How to Assess the Real Cost of a Fixer-Upper House

Trying to decide whether to buy a fixer-upper house? Follow these seven  steps, and you’ll know how much you can afford, how much to offer, and whether a  fixer-upper house is right for you.

1. Decide what you can do yourself

TV remodeling shows make home improvement work look like a snap. In the real  world, attempting a difficult remodeling job that you  don’t know how to do will  take longer than you think and can lead to  less-than-professional results that  won’t increase the value of your  fixer-upper house.

• Do you really have the skills to do it? Some tasks, like stripping wallpaper  and painting, are relatively easy. Others, like electrical work, can be  dangerous when done by amateurs.

• Do you really have the time and desire to do it? Can you take time off work  to renovate your fixer-upper house? If not, will you be stressed out by living  in a work zone for months while you complete projects on the weekends?

2. Price the cost of repairs and remodeling before you make an offer

• Get your contractor into the house to do a walk-through, so he can give you  a written cost estimate on the tasks he’s going to do.

• If you’re doing the work yourself, price the supplies.

• Either way, tack on 10% to 20% to cover unforeseen problems that often arise  with a fixer-upper house.

3. Check permit costs

• Ask local officials if the work you’re going to do requires a permit and how  much that permit costs. Doing work without a permit may save money, but it’ll  cause problems when you resell your home.

• Decide if you want to get the permits yourself or have the contractor  arrange for them. Getting permits can be time-consuming and frustrating.  Inspectors may force you to do additional work, or change the way you want to do  a project, before they give you the permit.

• Factor the time and aggravation of permits into your plans.

4. Doublecheck pricing on structural work

If your fixer-upper home needs major structural work, hire a structural  engineer for $500 to $700 to inspect the home before you put in an offer so you  can be confident you’ve uncovered and conservatively budgeted for the full  extent of the problems.
Get written estimates for repairs before you  commit to buying a home with structural issues.
Don’t purchase a home  that needs major structural work unless:

• You’re getting it at a steep discount

• You’re sure you’ve uncovered the extent of the problem

• You know the problem can be fixed

• You have a binding written estimate for the repairs

5. Check the cost of financing

Be sure you have enough money for a downpayment, closing costs, and repairs  without draining your savings.
If you’re planning to fund the repairs  with a home equity or home improvement loan:

• Get yourself pre-approved for both loans before you make an offer.

• Make the deal contingent on getting both the purchase money loan and the  renovation money loan, so you’re not forced to close the sale when you have no  loan to fix the house.

• Consider the Federal Housing Administration’s Section 203(k) program, which is designed to help home  owners who are purchasing or refinancing a home that needs rehabilitation. The  program wraps the purchase/refinance and rehabilitation costs into a single  mortgage. To qualify for the loan, the total value of the property must fall  within the FHA mortgage limit for your area, as with other FHA loans. A  streamlined 203(k) program provides an additional amount for rehabilitation, up  to $35,000, on top of an existing mortgage. It’s a simpler process than  obtaining the standard 203(k).

6. Calculate your fair purchase offer

Take the fair market value of the property (what it would be worth if it were  in good condition and remodeled to current tastes) and subtract the upgrade and  repair costs.

For example: Your target fixer-upper house has a 1960s kitchen, metallic   wallpaper, shag carpet, and high levels of radon in the basement.
Your  comparison house, in the same subdivision, sold last month for $200,000.  That  house had a newer kitchen, no wallpaper, was recently recarpeted,  and has a  radon mitigation system in its basement.

The cost to remodel  the kitchen, remove the wallpaper, carpet the house, and  put in a radon  mitigation system is $40,000. Your bid for the house should be  $160,000.

Ask your real estate agent if it’s a good idea to share your cost estimates  with the sellers, to prove your offer is fair.

7. Include inspection contingencies in your offer

Don’t rely on your friends or your contractor to eyeball your  fixer-upper  house. Hire pros to do common inspections like:

• Home inspection. This is key in a fixer-upper assessment. The home inspector  will uncover hidden issues in need of replacement or repair. You may know you  want to replace those 1970s kitchen cabinets, but  the home inspector has a  meter that will detect the water leak behind  them.

• Radon, mold, lead-based paint

• Septic and well

• Pest

Most home inspection contingencies let you go back to the sellers and ask  them to do the repairs, or give you cash at closing to pay for the repairs. The  seller can also opt to simply back out of the deal, as can you, if the  inspection turns up something you don’t want to deal with.
If that  happens, this isn’t the right fixer-upper house for you. Go back to the top of  this list and start again.