Is Buying a "Fixer- Upper" a Good Idea? by Lisa Getson
There are some homes for sale that are advertised as "fixer-uppers" or as being sold "as is." They require "tlc" or "tender loving care." This is reflective of the condition of the property. Usually homes like this have outdated kitchens and bathrooms. They require painting and flooring, among other things. Are these homes a good investment? It depends on the asking price, the amount of work to be done, and the ultimate price paid for the property.
The asking price for such a property should be reflective of the market value of the area and the condition of the home. There should be comparable houses in the neighborhood that have sold or are currently for sale, usually in average or above average condition. It is important to know what the home would be worth after all of the needed repairs. Once you have the end price established, calculate the amount of work to be done and then subtract it from the final price. This will back you into the appropriate asking price for the home, and it will usually be below current market value for the area.
The sale price of the home may depend on the buyer. If the buyer is an investor or a rehabber they will be limited in their purchase price as they have more costs involved. For starters, they have to pay transfer tax on the property both when they purchase it and when they re-sell it. They also have to pay a real estate commission on the resale. More than likely they own another home or homes and will be borrowing money to carry the new property while making the necessary upgrades. When deciding what improvements to make a rehabber always has to be sure that they are going to be able to quickly make a profit on their investment when selling the home. An investor who may consider renting out the property has to calculate if the monthly rental income is more than the monthly costs. This is all possible if the price paid for the property is low enough to allow for room for repairs and the final value of the home is significantly more.
If the buyer of the property is an end user, someone who is planning to live in the house, then they can usually pay a higher price for the property. They are still making a good investment. They are likely getting a house below market value for the area. There is more money available to make necessary repairs as there are no extra carrying costs involved and there is no worry about re-selling the property in a short amount of time. Furthermore, if an end user is handy they can do the work themselves.
There are some advantages to being an end user of a fixer upper property. First, you can usually get into a neighborhood that you may otherwise not afford. Second, you can make the upgrades to your liking. You can choose your own paint colors, put in the kitchen of your dreams and a bath to your satisfaction.
Whatever your position, as an investor, a rehabber, or end user, if the right property comes along that needs a little "tlc" it is worth visiting. And if the repairs are purely cosmetic and the house is structurally sound and the main operating systems are in good shape, it is worth considering for purchase.