6 Things You Should Know About Buying a Fixer-Upper

In a competitive market looking for and finding a house that needs TLC may help you nab your ideal location, but be sure of the cost of renovations and the neighborhood home values work for you.

Buying a fixer-upper can provide a way for buyers to afford a larger home or a better neighborhood. With the relatively low inventory of homes for sale these days, a move-in ready home can be hard to find, especially if you’re on a budget.  Homes in need of repairs of updating typically sell for less than other comparable home in good shape.

That could be why, in 2019, nearly 60% of home shoppers said they were open to a house that needs renovations, according to a survey from Realtor.com.  The DIY and HGTV shows make it look easy, but renovations aren’t as easy as they may look on TV. What looks like a simple project can quickly become something much larger after the demolition..

Renovation Mortgage Options

Renovation loans are mortgages that let you finance a house and improvements at the same time. Options include:

• FHA 203(k): Offered through the Federal Housing Administration, FHA 203(k) loans allow lower income and credit scores than conventional mortgages. You can do a streamline (up to $35,000) or a full 203K that involves a HUD consultant.  It is not as scary as it sounds!  A streamline cannot be used for structural repairs but can be used for a new roof, windows, kitchen, flooring, painting, etc.  A full 203k can include structural work.  Both programs required a licensed and vetted contractor.
• HomeStyle: Guaranteed by Fannie Mae, HomeStyle mortgages require higher credit scores than FHA 203(k) loans. But almost any improvements are eligible for this renovation loan. Just like FHA 203K, the conventional renovation loan requires an approved contractor.

FYI on DIY

Hire a professional contractor to estimate the cost of all the work that’s needed before you make an offer. Most buyers are not able to accurately estimate the time and cost involved in a renovation.  Do-It-Yourself is not allowed with a renovation loan, so make sure you have a contractor that has good references and can complete the project on your schedule.

Part of the budget discussion should involve not over improving your home for the neighborhood.  You do not want the most expensive home in your surrounding area.  You may not be able to sell it for what you have invested.  That is the reason for having a good bid from a legitimate contractor.

Bootstrap Your Renovation

If you decide to pay for all of the improvements and upgrades with cash, a credit card or a personal loan. These bootstrapped financing options might put a low ceiling on your budget and limit you to one project at a time, so a home that needs simpler repairs may be right for you.

A renovation loan can expand your budget and allow you to tackle larger projects, which may make it more reasonable to buy a house that needs a lot of work. And whether you DIY or hire a professional, don’t be surprised if there are roadblocks along the way. It always seems to take longer than expected and that is the nature of remodeling.

Renovation Loans Add Supervision and appraisals

Renovation loans often require extra consultations, inspections and appraisals designed to protect the lender’s investment — as well as your own.

A standard renovation loan vets the contractor, requires you to hire a HUD consultant who will approve your plans, manage contractor payments and inspect the property after each phase of work is complete.

A renovation loan requires and appraisal “as complete”.  The appraiser looks at your bid to see what work will be done and appraises the home as if the work has been completed.

Buying First, Renovating Second

Sellers are in the driver’s seat on when they want to close.  A renovation loan can take 60+ days to complete because you must find a reliable contractor(s), get bids, investigate materials you want in the rehab and many more steps.  Most sellers are not willing to wait, so doing the renovation as a refinance is a smart move.

The satisfaction of creating a home that’s uniquely yours

There’s no doubt that buying a fixer-upper is more work than a move-in ready house, but the reward most likely will match the effort.

When the dust clears and the paint dries, your home will be full of personal touches rather than the remnants of someone else’s life.  A house that’s just how you want it without the premium price tag of new construction? Now that sounds like a dream house.

Contact Curt Tiedeman, NMLS 35554 at Caliber Home Loans to get more information. 206.650.4202 |  Curt.Tiedeman@CaliberHomeLoans.com

Source:  Nerdwallet | BETH BUCZYNSKI & KATE WOOD