FIXER UPPER MYTHS & FACTS
What You Should Know
BEFORE You Buy
"A home will only sell for
what the market can bear. What this means is that no matter how
many upgrades were made, or how much money has been invested in the
upgrades, a home will
only sell for what the majority of homebuyers are willing to pay."
Before
deciding that your next home must
be a fixer-upper, you should do some
homework into what to expect when
purchasing these types of homes. Many
prospective homebuyers tend to have a romanticized
version of the entire process, and are quite
shocked when confronted with the hard reality.
Fixer Upper homes can often represent a
good deal, but there are some points that a
homebuyer should be aware of before
making
that offer.
MYTH #1 . . .
I can make a "killing" in the real estate
market by buying a run-down home, for tens
of thousands of dollars less than the average
home, fixing it up, and then immediately
selling it for full price, or more.
FACT #1 . . .
Most homeowners looking to sell their "fixer
upper" home understand that they will have to
list their home at a price that reflects the cost
involved in restoring the home to its original
condition. The asking price of a fixer upper is
usually calculated so that the savings represented
by the lower than average market price is
roughly equal to the amount of money that a
buyer could expect to spend on necessary
renovations. Updating the "look" of a home,
or upgrading to higher-end finishes, is not
included in these calculations, and you should
be careful not to spend so much money on
renovations that you are unable to recoup
your investment.
MYTH #2 . . .
If I’m buying a fixer-upper home, I
don’t
need to bother with the added cost and
aggravation of a home inspection because I
already know what I’m getting.
FACT #2 . . .
A home inspection should always be included
in an Offer To Purchase and Sell agreement,
and it is arguably even more important
to include one when you are looking to buy a
fixer upper. Structural defects are normally
not visible to the untrained eye, yet will cost
much more to repair than the obvious cosmetic
fix-ups. Most licensed home inspectors will
not only detail the defects that they uncover,
but can also give you a good idea of the costs
involved in fixing them.
MYTH #3 . . .
It’s better to pay a lot less and buy a
"fixer
upper" in an undesirable area, than to pay
more for a comparable "fixer upper" in a
better neighborhood.
FACT #3 . . .
Most of us have heard the quote, "the three
most important things to look for when buying
a home are: location….location…and
location!"
While this is obviously meant to be
funny, and is a somewhat oversimplified rule
of home buying, it does drive home the point
of how important it is to consider where you
will buy your home. Purchasing a fixer upper
in a desirable neighborhood will cost you more initially, but the
payoffs -- personal
peace-of-mind and higher return on
your home investment when you sell -- should
not be overlooked.
MYTH #4 . . .
Once I fix this house up, I can turn around
and sell it for double the price I paid.
FACT #4 . . .
A home will only sell for what the market can
bear. What this means is that no matter how
many upgrades were made, or how much money
has been invested in the upgrades, a home will
only sell for what the majority of homebuyers
are willing to pay. Factors to consider when calculating
your possible return on investment:
1. Location: What kind of a neighborhood
is the home in?
The type of neighborhood
will determine which type of buyers you will
attract when you decide to sell. For example: An
area consisting of mostly “first time buyers” will
attract buyers who have a strict and limited budget.
They are looking for affordability above all
else – including high-end finishes and perfectly
landscaped gardens.
2. Neighbors: What are the neighboring
homes like?
A beautiful home surrounded
by unkempt, run-down homes will sell for much
less, than a beautiful home surrounded by well kept,
nicely maintained homes.
3. Surroundings: What are the surrounding
features?
Buyers are willing to pay more for a home that is
in a convenient, yet quiet
locale. While you may find it convenient to
side onto a school, many potential buyers
would eliminate such a location due to the
noise level associated with the presence of hundreds
of excitable children, and the congestion
caused by school buses and parents dropping
off and picking up students.
MYTH #5 . . .
I can make a lot more money by turning this
single family home into a multi-family
dwelling.
FACT #5 . . .
While this statement is for the most part
true, it may not be possible. Most towns and
cities have strict zoning laws that not only dictate
the maximum allowable occupancy within
any given area, but also dictate the size and
design of a home when building new, or creating
additions to an existing structure.
Once
you have thoroughly investigated the
pro’s and con’s associated with purchasing a
fixer upper home, and you have decided that it’s
right for you, be sure to "run your numbers".
1. List Price of Fixer Upper
2. Average Recent Sale Prices of Similar "Non
Fixer Upper" Area Homes
3. Estimated Cost of Repairs from Reputable
Source (e.g. referred Renovation Company)
4. Buffer Amount for "Unexpected" Repair
Costs (usually 1/2 of estimated total)
5. Selling Expenses (real estate fees, lawyer
fees, closing costs)
6. Amount of Profit You Desire versus
Amount of Actual ProfitFor example:
1. $200,000.00 = List Price of Fixer Upper
2. $255,000.00 = Average Sales Price
3. $ 25,000.00 = Estimated Repairs
4. $ 12,500.00 = Buffer for Repairs
5. $ 17,000.00 = Selling Expenses
6. $ 20,000.00 = Desired Profit Versus Actual
Profit of $500.00If your intent was to purchase the house
shown in the example above, make the
repairs, and immediately list the house for
sale, your Actual Profit shown is only
$500.00. If, however, your intent was to purchase
the same house, but actually live in it for
a few years before selling, you would normally
expect to turn a much better profit for two reasons:
• First, historically speaking, the real
estate
market normally goes up over time and your
anticipated sale price would be higher - affording
you more profit.
• Second, the money that you would have
been paying in rent to live elsewhere - with no
return - is actively paying down your mortgage
and increasing your equity.
As with all investments, though, nothing is
guaranteed. So when looking to finance a
home, keep in mind that the real estate market
has taken some big hits in the past. Never
overextend yourself financially.Please note that the figures in the calculations
shown were used for example purposes only. Local
housing prices, repair costs, and selling costs will
vary greatly from one location to another. It is recommended
that all Buyers thoroughly research their
local costs and legal restrictions before purchasing.
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