Buying a home
that needs work—whether it’s cosmetic touchups or a complete
renovation in order to make it livable—is a time-honored way to
break into the housing market. The list price of the house will
probably be set fairly low, to attract interest. And, as with any
house, you can offer even less if you think that’s appropriate. (If
the house is in really, really bad shape, it’s possible that the
original owner has died, in which case there’s no one to insult
with a low price!)
But unlike buying
a house that’s move-in ready, figuring out the market value of a
fixer-upper isn’t a simple matter of comparing it with nearby
houses that have the same number of bedrooms and bathrooms and so
Let’s take a
closer look at how to decide the amount to offer for a true
fixer-upper—a home that’s in need of some serious work.
home is unique, your local real estate market is not unpredictable.
Within certain boundaries (a neighborhood, for instance), a real
estate agent or anyone else who has been going to open houses and
following recent sales can probably tell you what a “typical”
home of a certain size will sell for. (This may have little to do
with the amount the seller listed it for.) Websites such as Zillow
and RealEstateabc will even give you
recent sales prices and rough (very rough) estimates of value for a
professional opinions and recent records of sale prices, any
homebuyer should be able to come up with a “comp” (comparable)
value for a home. For more on how to do this, see Home List Price:
What Is a House Worth?
But most homes on
the market are not fixer uppers. Any theoretical “comp” value
that arrive at won’t really apply to a house in which, say, the
floor around the toilet has a hole through which you can view the
basement, the roof is a patchwork of old and loose shingles, and the
linoleum is peeling in a lot more places than the edges and corners.
mean you shouldn’t look at comp values for homes with the same
basic parameters—in the same neighborhood, with the same square
footage, having the same number of rooms, and on the same-sized lot.
In fact, this figure will be an important starting point in figuring
out how much to offer.
To set a logical
home price for the fixer-upper in which you’re interested, you’d
want to start by figuring out the value of the home if it didn’t
need work, then subtracting the cost of the needed work.
So, for example,
if two-bedroom, one bathroom homes in your desired neighborhood
typically sell for $300,000 and the home you’re looking at needs
$100,000 in work, an offer price of $200,000 might make sense.
arriving at the first figure already. Now let’s look at how to
calculate the cost of repairs.
Time to bring in
the experts. Unless you are a contractor, engineer, or in some
related specialty, it may be almost impossible for you to calculate
how much the repairs and renovations on a house will cost.
such as dry rot, pests, and an inadequate foundation can add tens of
thousands of dollars to the total. (In some cases, the cost of work
may be so high that razing the structure to the ground and starting
over will make more sense.)
You’ll want to
hire, at a minimum, a home inspector and a licensed general
contractor to tell you what needs doing and how much you’ll be
That will get you
pretty close to the figure you’ll subtract from the home’s
“normal” market value in order to reach the maximum price you
should offer. But first, you’ll want to make some adjustments to
The amount you’ll
owe the contractor for labor, materials, and permits is not the end
of the story. To the extent possible, you’ll want to add in:
on any loans you might take out with which to pay for the work.
Particularly if you’re planning to put any of this on a credit
card, you could end up owing significant sums on top of the basic
figure. (The good news on this is that the interest on a home equity
loan used for home improvements is tax deductible.)
expenses if you will be living in the home but unable to use
portions of it, such as the kitchen or laundry area (thus leading to
restaurant and laundromat bills).
inevitable unexpected expenses due to surprises or delays. No major
home renovation work ever seems to go off without a hitch.
is the sort you can’t really put a dollar figure on—your own
sanity and energy while you oversee, or even do the work. You might
want to take Nolo’s “Quiz: Are You Ready to Buy a Fixer-Upper?”
before embarking on this venture.
What if you buy a
fixer-upper and, a few years from now when it’s all finished,
realize that if you’d just waited to buy, you could have bought the
equivalent home for the same total cost (purchase price plus
repairs), without enduring all the in-between?
Unless you love
the process and are eager to customize a home down to every detail,
that prospect can lead to only one conclusion—a real bargain is a
house that you can buy for even less than it’s “worth,” so that
its eventual value exceeds the purchase and repair costs.
Of course, it’s
possible that home prices in your area are appreciating at such a
rate that you feel like it’s “now or never” for buying a house.
But this consideration is still one worth taking into account.
Beware of unexpected sources of competition when deciding how much to
offer for a fixer-upper. Yes, getting a bargain is important. But
home contractors and flippers, in particular, may be ready to bid
higher amounts than you. This is their business, and they can
efficiently fix up and turn around a house for a lower cost than
faced by the average buyer.
Believe it or
not, you may actually have to raise your offer price a bit in order
to compete with the professionals. Do this only if you really love
the land and the location, and won’t be strapped for cash for years
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