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Buying a Fixer-Upper? Consider These Tips
Wednesday, September 24, 2008 • Posted September 23, 2008 10:00 PM

You’ve always wanted to live in a house just like your grandmother’s. Maybe something you can fix up and rent out one of these days. A white picket fence, creaky wood floors, hand-cranked windows, a big kitchen, fireplaces in every room. But finding the house you want – in good condition – is proving to be a challenge. Houses are either too expensive, because they’re usually in desirable areas (like in older neighborhoods near a city’s center), or the repairs required to bring the house up to code are just too much to take on as a weekend project.

The fact is that many people are intrigued by the romantic idea of buying a rundown home, moving in, fixing it up and reselling for a profit. The strategy has become even more popular in recent years, thanks to homeowner-friendly changes in the capital gains portion of the federal income tax code. Given all the right circumstances, fixer-uppers can be a lucrative investment, but they’re definitely not a sure thing. A home that seems like a great bargain now can turn into a real money pit if you don’t do your homework before the sale. So how do you know if buying a fixer-upper is for you? Here are some questions to consider:

1. School yourself on what may be too good to be true. To get started in your search for a fixer-upper, check out both the Internet and your local newspaper in the real estate classifieds section. But don’t rely on just these sources – enlist the services of a Realtor who knows the fixer-upper market in your area. That person will be your eyes and ears – and an ally in your search. Even if you pull up to a home that appears on the outside to live up to its promises in print, have your Realtor take you inside for a closer look. Many of these fixer-uppers look quaint, even immaculate on the outside. The inside, however, is sometimes a much different story. You’ll soon learn to distinguish between homes that are worth your time to investigate and homes that probably aren't worth a look.

2. Do you have the skills needed to meet with contractors or make major improvements? Routine remodeling jobs like painting or installing new light fixtures are a far cry from adding a second bathroom, remodeling an outdated kitchen or landscaping the front yard. Tackling these improvements without the necessary experience and expertise can lead to costly mistakes. And if the home really only needs easy, inexpensive or purely cosmetic repairs, your efforts probably won’t add enough value to be profitable anyway.

3. Do you know which improvements are likely to add value? As a general rule of thumb, improvements that are invisible to buyers or merely bring the home in line with expected minimum standards don’t add much resale value. Also, a potential pitfall is over-improving the home relative to other homes in the neighborhood.

4. Are market conditions in your favor? There’s nothing worse than buying a fixer-upper with the intention of making a profit in a couple of years – only to discover the real estate market has gone south. If home values are depreciating, your fixer-upper might be worth less than you paid for it even if you make wise investments in improvements. Now might actually be a good time to buy – if you can find a place that’s worth fixing up – since mortgage rates, while beginning to rise, are still very low.

5. Will transaction costs wipe out your profit? Will the higher resale value of the home exceed your purchase price, plus your investments and your transaction costs? If so, will the profit be adequate compensation for your time and effort? These are just some things to think about before buying a fixer-upper with the goal of making a profit.

The cuteness factor can blind you to problems

You find a home – and it’s simply adorable and, better yet, a great deal. Don’t be so hasty to sign on that dotted line, though. The deal of the century is something we dream about, maybe even salivate over when no one’s looking. But this is clearly an occasion where your emotions must be thrown out the window and logic must take over. Don’t make a same-day decision – no matter how cute the sagging front porch may be. Give yourself time to consider what you might be getting yourself into. Think about the prospect of getting yourself into a home for which you paid too much, and for which you still have to invest thousands of dollars in repair.

It's also worth your time to find out if the asking price of that fixer-upper is comparable with the prices of other homes on the block. Are there other fixer-uppers on the street? Have any nearby homes been refurbished? If so, what was the selling price? What can you expect to get for that home if you refurbish it, then turn around and sell it?

Pre-approval is key

If you have your heart set on a fixer-upper, make sure you get pre-approved for a mortgage in which money is allocated for home renovation, such as the FHA 203(k). When you’re meeting with your lender, keep the lines of communication open about exactly how much work will be required to fix up your prospective home. Being specific about what needs repair and whether or not you plan to hire a professional to do the work is in your best interests, enabling you to obtain a loan that accommodates your needs. And, of course, being pre-approved helps your chances if you’re up against competing bidders.

Taking your time and finding a reputable lender, Realtor and home inspector – and maybe even taking a course or two about fixing up an older home – can help you make the right decision. Follow sound advice and get a good deal, and soon you’ll be hammering away with a smile.

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