Why would buyers purchase a fixer-upper house?

A fixer-upper is a house that is run-down and needs repairs.  The reasons vary, but often it’s because home owners want to:

• Earn “sweat equity” by purchasing a fixer-upper home doing the improvements themselves.  They are trying to save money by purchasing a house with upside potential.
• Put their own personal decorating touch on the home, and re-design it to their custom standards.  They want to do their own improvements.
• Enjoy doing projects.  Some folks simply like DIY projects around the house.

While buying a “handyman special” sounds like a good concept, there are some challenges that make “fixers” NOT ideal for first home buyers.  If you think that buying a fixer-upper may be a good strategy, weigh the pros and cons thoroughly.

One problem is that some “fixer” homes with major structural issues will not qualify for mortgage loans, especially FHA or VA loans.  That means you would have to pay all cash, unless you can qualify for a 203K or other construction loan.
 
Another challenge is that first home buyers often do not have enough cash on hand after close of escrow.  Without a substantial sum, often $20,000 to $50,000, the work in the house never gets completed.  Your family doesn’t want to live in a half-finished house!  Remember that you will pay for permits and hire licensed tradesmen, and the cost will probably be more than you anticipated.  Also, when home owners haven’t allotted enough money in their budget, they may try to cut corners.  But the shortcuts make the house worse instead of better.

One more challenge is the lack of home improvement skills.  It’s true that TV ads make you think you can easily “DIY” (Do It Yourself), but it can be misleading.  During my real estate career, I have seen many homes that depreciated in value due to DIY attempts.  I’ve seen it all — substandard construction, faulty wiring, dangerous plumbing, leaky roofs, “glob-ons” (add-on rooms erected without permits and reflecting low quality construction), and poorly designed floor plans.

Lastly, where are you going to live while the remodeling is in progress?  I advise you to stay in your old home until the work is completed… which costs you more in living expenses.  So you’ll need to account for overlapping occupancy of 2 months or more.

I understand that you may want a home within “upside potential” and that is a great reason to buy a fixer-upper.  If you’re insistent on purchasing a fixer, look for homes that need minor cosmetic improvements, such as paint, floors, and landscape.  Don’t take on a large-scale “fixer” home unless you are very experienced with house remodeling.  Start small and learn as you go!

Read more in our book, "Buy Your First Home", http://tinyurl.com/dy2wjx4.