The trend of purchasing fixer-upper houses, renovating them, and reselling them for a quick profit has taken off in recent years. This process, known as “flipping” due to the rapid buy-fix-sell progression, now accounts for 9.6% of all home sales. Simultaneously, the average return on investment (ROI) for fixer-uppers has decreased in the past half-decade due to increased home prices and more competition among investors.
Even if you don’t purchase a fixer-upper to flip it, you may still experience challenges. The low price tag of a distressed property seems attractive, especially to first-time buyers looking to repair the home and eventually resell. They then use the proceeds to trade up for a nicer home. However, unexpected issues like expensive structural repairs, can lengthen the time frame and increase the final cost of renovations.
It is certainly possible to enjoy the benefits of a fixer-upper. However, you need to understand the advantages and potential drawbacks before you make an offer on a property needing extensive work.
What makes a home a “fixer-upper?”
Fixer-uppers are homes requiring substantial repairs and renovations. A house that only needs cosmetic changes, such as a fresh coat of paint or new landscaping, doesn’t qualify as a fixer-upper.
Here are some issues you can expect from these low-priced properties:
- Fixer-uppers may be habitable, but they are usually not comfortable. Issues with appliances, plumbing, and electricity may mean you have to go without some basics if you choose to live there while making repairs.
- There is often damage you will need to fix immediately, including mold, leaks, flooding, unsecured windows or doors, infestations, or foundation cracks.
- The home’s systems may not work correctly. Fixer-uppers often need extensive plumbing or electrical repairs, and the HVAC system may require significant work or replacement. You may have to endure cold showers, leaky pipes, and flickering lights until the projects are complete.
- Parts of the interior may be beyond repair. You will likely need to completely replace some elements, such as floors, carpets, drywall, ductwork, and doors.
- The home may not be weatherproof or climate-proof. Depending on the seasonal temperatures and conditions, you may need to patch or repair the roof, replace windows, and add insulation to protect the home from the elements.
A fixer-upper may not have all these problems. However, you will almost certainly need to address several areas.
Finding fixer-uppers for sale
When you’re finding a fixer-upper for sale, know that certain repairs are easier to perform and bring a better ROI. This Old House suggests fixer-upper buyers look for homes that need moderate improvements but don’t require structural work.
For example, repairing drywall and plaster or laying new tile will take time and effort, but it will bring a good ROI and really change the appearance of the home. New kitchen counters and bathroom upgrades, such as a new showerhead, sink, and toilet, can also pay off.
Some upgrades, such as a new HVAC system, water heater, or rewiring project, can be costly. You’ll need to make careful calculations. Complete home rewiring could exceed $10,000, while a new HVAC system may run up to $9,400. Decide if these projects will still allow you to have a positive ROI.
Your repairs should bring your house into the same quality and price ranges as the other homes in the neighborhood.
The cost of the home plus renovations to bring the property up to par needs to be less than the median property price in the area. If it is, you have the chance to earn a profit on a flip. If you need to build an extension, finish a basement, or make other major structural renovations to match other homes in the area, you risk losing money on the project.
Pros of buying a fixer-upper
There are advantages to purchasing and renovating a fixer-upper. Keep these in mind when looking for properties and choose ones that allow you to enjoy these benefits.
Lower home purchasing costs
The cost of a fixer-upper will vary depending on square footage, location, current real estate market conditions, and the cost of necessary repairs. However, these homes should always cost less than the median price of similar properties in the same area. The National Association of Realtors offers a tool for finding average sale amounts by county.
The lower cost could put a larger property in a more desirable neighborhood within your price range. Or the savings could make it easier to earn a profit on a flip.
If you want to enjoy the benefits of the lower purchase costs, you still need to have a reasonable down payment, and you must be able to qualify for a mortgage. These requirements could mean you have to save and improve your bad credit before you start your fixer-upper search.
Less buyer competition
Many home shoppers are looking for their dream property. They prefer a turn-key house they can personalize with no more than a few coats of paint and some new furniture. They see leaking pipes, loose tiles, and damaged drywall as deal-breakers.
If fewer people want the home, you can potentially make a low offer and still have a good chance of acceptance.
More room for unique modifications
Fixer-uppers often require completely removing and replacing certain features. The scope of these projects gives you opportunities to add new elements to the home. Because you’re already investing in the project, some of these changes won’t add much to the renovation costs.
- Add a skylight during roof repair or replacement;
- Switch to wood floors when replacing tile;
- Install an island during kitchen renovations;
- Opt for a bay window during a window upgrade project.
You can also consider modifications to make the house more efficient. These include:
- Switching to underfloor heating;
- Changing the air conditioning or furnace;
- Adding a pellet stove or other supplementary heating system;
- Installing a tankless water heater.
Fixer-uppers can make sense financially. The average home increases in value by 3% per year. Houses that need repairs often have lower-than-average sale prices, allowing you to target a larger ROI. Renovations can help you build equity in your home quickly. However, you must factor in the costs of upgrades and repairs. Contractor or material bills could cancel any equity gains you hope to make.
Cons of buying a fixer-upper
You also need to keep the drawbacks of fixer-uppers in mind. Every under-priced home will likely have some drawbacks, but you have to decide if they’re severe enough to cancel out the positive aspects and limit your profits.
Renovation costs can add up. According to the contractor search engine Houzz, 31% of renovation projects went over budget in 2019. Once you start these projects, it can be impossible to cancel them. You might end up getting into credit card debt, taking a second mortgage to cover costs, or opening a line of credit.
Most of the time, projects go over budget on fixer-uppers because you or the contractor discover underlying issues, such as structural, electrical, or plumbing problems. Concerns like wood rot in load-bearing supports, exposed or faulty wiring, and leaks in pipes under the floor or behind drywall can cause the price of a project to skyrocket. You need to fix these underlying flaws before you can continue with planned upgrades.
Other unexpected costs can arise if you start a do-it-yourself project and realize that you need professional help to complete it.
Long-term construction and planning
Renovations require careful planning and budgeting. If you are making repairs to the structure of your home or if you need to fix electrical plumbing, HVAC, or floors before you move in, you need to prepare for a lengthy wait. If you continue living in the home during the project, you will be dealing with dust, noise, and limited use of plumbing, lights, or certain rooms.
Is a fixer-upper right for you?
The idea of fixer-uppers and house flipping is attractive. On paper, these properties seem like the perfect way to beat the real estate market. However, renovations and achieving a positive ROI can be challenging. You need to ensure this approach to property investment is right for you.
Here are some considerations.
- You can do some of the work yourself. If you have plumbing, electrical, or carpentry skills, you can limit contractor costs.
- You understand the time commitment. You should have somewhere else to stay during the process or be prepared to live with limited functionality, noise, dust, and other frustrations.
- You have money for unexpected expenses. It pays to have savings so you can handle these surprise costs without creating debt.
- You understand the real estate fundamentals. Understand how to find the median home price in the area and compare your property with others in the neighborhood so you don’t overdo or underdo renovations.
If you understand the drawbacks and can make a plan to account for them, you can potentially save money by purchasing and renovating a fixer-upper.