It's an age-old conundrum: Buying a home is the best way to build long-term wealth, but saving up a down payment in some markets is next to impossible. One way around the problem is to choose a house that needs significant repairs or renovation. Because repairs are expensive, the list price of the home can be deeply discounted. Ideally, that means you can put off repairs until you have money — or, if you're handy, save money by doing some of them yourself. But how do you know you'll save money in the long run? And how do you know the house won't fall down the day after you sign the mortgage? Follow these steps for a successful renovation:
- Don't skip the home inspection. In most home purchases, the buyer pays a few hundred dollars to have an inspector go through the house and point out things that need to be improved or repaired. However, some buyers try to save money by skipping this step. If you're purchasing a fixer-upper, never skip this step; hire a reputable inspector and use his or her recommendations as a starting point for your repairs.
- Talk to contractors first. Once you've worked out what needs to happen, talk to trusted contractors to find out how much it will cost. Don't assume you can do everything yourself. You'll likely save money by hiring professionals for skilled tasks like plumbing and wiring because professionals already own the tools and equipment they need for the job.
- Look into special mortgages. The FHA and the VA both offer special mortgages that offer financing for your construction projects for homes in need of renovation. Look into programs that offer incentives for homeowners making eco-friendly or disaster-resilient improvements.
- Look at comparable properties. Once you've worked out what your home will cost and what you'll pay to improve it, the next question is whether you're saving money in the long term. You can figure this out by looking at other nearby properties that need less renovation. Make sure that the comparable homes are in the same neighborhood, have the same number of bedrooms and bathrooms, and have similar sizes and amenities. Then it's time to do some math.
For many first-time homebuyers, buying a fixer-upper is the best way to build home equity. However, it can also cost a great deal of time, money and effort. Think your decision through carefully. And if you have questions, give us a call. We'll help you make sure you're making the right call.