Considering a Fixer-Upper? Follow This Checklist First

In today’s competitive real estate market, soaring home prices have led many buyers to consider alternative options. One such option is purchasing a fixer-upper.

While fixer-uppers often come with a lower price tag than move-in ready homes, it’s essential to weigh the potential benefits against the drawbacks. In this guide, we’ll walk you through a checklist to help you determine if a fixer-upper is the right choice for you.

We’ll also delve into loan options specifically tailored for purchasing and renovating fixer-uppers, providing you with comprehensive insights for making an informed decision.

1. Do your research

Before committing to a fixer-upper, it’s crucial to gather as much information as possible about the property. Request that your real estate agent investigate the home’s history, including previous listings, sales, and any seller’s disclosures. Additionally, consult local property records to check for foreclosures, liens, and building permits associated with the property. This research will provide valuable insights into the home’s background and potential challenges.

2. Collaborate with a contractor

When touring a potential fixer-upper, it’s advisable to bring along a trusted contractor or construction professional in addition to your real estate agent. Their expertise will help you identify any existing problems, and they can recommend necessary updates or repairs to make the home more livable and marketable.

3. Assess the repair costs

After touring the home, consult your contractor to estimate the repairs and upgrades required, along with associated costs for labor and materials. This information will help you determine a fair offer for the property, factoring in the projected expenses accurately.

4. Estimate the future value of the home

To make sure the home is a good investment, you’ll want to get a good idea of its value — the final value, once your repairs and renovations are complete. Your real estate agent should be able to help you with this by using comparable sales figures in the area. 

If you’re considering a fixer-upper to flip and sell, try to follow the 70% rule when you make an offer. Under the 70% rule, you should pay no more than the 70% of the home’s after repair value — minus repair costs — if you want to make a profit.

5. Understand the local market

You should also work to understand the local real estate market — especially if you think you’ll sell the home in the next few years. Given the home’s current state, as well as the renovations and repairs you’re looking to make, will there be demand for the property down the line? Will it align with local buyer preferences? Will it gain value and give you a good return on your investment? Your agent can help you with this step as well.

6. Conduct a comprehensive home inspection

When making an offer on a fixer-upper, ensure it includes an inspection contingency. Hire a professional home inspector to conduct a thorough evaluation of the property’s problems, defects, and safety hazards.

The inspector will give you a full report detailing the home’s problems, defects, and safety hazards, and you can use it to either renegotiate with the seller or even back out of the deal entirely. It can also serve as a great punch list that your contractor can work off of. You should have them update their repair estimate based on it, too!

7. Evaluate the overall picture

Take a step back and assess the complete picture. Consider whether the necessary repairs, renovations, and associated costs align with your budget and timeline. Determine if you can comfortably live in the property during renovations or if you’ll need to maintain your current residence. Seek advice from your inspector, contractor, and real estate agent to gain different perspectives and determine whether the fixer-upper is worth pursuing.

Loan Options for Fixer-Uppers:

If you find that a fixer-upper is the right fit for you, it’s essential to get pre-approved for a mortgage loan specifically tailored for purchasing and renovating such properties. Consider exploring loan options that offer financing for both the purchase price and the estimated renovation costs.

FHA 203(k) loan

The Federal Housing Administration (FHA) offers the 203(k) loan program, specifically designed for purchasing and renovating fixer-uppers. This loan provides financing for both the home purchase and the renovation costs. There are two types of FHA 203(k) loans:

Limited 203(k) loan: Suitable for minor renovations with a maximum loan amount of $35,000. This loan is ideal for cosmetic upgrades, repairs, and improvements that do not involve structural changes.

Standard 203(k) loan: Appropriate for more extensive renovations, including structural repairs. The loan amount is based on the projected value of the home after renovations.

Fannie Mae HomeStyle renovation loan

The Fannie Mae HomeStyle Renovation loan allows borrowers to finance the purchase of a fixer-upper and fund the renovations. This loan option is available for primary residences, second homes, and investment properties. The HomeStyle Renovation loan offers flexibility in terms of the types of renovations covered, such as room additions, kitchen upgrades, and major repairs.

VA renovation loan

For eligible veterans, the Department of Veterans Affairs (VA) offers a VA Renovation loan. This loan combines the benefits of a VA loan, including competitive interest rates and no down payment, with financing for renovations. It allows veterans to purchase and renovate a fixer-upper property with a single loan.

Conventional renovation loan

Conventional renovation loans, offered by various lenders, provide financing for purchasing and renovating fixer-uppers. These loans follow conventional guidelines and can be a suitable option for borrowers with a good credit history and a significant down payment.

USDA Rural Development home repair loans and grants

If you’re purchasing a fixer-upper in a rural area, you may qualify for USDA Rural Development loans and grants. These programs offer financial assistance for low-income homeowners to repair, improve, or modernize their homes. Eligibility and specific terms vary based on income limits and the location of the property.

Personal loans and home equity loans

In some cases, borrowers may choose to fund their fixer-upper renovations through personal loans or home equity loans. Personal loans are unsecured loans that typically have higher interest rates but offer flexibility in use. Home equity loans, on the other hand, use the equity built up in an existing property as collateral for the loan, providing access to substantial funds.

Ready to get started?

If you find that fixer-upper is the right fit, you’ll want to get pre-approved for your mortgage loan before submitting an offer. Contact the Embrace Home Loans office in your area to get started today.