Most frst time home buyers are looking to find a move-in ready home that doesn’t require extensive renovation efforts. However, there are still a significant number of people who don’t imagine just finding their dream home, but instead, envision creating it themselves.
There are certainly advantages to doing so - you can personalize aspects of the home exactly to your preferences, find a home within a more modest budget, and then there’s always the appeal of quickly increasing equity once the desired updates are completed.
A fixer-upper is a safer bet for someone with prior homeownership experience, someone with cash or liquid assets, or someone who has tried and true handiwork experience if they plan on doing it themselves.
If you find yourself interested in buying a fixer upper, be sure you know what you’re signing on to for before you sign those papers.
Do the math
Before you can consider whether buying a fixer upper is a strategy worth pursuing as a first time buyer, you need to know if it’s an option you have the ability to pursue.
Consider your financing
The type of financing you qualify for can determine whether or not buying a fixer upper is even in the cards for you. This is the first stop on the road to deciding if a home improvement project is right for you.
If you qualify for a conventional loan, you will have more options when choosing the quality of the home you buy. Appraisals are largely used to determine the value of the home rather than the safety and quality of the living space.
If you use a government loan to finance your home, you’ll be subject to a stricter set of rules governing the condition of the home you choose. FHA loans can’t be used to buy homes that are less-than-functional and safe (unless you’re utilizing a 203K rehab loan - more on that later), so you’ll be limited to items that are more cosmetic and home improvement in nature, as opposed to fixing up a dilapidated home with major structural issues.
Calculate your budget
Hopefully you've already asked yourself the important financial questions all first time home buyers should ask, and have your down payment in order. The next step would be calculating how much money you will have available to spend on renovations after you buy the house, as well as how you’ll obtain the necessary funds if you don’t have them saved already.
You don’t want to find yourself in over your head before you even get this project off the ground, so be aggressive when you determine your budget for the remodeling projects you plan to take on.
Leave a lot of wiggle room, especially if you don’t have a lot of experience in construction.
When you consider different homes, be realistic about which ones represent opportunities that could result in meaningful improvement projects. Look for homes that need affordable repairs or improvements and that will most likely provide a return on your investment versus which ones will not. Anything structural should most likely be avoided altogether unless you’ve got a solid background in construction.
Professionals versus DIY
Who is going to do the work on this house?
This is an important question to ask yourself, and one that is often overlooked. It’s not that one choice is better than the other, but both require a lot of forethought and the weighing of pros and cons.
Hiring a professional contractor to remodel
There are several benefits when you hire a professional contractor to help with your remodel.
Professionals are much more likely to perform quality work and have the requisite expertise to do the job correctly, but also require vetting to ensure you don’t end up with low quality craftsmanship or exorbitant costs.
Consider how big your projects is. Are you adding rooms or moving walls? If you don’t have the experience or time to pull permits for a big project, consider a general contractor who can handle these items for you. They manage the outsourcing of the specialty work to subcontractors, such as plumbers and electricians, but tend to cost more since they’re managing the project and people for you.
Ask around and review businesses online, but remember that the prettiest website won’t always be representative of the best contractor. These are busy, hands-on professionals who are largely focused on their work, and often spend little on marketing.
Referrals are usually the best bet when searching for contractors to bid jobs.
DIY home improvements for a fixer upper
DIY can save you money and give you more control over the process, but it can also cost more money in the long run if mistakes appear, depending on the size of the mistake versus the original damage. It will also take significantly longer to accomplish changes if you aren’t able to devote full-time work to repairs.
The price tag, timeline and specialized skills required to complete many seemingly easy DIY home improvement projects are often a much larger investment in time and money than they appear to be. Let’s just say fixer upper’s cost of renovations don’t exactly match up with California costs.
Remember, this is your first home and a significant investment. Unless you feel confident in your abilities (and have considerable patience), consider simple cosmetic improvements for the DIY feel and leave the heavy lifting to the professionals.
Flipping a home is not easy money
It’s not a great idea to bet the farm on your first home and assume you can flip it to move up the housing food chain more quickly than traditional appreciation might allow.
That’s not to say you can’t see increased equity from some well thought out improvements on your first home, especially if you've been lucky enough to find an affordable home in California to start with. But going into your first purchase with the idea you’ll flip it for a hefty profit is a big gamble with your biggest asset.
It’s easy to slip into a landslide of spending once you get started fixing a damaged property and even easier to find the improvements don’t necessarily translate into the equity you hoped they would.
Improving a home can absolutely build equity, but it’s important not to underestimate the cost of repairs. Renovation project costs can add up quickly if you’re not careful and it isn’t uncommon for inexperienced do-it-yourself project managers to find they’ve exceeded their budget before the project is done.
In truth, you do not recoup your investment for most renovations, and all projects are not equal when it comes to increasing value. If you are going to complete expensive renovations make sure you are not over-improving for your neighborhood.
You’ll never get your money back if you are the most expensive or fanciest home in a neighborhood.
Beware hidden damage
Speaking of landslide spending, a very real risk of buying a property with visible damage is finding even more invisible damage once you get started. All too often a buyer will take inventory of obvious necessary renovation needs, like paint and flooring, only to discover additional needed repairs beneath the obvious ones.
Problems like termites, water damage, asbestos, mold, foundation issues - and so many more - are all incredibly difficult to identify before you begin peeling back the layers. A thorough pest and overall home inspection are an absolute must if you plan to buy a less than perfect home, but remember that they aren’t foolproof.
If you buy a house knowing it needs a lot of work, odds are you’ll discover even more things that need fixing when you dig into the obvious problems. Bet on it, and account for the unknown when you determine your budget.
The psychology of renovations
Finally, if you are able to take on such a project, do not underestimate the toll long-term remodeling can take on a person or family - particularly if you’re residing in the property during the process.
It’s easy to romanticize the process before it begins, but once you’re in it...well, you’re in it. If you are living in the house while you remodel, the mental exhaustion can be overwhelming, and you should prepare for days where you wish it was all over and maybe even regret your decision.
There’s no going back until it’s done. It will be loud, dusty, things will get broken, you may not always have access to plumbing, and it can often take longer than anticipated.
Families with children should take particular caution here, as the additional stress of a construction zone planted squarely in the living room or kitchen can prove extremely stressful...and dangerous too.
Can you imagine taking your eyes off your toddler for one second to stir a pot of soup or feed the dog, only to turn around and discover your baby has wandered out the second floor balcony slider and is tight rope walking the exposed support beam of the new deck you’re building?
The bottom line for first time buyer fixer uppers
The truth is, it’s not always a bad idea to fix up a home in need of a little TLC, but it is always a bad idea to jump headfirst into an all-encompassing, resource-heavy project requiring a serious commitment of time and money without considering the very real personal and financial risks that potentially come with the territory.
If it is your dream to create your dream home rather than buy it as-is, do all the research you possibly can - then maybe do a little more. Additionally, consider buying your first home move-in ready, learning the ropes of homeownership and then undertaking a renovation-style project on your second home.
Don’t be afraid to decide that a house in need of heavy renovations isn’t for you, no matter how interesting or romantic the idea might seem. Do all the research possible to guarantee you truly end up with the home of your dreams!
Renovating through your loan
If after reading this you still think you want to try renovating a house but you don’t have the cash on hand for the down payment, closing costs and renovations, there are both FHA and Conventional renovation loans.
These products allow you to finance the repairs and renovations you want to do through your loan, seriously reducing your out of pocket cash. The caveat with these products is that the work needs to be done by licensed contractors and you need to make up your mind on what exact renovations you are going to do in a very short amount of time.
These are great products for the right situations and can be a huge asset when trying to get into neighborhoods that are at the top of your budget. If you are interested in learning more about renovation loan products contact your trusted Loan Officer for more details.