Should You Buy That Fixer-Upper?

by Kathryn Godby Oram

In commercial real estate lingo, a fixer-upper is called a “Value-Add” deal. Either term refers to a real-estate property that will require maintenance work (redecoration, reconstruction or redesign) and can usually be lived in as it stands.

The idea that you can add value to a property is why buying a 'fixer-upper' has so much appeal. Market data shows that while housing sales have increased, prices have not.

In fact, prices are not predicted to hit bottom until the first quarter of 2010. For buyers, rates are still historically low, prices are down, government tax incentives are due to expire, and there is an abundance of homes to choose from in every market. Yet despite the appeal of buying, many new buyers are afraid to pull the trigger and loose value immediately upon closing.
Read more Research & Statistics by the New Jersey Association of REALTORS »

Buying a “Value-Add” house, if done right, can be a hedge against falling prices. The potential exists to buy the cheapest house in a desirable area way below market price, invest some time and money for renovations, and raise the property's potential value to get a return on your investment.

Make sure you have a realistic idea of what you're getting into. Here's a few things to look for:

Chances are if you’re reading this, you’ve not gone the fixer-upper route before. Finding your subject property is not an easy task. Even the best house with the best renovations will not pay you dividends if it is not in a good locale. Keep playing that old Realtor tune “location, location, location”; A great yard, a well sited home and nicer more expensive homes in close proximity are guidelines. In this market look for a house that has been overlooked because buyers cannot see past the orange shag carpet, the scary kitchen and the overgrown garden. Put on a pair of rose-colored glasses and squint. You can see it. I know you can! The best fixer-upper is a home that is out-dated but has been maintained. If the house is not sold because it needs paint and a new kitchen then there is your winner!

Once you’ve decided on a specific property find a good inspector. Cull recommendations from friends or co-workers. You might also use a screening agency such as service magic, or go to the American Society of Inspectors for help in finding a competent inspector. Your inspection report is your Golden Ticket; it tells you whether to halt or go forward. It can be your guide to assess what the house needs and if the process is manageable or will be too taxing on you and your checkbook.

Your inspection will cover everything from the roof to foundation. Pay close attention to water, mold, septic, oil tank and structural issues. Lead tests, Termite and radon may or may not be included. Pest and Radon inspections are a necessity but check with your Realtor to assess weather or not you need a lead test.

With your report in hand walk through your prospective purchase with a contractor get estimates on all proposed work. Remember that budgets expand not just because of unforeseen problems but because you may want to add more projects along the way. Add 20% to the estimate if your plan is simple. The more complex your job, the more overages you may encounter.

Keep in mind that the house was standing when you bought it and the nasty bathroom won’t kill you. If some projects can be done over time than let them. Waiting is it’s own reward. Many homeowners, myself included, have had to scale back projects because of budget and then come to realize that their original ideas were not optimal. Sometimes living in a space for a while gives you a vision that you may not have had before. Think about doing projects in phases to give yourself time to save more money and space out your expenses.

Doing a Value-Add project is not for everyone. Take stock of your time, your desire, your talents and decide if this is the right move for you. Can you do dishes in the bathroom? Do you like to paint? Can you use a hammer? These are only a few of the questions you should ask yourself. In the end, you need to decide if you are the type that likes to do things yourself. If so, this will be a trying but rewarding and profitable experience. At the end of your project, though these things never truly end, you will have a home that is absolutely yours.

I walked into the closing of my first home and signed the papers and cried. I was young, newly married, pregnant with my third child and wondering that the heck I’d just gotten myself into. Years later, I have a wonderful house, it’s nothing like the one I bought. I didn’t move, I renovated and I kept going. I bought a dump on a great street. It had good bones but a sad face. I stood in front of that house and squinted and saw what that house could be. It’s almost there. People always tell me that I have a great house and I say, “It will be” Once you get the bug you keep improving, take pride in your work, and enjoy the journey.

I have six kids now and my old farmhouse works well for us, thank goodness. The reason is works is because I followed my own advice. I bought in a good neighborhood, I knew the floor plan would work for me and I was totally aware of the scope of the work that was needed. I never thought it would be simple or cheap and I never needed to have everything done immediately. That said, it was hard but it was worth it. While others in my neighborhood have loan to value ratios that are less than desirable, I am safe. Safe at Home.