs. If you’re making minor changes that you can handle with savings, a home equity loan, or non-mortgage financing, then a traditional conventional or government-backed mortgage may work for you. But if you want to finance the home purchase and the cost of repairs into one loan, consider a renovation mortgage for fixer-uppers. 

Renovation- or fixer-upper loans combine the home purchase with the cost of repairs into a single mortgage. In addition to the mortgage options below, you may find financing or grants through state or local programs. And borrowers specifically making eco-friendly upgrades may have additional options through energy-efficient initiatives

How to buy a fixer-upper: Financing options to consider

As you shop for a mortgage for a fixer-upper, here are some programs to consider. Keep in mind that not all lenders offer the programs listed below and some lenders may have their own renovation loan options, so you’ll want to shop around.

  • FHA 203(k) loans. Guaranteed by the Federal Housing Administration, FHA 203(k) rehab loans have a minimum down payment of 3.5% and a minimum credit score of 580. However, some lenders may have higher FICO minimums. FHA 203(k) loans are subject to the FHA mortgage limit for the area where the property is located, and repairs are limited to those approved by the FHA. When financing larger renovation projects, an FHA Standard 203(k) loan allows for renovations exceeding $35,000, with a $5,000 minimum. However, you must work with a 203(k) consultant who helps determine the necessary repairs and estimated costs. Buyers also can choose the Limited 203(k), which covers renovations up to $35,000 — or $50,000 in some locations — and doesn’t require working with a renovation consultant.
  • HomeStyle Renovation. HomeStyle® Renovation is a conventional (non-government) loan guaranteed by Fannie Mae. The minimum credit score is 620, and down payments as low as 3% are permitted, depending on the borrower’s eligibility; however, requirements may vary by lender. Unlike FHA loans, borrowers can complete just about any renovation project, but they must first work with a contractor to submit renovation plans to their lender, and they have up to 15 months from closing on the loan to complete the repairs.
  • CHOICERenovation® & CHOICEReno eXPress. Guaranteed by Freddie Mac, CHOICERenovation® mortgages are another conventional loan option that combines renovation cost with the home price. These loans have various loan terms and allow down payments as low as 3% for eligible borrowers. Renovations must not exceed 75% of the home’s estimated “as-completed” value, and borrowers must finish repairs in 12 months. For smaller-scale projects, borrowers can choose the CHOICEReno eXPressSM. Renovations must be completed within six months and may not exceed 10% to 15% of the home value, depending on location.
  • VA renovation loan. Military borrowers and veterans may be eligible for a VA loan for alteration and repair. VA loans typically don’t require a down payment, but many lenders require a minimum credit score of 580 to 620. Borrowers must use an approved contractor or builder and are limited to renovations similar to comparable homes in the area.


Are you interested in learning more about buying a fixer-upper? Speak to a local Finance of America Mortgage Advisor today to discuss your mortgage options.

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