One persistent myth in real estate is that anyone can make money by buying a fixer-upper or foreclosure property at low cost, doing the renovation work themselves and then reselling at a profit.
Many experienced contractors and career renovators do just that, but first-time buyers can get caught in a web of cost overruns, contractor disputes and resale problems.
For many first-time buyers, a fixer-upper is the only option and sometimes the best option.
Follow these basic rules of thumb when you consider buying fixer-uppers, foreclosure properties or other real estate bargains:
- Look for fixer-uppers with cosmetic problems. Exterior additions or major defect repairs can be costly and the expense of correcting major defects may not add to the market value of the property. Properties that have only cosmetic problems such as outdated carpet and bad wallpaper are ideal for first time buyers.
- Always have a fixer-upper inspected by a home inspector prior to purchase. This inspection should be a condition of the agreement to purchase. Not only does this give you an idea projected repairs, it also will identify potential problems that could lead to cost overrun.
- Don’t pay too much for the property. Estimate the repaired value, the cost to repair and the cost to carry the property before you purchase the property. Underestimating the repairs and or carrying cost can have a negative effect on your profit.
- Renovate wisely. Keep the resale value in mind and do not over improve the property. The kitchen and bathrooms should be your main area of concentration.
If you are buying the fixer-upper as an owner occupant, you may want to request the seller pay a portion of your closing costs. This will enable more of your money to go towards the repairing of the property.