Investing in a fixer-upper home

Buying A Fixer-Upper home

If you’re thinking about buying a fixer-upper home and converting it to a BRRR, flipping it or even holding it long-term, make sure you commit to do the following BEFORE making an offer.

Get A Home Inspection

Home inspections WILL cost you several hundred dollars, but over the cost of your life and investment career, they’ll save you tens, likely hundreds of thousands of dollars.

A qualified home inspector will perform a thorough investigation of your fixer upper home and give you a report of home repairs.

The list of repairs will include your big ticket items such as the roof condition, plumbing, HVAC, electrical, irrigation and foundation systems.

Even if you’re looking to purchase a fixer upper as-is, a home inspection will give you more clarity as to what your renovation and repair costs will entail.

You won’t be able to get exact repair costs with the research and the quotes you get from contractors, but you will have a ballpark estimate.

Repair costs and home inspections on fixer upper homes

A home inspection will come with a disclaimer - because some areas of your fixer upper will be inaccessible, even the most thorough inspection won’t get you EVERY possible secret your fixer upper home is hiding.

On top of that, home inspections are more focused on the structural and functional aspects of your home.

With your report and repair estimates in hand, now you have to take into consideration other renovation or improvement costs that are more aesthetic.

If you’re looking to BRRR, fix and flip or utilize the home as a short-term rental, you’ll also want to prioritize improvements that make your fixer upper home more marketable in today’s resale, rental and AirBnB markets.

When you’re buying a fixer-upper house, you’ll probably end up with a big list of To-Dos!

With all of these projects, you’ll also have to calculate the costs of trades and materials.

One of the harder parts of buying a fixer upper home is prioritizing your projects, choosing which ones are “NEED TO DO” and which ones are “HAVE TO DO”.

If you’re investment-minded and are looking for a relatively fast Return on Investment, then you’ll want to focus on the projects that return the home and exceed the neighborhood’s comparable properties.

For example, if you purchased a fixer upper home for $300,000 and comparables in the area have recently sold for $375,000, you want to focus on the projects that, upon completion, have the potential to sell for AT LEAST $375,000 and preferably $400,000 or more.

If you’re purchasing a fixer upper home with an exit strategy further out in the future, then you can layer in your projects over time.

My real estate investments have NOT typically been for passive returns - I’ve bought and held single family homes and townhomes for multiple years.

In each case, I’ve focused on the structural, non-aesthetic projects first.

As I came within 6-9 months of my target exit date, I began looking at the improvements that would create the greatest “curbside appeal”.

The money I spent in that short-term window generated a high return.

Each improvement I made was meant for my “ideal buyer”, not for my personal use.

Your strategy might be different, which is fine.

Just keep in mind this worst case scenario.

You spent your discretionary income on aesthetic improvements to your fixer upper home and depleted your cash reserves.

Something happens in your life or the real estate market changes that ratchets up your sense of urgency to sell your home.

You put your home on the market and buyers reject your list price for the following reasons:

• Buyers will take advantage of your sense of urgency by making low offers, knowing you are in a position where you HAVE to sell.
• Savvy buyers won’t pay a premium for your home due to the structural deficiencies you never completed.
• They don’t have the same aesthetic tastes and view the aesthetic improvements you made as liabilities. They’ll want to pay less for your home to compensate for tearing down your improvements.

When a real estate market shifts from a seller’s market to a buyer’s market, this cold truth presents itself.

That’s why savvy investors ALWAYS have their exit strategy in place BEFORE they make an offer on any fixer upper home.

Are permits necessary for your fixer upper?

Some of the repair work on your fixer upper will likely require permits to complete.

• Foundation repairs
• Window and roof replacements and installations
• Room additions or changes to the original layout
• Sheds and garages, especially if converting to an ADU(accessory dwelling unit)
• Fences
• Plumbing and electrical work

No one likes paying extra for permits, nor does anyone like waiting on the local municipality to get around to approving the repair work.

But when it comes time to sell your home or get home insurance, it’s to your benefit to secure the necessary permits for any repairs or renovations you do on your fixer upper.

DIY and your fixer upper home

If you have the time, money and aptitude, doing the home repair and renovation yourself will save you money.

You’ll also have more control over the timing and cost outlay of your repair projects - if money is tight or your full-time job takes priority, you can slow down your repair schedule, or speed it up if you have extra vacation time or had an unexpected windfall of money.

If you’re not mechanically inclined or your time is better served elsewhere and money is best served having someone else do the work, then by all means hire and manage the contractors and trades yourself.

If home repairs or interior design is a hobby and bringing fixer uppers to life is a lifelong dream, then your decision is not as much a financial one as it is a decision on how you WANT to spend your time.

Making offers on fixer upper homes for sale

Savvy real estate investors know that they make a significant part of their “RETURN ON INVESTMENT” when they purchase the home, NOT when they sell it.

Since there will be significant repair costs(time and money) with your fixer upper, you want to make sure you don’t overpay for any fixer upper.

Real estate agents who are investor-friendly can help you navigate how to structure offers on fixer upper homes for sale. No two transactions are alike, and a real estate agent who is investor-friendly will do their best to protect you against any contingencies that arise.

And when it comes to deciding whether or not you make an offer on a fixer upper, don’t be afraid to walk away from any home for sale AND, if you’ve made an offer on a fixer upper, never be afraid to walk away from a deal if the seller isn’t open to negotiating or countering your offer.

It may not seem like it at the time, but there will ALWAYS be another fixer upper home for sale. Always keep that in mind as you’re looking for your next home to buy.

This post first appeared on Banyan Bridge Group's website December 3, 2022.

Bob Pudlock is an investor-friendly real estate agent, investor and President of Banyan Bridge Group, a Florida real estate agency part of LoKation Florida.