Content of the material
- What is a fixer-upper home?
- A fixer-upper is only cheaper If youre willing to do the work yourself
- How to Handle Renovations
- How big of a remodel should you take on?
- Major electrical work
- Major plumbing work
- Foundation or structural work
- Meth or Mold Remediation
- Additions added
- Fixer-Upper Repair Estimates
- #6 Calculate Your Fair Purchase Offer
- Fixer-Upper Mortgage And Loan Options
- FHA 203(k)
- VA Renovation Loan
- CHOICERenovation Loan
- #4 Double-Check Pricing on Structural Work
- Fixer Upper Home Inspections
- 4. Not Enough Knowledge
- DIY Home Improvement Ideas to Make Big Improvements for Little Money
- 1. A coat of paint can do wonders
- 2. Install new doorknobs, switchboards, and light fixtures
- 3. Add an inexpensive stair runner
- 4. Accentuate with crown molding
- 5. Introduce greenery to your home
- 6. Add new curtains, rugs, towels, and sheets
- 3. Upgrade the Exterior
- How to Finance a Fixer-Upper House
- FHA 203(k)
- VA Renovation Loan
- HomeStyle Renovation
- CHOICERenovation Loan
- Bottom line
What is a fixer-upper home?
A fixer-upper is a home that needs repairs, but not so many that it’s uninhabitable or worthy of being torn down.
Fixer-uppers are usually offered for a lower price than homes in better condition, which makes them appealing to buyers looking to maximize their purchasing power or investors looking to flip the property and turn a profit.
A fixer-upper is only cheaper If youre willing to do the work yourself
The whole point of buying a fixer-upper is to fix it up yourself. If you have to hire expensive laborers to do all the work for you, you might as well just buy a ready-to-move-in home. Or you should at least crunch the numbers to see if hiring that expensive crew will be less than buying a nicer house.
While you might not be able to do all the plumbing and electrical work (assuming that needs doing), you should be able to do most of the other work.
You’ll want to price the cost of repairs before you buy the house. In fact, you’ll be required to if you apply for certain mortgages or loans.
How to Handle Renovations
While you might picture yourself laughing wildly in cute coveralls while swinging a sledgehammer or slinging paint, renovating a fixer-upper doesn’t always look like what you see on TV. In real life, you’ll get ready for work with sawdust on your clothes and paint in your hair. But it could be worth every minute if you enjoy it and love the house.
Here are some tips for planning your fixer-upper renovations:
- Make a budget. To prevent costs from spiraling out of control, you need a home renovation budget. Lay out the projects you want done and price them before you buy. Get bids and time estimates for each individual project, then rank them according to priority and start a detailed budget for the project you want done first.
- Decide whether to DIY or hire a contractor. Once you know what you want fixed, you can either tackle home projects yourself or—if a project is beyond what you’re willing to handle—hire a contractor. Be real about what you can do yourself or what may need a professional’s touch. If you go the DIY route and then decide halfway through to bring in a pro, your costs can easily explode outside of your budget—so stick to a plan!
- Don't outbuild the neighborhood. Be careful not to go switching everything out for marble or adding too many custom features. If you go all out and upgrade the house to be the most expensive one in the neighborhood, it’ll be hard to get your money back when it’s time to sell the house.
- Cash flow project by project. If you don’t have the money to get everything done all at once, it’s okay—but move at the speed of cash. Hold off on starting a project until you have the cash to get it finished. That way, you won’t be burdened by debt—and you’ll thank yourself when the unexpected costs of homeownership come your way.
How big of a remodel should you take on?
How big of a remodel you ch0ose to take on depends on how much experience, time, and money you have. If you have never bought a fixer-upper, I would suggest not buying a house that needs a full-blown remodel or that is gutted. I have been remodeling houses for almost 2 decades, and I try to stay away from the big jobs as well. There is so much that can go wrong and so many things you will not know about until you start the job. Big remodels are also very taxing on contractors, and they may take on more than they can handle, causing even more problems.
I would also be careful about buying houses than are more than 50 years old. The older a house is, the more problems that will come up, even if it looks to be updated or well maintained. The old saying “They don’t make them like they used to” is right on many levels. I have seen old houses with literally no foundation that were sitting on dirt. I have seen old houses with rocks supporting walls, and I have seen old houses with duct tape seeming to be what was holding it up.
Newer houses can have problems as well, but there is less risk that they will have major issues. Before you buy a house, I would suggest getting a home inspection completed so that you know how much work is needed. An inspection will not find everything that is wrong, but it should give you an idea of the major problems. I would be very careful about buying houses that need:
Major electrical work
Many houses need some electrical work, but major electrical problems can not only be expensive to fix but also dangerous. If a house needs electrical work, get it checked out by an electrician to see how serious it is and what it will take to get it fixed. You could be looking at $500 to $15,000 to repair the electrical depending on the severity of the problems.
Major plumbing work
Many houses have minor plumbing issues, and some houses have major problems. It is a similar situation to the electrical system on a house where you need to get it checked out by a professional. If a house has galvanized pipes, the entire plumbing system may need to be redone. Not only are you replacing pipes, but the plumber has to cut into walls, and there will be many repairs needed after the pipes are replaced as well.
Foundation or structural work
We have fixed many foundations over the years. Some have been easy fixes and some major projects. Most foundation problems are not serious, but again, you need a professional to check out the problems. It is also important to get multiple opinions on the fix. We have had one company tell us a foundation would be $84,000 to repair and another $5,000 to repair. You can see the video of that house below:
Meth or Mold Remediation
Mold can be a major problem that either requires tens of thousands of dollars of work or can be sprayed and removed easily. The same goes for a house that has had meth used in it or been a meth lab. Some houses that have a little bit of meth residue may be remediated easily while others need to be entirely gutted. It is important to get multiple opinions on these issues as well because some companies love to overcharge for scary issues like mold, and meth.
Adding on to a house can seem like a great way to add space and value, but be very careful. Most additions cost more than the value they add and are a very involved process. First, you must get a permit in order to add to a house unless you want to run into major problems down the road. Second, additions are expensive and it can be tough to make them flow well with the house. In some cases they make sense, but it is rare, and the market must be able to support the increased value because if your house is bigger than all your neighbors’ homes, it will be tough to sell.
Fixer-Upper Repair Estimates
A huge part of buying a fixer upper is being able to foresee costs before you buy and make general estimates as to how much the property will cost to repair, remodel or fix up. Many buyers choose to hire professional contractors to make assessments and estimates of how much the work will cost. But any buyer should know how to distinguish low-cost, easy fixes from harder, more expensive ones. Below is an introductory list to give you an idea of what can be considered small and major fixes.
#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.
Fixer-Upper Mortgage And Loan Options
Finally, financing a fixer-upper is much more complicated and complex than getting a mortgage on a home that’s not in need of major repairs and updates.
Most lenders aren’t going to finance a fixer-upper with a traditional mortgage. After all, they aren’t going to approve a loan for more than the home’s current value.
Turning to a home equity loan won’t work either since you won’t have any equity built up on a new purchase.
This is where other solutions need to be considered, like an FHA 203(k) loan (Quicken Loans® doesn’t offer this type of financing) or a personal loan in order to purchase the home. Once the home is in qualifying condition, you could always refinance into a traditional mortgage.
An FHA 203(k) loan is backed by the federal government and includes money not only for a home’s purchase price, but also for some repairs and renovations. This makes a 203(k) loan an ideal candidate for many types of fixer-upper houses. With a 203(k) loan, you’ll need to specify and get bids for all of the repairs that you want to fund with the loan, and most loans will also include a 10-20% contingency to account for any extra cost overruns.
VA Renovation Loan
A VA renovation loan is a type of loan that is available for veterans and other military service members. If you qualify for one, a VA Renovation loan has all of the same benefits of a regular VA loan, like no down payment and lower closing costs. And like an FHA 203(k) loan, you can also include rehab and renovation costs into the loan amount alongside the purchase price.
A HomeStyle loan can be another option for buying a fixer upper house. HomeStyle is a Fannie Mae conventional loan that has many similarities with the government-backed FHA 203(k) loan. One difference between the HomeStyle and a 203(k) loan is that the HomeStyle loan limits the renovation amount to 50% of the as-completed value, whereas the 203(k) has no maximum as long as your ARV is under the FHA maximum loan amount.
The CHOICERenovation loan is a program from Freddie Mac that was introduced in 2019. CHOICERenovation loans can be another option to purchase a fixer-upper, and can even be used as an option for refinancing, as long as you aren’t taking any cash out. And unlike a 203(k) loan, which cannot be used for an investment property (unless you plan on living in one of the units), a CHOICERenovation loan can be used for a second home or investment property.
#4 Double-Check 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
Fixer Upper Home Inspections
Before you buy a fixer upper home, an inspection (or several inspections) is crucial. While you may be able to assess many repair costs on your own, nothing beats the security of having a true professional come and tell you that your own assessments are correct. By the same token, nothing beats having a professional show you a reason not to buy the home that you might have missed.
Roof certifications should always be obtained prior to a fixer upper purchase. If you're not willing to replace a roof, and the home does not pass a roof inspection, then you should count out the property.
Pest inspections are also very important. Homes with termite damage can be extremely costly to fix, and the result of extensive damage could have an effect on the structural integrity of the property. A home with a pest infestation will have a double cost: the cost to get rid of the pest, and the cost to replace or fix the damage they've done.
Sewer line inspections are also important, as are engineering reports on the structural integrity and foundation of the home. These are areas most buyers don't have much expertise, and hiring a professional can help you assess whether the property is what you expect.
4. Not Enough Knowledge
To be successful, you know how to pick the right property, in the right location, at the right price. In a neighborhood of $100,000 homes, do you really expect to buy at $60,000 and sell at $200,000? The market is far too efficient for that to occur regularly.
Even if you get the deal of a lifetime—snapping up a house in foreclosure for a song, say—knowing which renovations to make and which to skip is key. You also need to understand the applicable tax laws and zoning laws, and know when to cut your losses and get out before your project becomes a money pit.
Big-league lenders have also started to seek profits in the flip-loan marketplace, with global investment firm KKR joining other private investment firms seeking a piece of the action.
DIY Home Improvement Ideas to Make Big Improvements for Little Money
1. A coat of paint can do wonders
A coat of new paint is easily the most transformative thing you can do for your house on a budget. The best part is that you don’t necessarily have to hire a professional. Do a little research, watch a couple of YouTube videos, buy some useful tools and you can do the job yourself. Here is how we’ve redone a basement room that was a little too dark (see before and after pic below).
2. Install new doorknobs, switchboards, and light fixtures
Like I said above, little things can make a huge difference. Doorknobs and switch plates are easy to overlook but install new shiny ones and you will see how the whole space instantly gets elevated. The same goes for light fixtures and faucets. Good lighting opens up the room and makes your space look bigger.
Faucets, however, tend to be a bit expensive. But you don’t have to replace all the faucets in your house at once. Start with the kitchen and do the bathroom next month. You might also find some discount deals on your local home improvement store.
3. Add an inexpensive stair runner
The whole staircase can’t be ripped apart and replaced when you’re on a tight budget. Try an inexpensive runner instead to give your stairs a non-slip new look. Check out a thrift store or get the biggest table runner you can find (which works for stairs, of course).
4. Accentuate with crown molding
Another way to upgrade your house is by adding crown moldings. But the easy way. Look for lightweight foam moldings (polystyrene foam coated in hard plaster). They are not only inexpensive but also easy to cut and install.
You can finish this project over a weekend and give your rooms an elegant touch.
5. Introduce greenery to your home
THE most inexpensive way to give your home a new look is by adding greenery. Never underestimate the transformative power of lush green leaves and bright flowers.
Add a bunch of easy-to-maintain indoor plants like the snake plant, aloe, money plant, jade, rubber plant, and Philodendron to your living room. The greens will breathe a new life into your space and make it look brighter.
6. Add new curtains, rugs, towels, and sheets
Faucets and light fixtures seem too much? Replace curtains, rugs, towels, and sheets instead. You won’t have to spend a lot of money and will still get a new look.
3. Upgrade the Exterior
Exterior upgrades are also an important consideration for fixer-uppers and can be more affordable than interior changes, which often require plumbing and other system improvements. The 2020 U.S. Houzz & Home Study found that 21% of renovating homeowners tackled roofing, windows and skylights, and exterior paint projects at a median spend of $8,000, $3,900, and $1,000, respectively. Outdoor yard and landscaping projects are also a good idea, says realtor Jennifer Thomson.
"Don't forget about your fixer-upper's curb appeal; the neighbors will thank you and you will be able to enjoy your yard in the summer months," says Thomson, who recommends adding grass for starters. "If you use fast-growing grass seed, you will have a lush lawn surrounding your home in no time. Most homeowners spend between $450 and $900 on lawn seeding a 5,000-square-foot lawn. When it comes time to sell your fixer-upper, the curb appeal will add thousands to the value of your home."
Bermuda grass germinates in as little as seven to 10 days, while Buffalo grass can take two weeks to 30 days, says Thomson. Yet another option is Centipede grass, which has a germination time of 14 to 21 days.
How to Finance a Fixer-Upper House
The process of obtaining a property improvement loan to purchase a fixer-upper is different from the process of obtaining a loan to purchase a property that has been fully renovated and is ready to move into.
There is a huge range in the state of these houses, therefore the bank needs to be confident in your capacity to turn an ugly duckling into a swan, as there is a big difference between a new home and a home that needs major repairs.
A fixer-upper may be transformed into the house of your dreams with the aid of four specialized home improvement loans, which typically have a lower interest rate when compared to other home loans.
Each software has its own advantages and disadvantages, so it’s vital to familiarize yourself with all of them.
The Federal Housing Administration, which is part of the Department of Housing and Urban Development, offers the FHA 203(k) loan program.
Homeowners can use a single loan to pay for both the purchase of a house and the improvements. This scheme allows current homeowners to fund the renovation of their present residence.
Rehab expenses must be $5,000 or more, and the property’s value must be less than the FHA’s maximum mortgage limit in your location to qualify for a 203(k).
For a single-family house, the maximum is $356,362 to $822,375 as of January 30, 2021. In the case of multi-unit buildings, further restrictions apply.
If the property value is less than the renovation expenditures, or if the property is worth 110 percent of its pre-rehab value, the house’s value will be lower.
A 203(k) loan needs a 3.5 percent down payment on a purchase or a 2.5 percent equity (including project expenditures) for a refinancing if your credit score is 580 or more. A 10% down payment is required for those with FICO scores ranging from 500 to 579.
For residences that are at least one year old, you can get a 203(k) loan to conduct modest repairs or major ones, all the way up to tearing the house down to the foundation.
Efforts should be made to enhance the property rather than adding frills like a swimming pool. If you have to move out of your house while it’s being renovated, you can include up to six months of mortgage payments in your loan. All improvements must be completed within six months of receiving loan funds.
A HUD consultant must be hired to monitor the remodeling process, which increases your overall expenditures. An FHA appraiser or your HUD consultant must approve any renovations made by a licensed contractor.
Those who will benefit most from this loan are the following: A 3.5 percent down payment is required for an FHA 203(k) loan, which is the best option for those planning extensive repairs. The 203(k) loan is the only one that permits you to demolish the house down to the foundation and start again, even if your restoration budget is merely $5,000.
VA Renovation Loan
No-down-payment loans are available to active-duty military members, veterans, reservists, and their families who want to buy or remodel a property. Adding a room or constructing a detached garage are two examples of home improvements eligible for this type of financing.
To be qualified for the loan, you must have enough VA entitlement to cover the amount of the loan. Many lenders need a credit score of 620 or higher, even though the VA doesn’t.
You can borrow up to 100% of the purchase price plus the cost of repairs to get a mortgage. Existing homeowners can borrow up to the entire worth of their house after repairs, up to a maximum of $100,000.
Although mortgage insurance is not required for VA loans, borrowers may be charged a VA financing fee ranging from.5 percent to 3.6 percent of the loan amount (as of January 29, 2021). You might get a different percentage depending on how much you put down and how many times you’ve utilized this advantage before.
As a condition of participating in the VA Renovation Loan program, you must bring your house to the minimum VA property criteria. All work must be done by contractors designated by the VA.
Anyone with a military history or their spouses are eligible for VA Renovation loans. If you don’t have a down payment or your property needs only minimal repairs, these loans are ideal.
Financing for a wide range home remodeling projects is available through Fannie Mae’s HomeStyle Renovation loan program. The standard first mortgage can be used to pay for these renovations thanks to this financing program.
Based on where you reside, you can get a Fannie Mae HomeStyle Renovation loan up to a maximum of $822,375. A credit score of 620 or higher is required to be eligible for a HomeStyle Renovation mortgage.
A single-family home’s LTV may go as high as 97%. The loan-to-value ratio (LTV) is the ratio of the loan amount to the home’s value, which is why it is called the loan-to-value ratio. If the loan is paired with HomeReady, a program for low-income borrowers, the borrower must be a first-time purchaser for LTVs exceeding 95%.
The lower of 75 percent of the purchase price plus rehabilitation expenditures or the finished assessed value is the maximum for rehab funding. Imagine purchasing a $200,000 house for $320,000 in value after $100,000 in repairs.
The least amount of money that may be spent on repairs is 75% of $300,000 (the purchase price plus repairs) (new value). In order to meet Fannie Mae criteria, the planned $100,000 budget must be less than $225,000 (300,000 x 75 percent).
Closing on a Fannie Mae mortgage does not need that the home be livable. Six months of payments can be deferred by buyers while their house is being repaired. Fannie Mae, on the other hand, does not demand that the renovations increase the property’s worth.
Even if you can’t completely demolish and start again, you may use this loan to pay for an expansion or a room addition.
It’s possible that you might save money by completing part of the work yourself, but the lender will need to accept your plans. No more than 10% of the total loan amount can be used for this job, and only the supplies and not your time will be repaid.
Those who will benefit most from this loan are the following: If you’re looking to save money by doing part of the repairs yourself, the Fannie Mae HomeStyle Renovation loan is for you. It has a generous cap on rehabilitation expenses, which is ideal for large-scale projects.
Buyers of a fixer-upper can get help paying for their renovations with a CHOICERevonation loan from Freddie Mac. These loans are also available to current homeowners who need to pay for repairs.
A permanent dwelling, a secondary residence, or even an investment property might all benefit from these loans.
When combined with Home Possible, a low-to-moderate-income loan program, the LTV can rise to 97 percent for a single-family property. In high-cost locations, CHOICERenovation borrowers can borrow up to $822,375, although the loan maximum is $548,250.
At least 660 FICO score with less than 25% down and at least 710 FICO score for second home/investment properties are required of the borrowers.
The rehab budget is limited to 75% of the lesser of the combined purchase price and project cost or the property’s post-renovation appraised value, similar to the HomeStyle loan outlined above.
The money from these loans may be used to restore and repair the house, as well as to make safety and security improvements for when a tragedy strikes once again. Plan, permit, and inspection fees can also be included in the total cost.
If you are unable to remain in the house during the renovation, you may be eligible for up to six months of compensation. Even if the house is destroyed, it can’t be rebuilt.
Those who will benefit most from this loan are the following: You may use the CHOICERenovation loan from Freddie Mac to finance your primary home, a vacation house, or an investment property. These loans can also be used to fix up a house or make it more resistant to natural calamities.
There is no such thing as the perfect fixer-upper — it’s a matter of a fixer-upper that’s perfect for you. Each property is different, and the choice depends on your budget, timeline and lifestyle preferences. Be realistic about whether you want to take on a major project or one that requires a few fixes here and there before taking the leap.