What you need to know about buying a fixer upper

Renovating a distressed home looks so easy on television. It looks like fun, too. But if a cable network isn’t footing the bill, how do people afford to pay for major renovations, and how do they know if all that work is worth it? Here are a few things you should know before purchasing a fixer upper.

Why do people buy distressed homes?

One of the main reasons people buy property in need of repair is the low price point compared to move-in-ready homes. For some, it’s a smart way to lower their monthly house payment; for others, it’s an opportunity to live in a nicer neighborhood or better school district.

Another reason people purchase distressed homes is to invest in real estate. The low price attracts these buyers, too, but their goal is to fix up the home and sell it for a profit. Property often takes years to appreciate in value, but investors build equity at a faster pace when they buy property at a bargain price.

Finally, many homebuyers have personal reasons for purchasing distressed houses, such as buying their childhood home or saving a unique property that’s adds character to the neighborhood.

How much should you spend on renovations?

You found what seems to be the perfect project in the right location at the right price. Now it’s time to do a little research to determine how much you can invest to rehabilitate this property without overspending.

Steps to estimate your maximum renovation budget:

1. Visit a local real estate or county government website to find the cost per square foot for homes in the same neighborhood as the distressed property. If the website doesn’t show the cost per square foot, you can calculate it yourself (Price of Home ÷ Number of Square Feet = Cost Per Square Foot).
2. When you have a good sample of neighborhood home prices, add the high and low end of the range then divide by 2 to get the average cost per square foot. For example, if the neighborhood range is between $90 and $120, the average cost per square foot is $105 ($90 + $120 = $210; $210 ÷ 2 = $105).
3. Next, find the cost per square foot of the distressed home. If the list price is $70,000 for a 1,400 square foot home, the cost per square foot is $50 ($70,000 ÷ 1,400 = $50).
4. Multiply the number of square feet in the distressed home by the average cost per square foot for the neighborhood. Using the numbers above, the 1,400 square foot distressed property at $105 per square foot would be around $147,000 (1,400 x $105 = $147,000).
5. Subtract the list price of the distressed property from this number to find the maximum amount you can spend on renovations without overspending ($147,000 – $70,000 = $77,000).

What are typical repairs for distressed properties?

Once you have determined how much you can spend on renovations, make a list of improvements then interview several qualified, licensed contractors who can do the work. Your lender will need to approve your contractor, so this is a crucial step.

The U.S. Department of Housing and Urban Development website lists these common repairs:

• Structural alterations and reconstruction
• Modernization and improvements to the home’s function
• Elimination of health and safety hazards
• Changes that improve appearance
• Reconditioning or replacing plumbing; installing a well and/or septic system
• Adding or replacing roofing, gutters and downspouts
• Adding or replacing floors and/or floor treatments
• Major landscape work and site improvements
• Enhancing accessibility for a disabled person
• Making energy conservation improvements

What financing is available for buying and renovating distressed property?

If a distressed home renovation still seems like the right move for you, the next step is finding the right loan to pay for it. Traditional mortgages do not cover the cost of major repairs, but there are several loan programs that are designed specifically for rehabbers.

Renovation loans fund the purchase of the distressed property and the cost of structural repairs, cosmetic renovations, and in-between improvements.

The bottom line

Home renovation is not for everyone. They can be stressful, and they tend to take longer and cost more than anticipated.

On the other hand, if it’s your dream to give new life to a run-down home and you have the time and inclination to do so, it may be a smart financial investment or a great way to create a home that’s uniquely yours. Talk to a Flagstar Bank loan officer about your interest in buying a distressed home. They will listen to your story and find the right loan to help you achieve your goals.