Fixer upper homes can be found in even the most expensive cites for much less than other homes. Even here in Tucson, where a small home will usually be over $200,000, an investor at our real estate investing club just told us he found one for $35,000. Before you get excited by the idea, though, here are the two most important questions you should ask yourself before buying a fixer upper:
1. Do you want to deal with it? You don't necessarily have to fix the house yourself, as you will see in the example below. Still, you will have to deal with hiring contractors, and you'll have the stress of unexpected problems that always occur with fixing houses. There are always unexpected problems.
2. How much is it worth to you to deal with it? Suppose you end up with total of $125,000 into a house that is worth $145,000. Does that $20,000 equity gain make it worth it? It is entirely up to you to decide how much you want for your trouble. How do you know what you'll gain in equity? Figure it like an investor would, as in the following example.
When you look at a fixer upper, decide what you would need to do to make it a nice place to live. It might need a new roof, new carpeting, paint and a dozen smaller things done. Make a list all the things you will do if you buy it.
With the help of a real estate agent or appraiser, estimate what the house would sell for if it was the way you want it. Now you have your finished value. Work backwards from here to arrive at the price you will offer.
Suppose the house will be worth $179,000 when it is done. It will need carpet, wall repairs, yard work, paint, a new door, new appliances, and a few other things. Calling around to get a few quotes, you determine this will all cost $12,000 unless you do some of the work yourself. Subtract this from the $169,000.
Subtract "holding costs." This includes interest on the loan, taxes, insurance, and utilities during the time you can't live house while it's being fixed. You can skip this if you get to move right in, but we'll assume $2,000 for our example. Subtract another $2,000 for anything unexpected.
Subtract the amount that "makes it all worth it." For our example, we'll assume it's worth the trouble for you if you get an instant equity gain of $13,000. Now, having subtracted the repair costs, holding costs, unexpected event money, and your "profit," we arrive at $150,000.
$150,000, then, is the most you should pay for the house. Offer less, maybe $144,000, so you have some negotiating room. If you can't get it $140,000 or less, you should probably walk away. This is the short lesson on how to buy fixer upper homes.