Expert reveals trick to renovating in a rising market
Everyone knows Australia’s property market is going up, but what does that mean for renovators? ...
Buying a fixer-upper home can be a profitable way for first-time property investors to get into the real estate market, but there are things you should know beforehand.
For some investors, buying a fixer-upper as an investment property sounds like a good and profitable challenge: it’s like starring in your own episode of The Block!
For others, a fixer-upper may be their worst nightmare: why would anyone want to buy a property that needs so much work and can potentially end up as a ‘money pit’?
In this guide, we’ll look at the pros and cons of purchasing a fixer-upper home and what things you should consider if you decide to buy one.
What is a fixer-upper property?
In real estate terms, a fixer-upper is a property that when purchased will require a significant amount of maintenance work such as repairs, renovation, redesign, or reconstruction.
We are not talking about a house that just requires you to change the carpet or add on a new coat of paint for it to look cozy. If you plan to buy a fixer-upper home, you must be prepared to do the hard work (or maybe hire someone to do it for you), including remodel a kitchen or add new floors.
Despite fixer-upper homes needing significant improvements, it’s usually still possible to live in it while you’re working on it. To save money, some buyers choose to live on the property while the works are being done.
Some people consider fixer-uppers a good deal because they are usually sold below the potential market value and cheaper than their new and younger counterparts. Quite often, when a house is in such a state of disrepair, the buyer is really paying for the land value rather than the house value. Buyers can then use the excess money saved from the sale to pay for the renovations.
These types of properties are popular with buyers who are looking to boost the property’s potential value to get a return on their investment (also known as flipping) or first-time home buyers on a tight budget.
Investors use simple formula when contemplating whether or not to buy a fixer-upper, which is:
Purchase price + the cost of repairs = Average home price in the local market
If the equation does not pan out, the repairs may cost too much and the buyer can expect that the house would not be worth all the effort
What are the pros of buying a fixer-upper home?
Because fixer-upper homes are usually sold below market value, they can pave the way for first-time real estate investors to get into the property ladder sooner.
There is also more room for negotiation regarding the price, depending on how long the property has been on the market and how the building and pest inspection will go. If you have saved enough money for the purchase, you may not even need to get a home loan.
Moreover, competition for a fixer-upper isn’t as stiff as for newly developed houses, and if the owner is determined to sell, you could get the property for a steal.
And because property taxes are based on the house sale price, you will also save on the stamp duty tax when buying.
Any improvements or renovations you take on should increase the value of your home. When the value of your property increases, so does your equity. Boosting your equity can work to your advantage, especially if you are looking to refinance your mortgage or selling your home for above market value.
However, if you are buying a fixer-upper with the intention of selling at a higher price, make sure to not overcapitalise on your renovations. This happens when the cost of renovation and repairs to upgrade the property does not increase its value to the same level. Going overboard with your upgrades may also increase the value of your property well beyond what buyers are willing to pay to live in your property’s location.
Even if you didn’t get a chance to buy your dream home, a fixer-upper gives you the opportunity to add your personal touch to it and make things look the way you want them, which can be very rewarding.
However, if you are buying a fixer-upper as an investment property, it usually pays to be more conservative with your style choices. What may be appealing to you may not be attractive to (or even drive away) potential buyers.
What are the downsides of buying a fixer-upper home?
You’ve seen all the amazing montages of popular home-improvement television shows turning a run-down property into a dream home and you think to yourself, “Hey I can do that, easy!”
But the reality of it is that a fixer-upper requires plenty of time and effort to finish, even with the help of professionals in the industry. Even if you are outsourcing most of the work, you will need to be constantly accessible to answer their questions or provide instructions on how you want certain jobs to be done.
You will need to choose the materials and fixtures and coordinate their delivery, especially if you choose not to get a project manager on board.
If you think you are capable of doing the job yourself and have taken on all the works needed to be done, renovations may take even longer. This is where setting a realistic timeframe and having the forethought to anticipate potential issues come into play.
The devil is truly in the details when renovating a fixer-upper. One downside of buying a fixer-upper is that you may end up biting off more than you can chew when you find that there are far more repairs needed than you originally thought.
This is why conducting a building and pest inspection is important before buying a fixer-upper. They can let you know beforehand if the property is worth the time, effort, and money.
However, sometimes you won’t discover structural issues, mould, or plumbing problems until the work is underway, and you're suddenly saddled with some very expensive decisions.
Here are signs to look out for which may indicate that a house may have serious structural damage:
As a contingency plan, add a financial buffer to your renovation budget so if things do go south, you're at least somewhat prepared.
A lot of stress can come with renovating a fixer-upper and some people are simply not built for it.
When issues and costs start to mount when renovating a fixer-upper property, it’s understandable to get a dose of buyer’s remorse. The time and effort (not to mention the money) needed to make this type of property worth it can be mentally and emotionally taxing for some buyers.
What things should I consider before buying a fixer-upper?
Anyone who’s ever taken on a renovation project will tell you renos always take longer than you expect. Getting a fixer-upper in tip-top shape is at the extreme end of the reno spectrum, so first up you should realistically assess whether you have the time to take on the task.
Buyers who plan to take on the works themselves must understand that renovating or rehabbing a fixer-upper can be a serious time commitment.
Of course, you can choose to source the outwork for an extra cost. But even with professional help, be prepared to spend plenty of your time on the project. If you do not live on the fixer-upper property, you will need to be constantly present on-site to oversee the works, and you will also need to coordinate all the supply and fixture deliveries.
Carefully assess what renovations you will be doing and how much time and effort these will entail. This will help you set a realistic timeframe on when you can move in or put the property on the market.
The main goal in purchasing a fixer-upper is to end up with a property that is worth more than you paid for.
The cost of renovation and repairs should be a big consideration when creating your budget. It’s easy to underestimate the work involved when you are not in the industry.
And be honest with yourself: Is the cost of renovations really within your budget?
Before you plan a full renovation, check if council restrictions would prevent you from fixing a prospective property.
In some areas, some councils will not allow you to put an extension or change the facade of a property. You will also be further restricted as to what can be done when a building is heritage listed.
Before purchasing a fixer-upper, you can check the contract of sale which can show any easements through your property, which can restrict building works. You can also speak to your council town planner to check for any restrictions your property may have. Also be aware that if there are trees on the property, removing these may require council permission. Depend on the species and size, in some cases, it may not be possible.
Before buying a fixer-upper property, make sure that it has good bones. In real estate talk, “good bones” refer to a fixer-upper with structural, electrical, plumbing, and mechanical systems.
The building inspection report can reveal if the property you are eyeing is structurally sound.
While your fixer-upper may not be in a ‘desirable’ state when you buy it, make sure that the property is situated in a desirable neighbourhood.
Check out what amenities and facilities are near the property. Are there transportation hubs nearby? Are entertainment and recreation facilities easily accessible? Are there good school zones in the area? If the fixer-upper is in a desirable location, it might be worth all the trouble.