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Buying a Fixer-Upper as a First Time Home Buyer

As we noted in our recent post “Financial Help for First-Time Homeowners with Fixer-Uppers,” buying a fixer-upper is a serious undertaking. Of course, there are many advantages to purchasing a fixer-upper instead of a turnkey home. To start, there are dozens of financing options available to buyers of fixer-uppers. The Federal Housing Administration’s 203(k) rehabilitation loan and USDA renovation loan are just two. In most cases, homeowners can bundle their home and renovation loans in one monthly payment. Furthermore, fixer-uppers usually cost less and are more customizable than turnkey properties. However, fixer-uppers do present a series of challenges – especially to first-time home buyers. For example, homeowners must wait until renovations are complete before they can move into their new home. They must also meet standards and deadlines set by their lender. This can affect everything from which contractor they choose to the timeframe of each home improvement project. Follow below to learn all about the pros and cons of buying a fixer-upper as a first time home buyer.

Pros and Cons of Buying a Fixer-Upper as a First-Time Homeowner

Advantages of Buying a Fixer-Upper

#1 There Are Many Financing Options Available to First-Time Buyers

From down payment assistance to loans that bundle renovation spending with your original mortgage, there are so many financing options available. The federal government backs or funds most of the loan options detailed in our previous article. Many are designed specifically for buyers with a tight budget, low credit scores and limited ability to buy a move in ready house. Your specific state – whether you live in Massachusetts, New Hampshire or California – likely offers additional programs for first-time buyers. We get into all the fixer upper mortgage and other financing options available in our post “Financial Help for First-Time Homeowners with Fixer-Uppers.”

#2 Buying a Fixer-Upper Is Usually Less Expensive Than Buying a Turnkey Home

Buying a Fixer-Upper Is Usually Less Expensive Than Buying a Turnkey Home

Most fixer-uppers are less expensive than turnkey, move-in ready homes. In his article “Should you buy a fixer-upper home?” for MarketWatch, McCall Robison explains. Robison writes that in 2018, “fixer-upper homes [were] typically 8% below the market value.” In a balanced market or a buyer’s market, fixer-uppers are usually far below the market value of a turnkey home.

Of course, the residential real estate market in 2022 is still hot – with sellers holding a significant advantage over buyers. With housing inventory low and demand high, competition for any type of house is fierce right now. Even so, there might be less competition for fixer-uppers amongst home buyers. This is because of the amount of time, energy and resources required to rehab them. Furthermore, first-time buyers could face competition from developers or fix-and-flippers who make a profit off reselling rehabbed properties. 

#3 You Have the Opportunity to Immediately Increase Equity in Your Home

Buying a fixer upper with a lower purchase price allows a buyer to quickly increase equity after completing structural and cosmetic renovations. In their article “Considering a fixer-upper? Here’s what you need to know” for Curbed, Emily Nonko and Laura Fenton explain. Fenton and Nonko write that once your renovations are complete and “you can go back to your lender and request a new appraisal.” 

If the home appraises above the amount you originally paid, “this higher appraisal may enable you to stop paying private mortgage insurance (PMI).” Of course, this is only so if you put down less than 20% at closing. Another option is to consider cash-out refinancing or take out a home equity loan based on the equity you have gained. In our article about alternative financing options for homes that cannot qualify for a traditional mortgage, we elaborate. We note that home equity loans are a great option for second-time buyers.

#4 You Can Customize Your Home to Your Preferences and Lifestyle

You Can Customize Your Home to Your Preferences and Lifestyle

Creative control is another benefit of buying a fixer-upper. When purchasing a turnkey property, all the finishes have already been chosen by the previous homeowner or developer. With a fixer-upper, you can replace elements you dislike with exactly what you want. You might even be able to alter the floor plan or expand the kitchen, depending on the type of financing you qualify for. 

Disadvantages of Buying a Fixer-Upper

#1 Home Renovations Are Still Expensive in 2022

Home Renovations Are Still Expensive in 2022 which is a disadvantage

The cost of home renovations and repairs has been steadily increasing over the last two years. Everything from replacing windows to remodeling a kitchen seems a lot more expensive in today’s housing market than in years prior. Hiranmayi Srinivasan explains in her article “The Average Cost of Home Repairs Will Be Higher Next Year” for Better Homes & Gardens.

According to Srinivasan, “inflation, labor shortages, and rising housing prices” are largely responsible for the growing cost of repairs, remodels and renovations. Referencing Thumbtack’s Home Care Price Index, Srinivasan notes that “the average cost to maintain a single-family home increased by 9.3%” in 2021. In 2022, renovation costs are still rising.

Plus, more Americans are working and learning from home than ever before. As such, our homes are experiencing more wear and tear than is typical. This could be why 30% of homeowners surveyed by Thumbtack reported “they plan to spend more than $10,000 on home projects in 2022.”

Increasing demand could also contribute to rising costs this year. Quoting iProperty Management CEO Leonard Ang, Srinivasan elaborates. Ang tells Srinivasan that “‘the overall trend has been for higher prices across the board.’” Between the “serious supply and labor shortages…and an increased use of home appliances,” a gap between demand and supply remains. As such, buying a fixer upper might not actually be the right way to save money in 2022.

#2 Most Rehab Loans Restrict What You Can and Cannot Do

Most Rehab Loans Restrict What You Can and Cannot Do

What you can and cannot do with cash from a renovation, construction or rehab loan differs from lender to lender. With some loans, you could repair a deck, but you might not be able to add a new deck. With others, you might be able to make structural repairs but not cosmetic improvements. If you opt for a government loan like HUD’s 203(k) rehab loan – insured by the Federal Housing Administration – you probably won’t DIY much.

You will need to hire an approved contractor, to whom the loan amount is paid in installments as stages of the renovation are completed. Furthermore, many rehab loans require first-time home buyers finish renovations within a very short timeframe. This timeframe is often around six months from the purchase date of the fixer-upper house. 

#3 You Might Not Be Able to Move Into Your New Fixer Upper Home Right Away

Last on our list of cons when buying a fixer-upper is that you might not be able to move into your house right away. The greatest advantage of buying a turnkey house is that it is a move in ready home. If your fixer upper home requires structural renovations, you could be stuck renting your old apartment for a few months. Thankfully, some lenders do provide first-time buyers with a stipend to cover living expenses. This way, you do not have to stay in a construction zone. Be sure to check with your lender to ensure you are saving money by buying a fixer upper house rather than wasting it!

How Much Should I Pay for a Fixer-Upper House?

How Much Should I Pay for a Fixer-Upper House?

It can be difficult to determine the true cost of a fixer-upper – especially for first-time home buyers. Of course, there is a standard formula for determining how much you should pay. Say the home is listed at $300k – including closing costs – and you are quoted $150k in repairs. You should not offer more than $450k for the property. Read our post “How Much Are Closing Costs for Home Buyers” to learn exactly how much you could owe when buying a home.

However, first-time buyers should keep in mind when house hunting that these quotes are usually just estimates. They only cover the costs of labor and materials. There are often hidden costs when renovating a house that buyers might forget to budget for. These quotes do not cover the cost of your temporary housing, shipping delays or the interest on your loan. 

Determining If a Fixer Upper House is Worth the List Price

Consulting a real estate agent or loan officer is the best course of action when deciding if a fixer upper house will save money. But first, consider Terri William’s advice in her article “Buying a Fixer-Upper? Here’s How to Tell When There’s Just Too Much to Fix” for Apartment Therapy. Before submitting an offer, Williams recommends calculating “how your updates will affect resale value.” Cost of repairs should not exceed the amount “you’ll be able to recoup in the home’s after-renovation value.”

Next, set “a budget for unexpected expenses” and add this to the estimated cost of repairs. You might also try to avoid homes with major issues related to the structure – particularly the foundation – electrical, plumbing or roof. Rehabbing any of these will cost a lot more money and take a lot more time than replacing windows or ripping out flooring. Avoiding fixer upper houses with major issues could potentially save thousands on renovations and hours on headaches.