Rule #1. Evaluate the fixer-upper total price
If it’s a fixer-upper, it should come at a fixer-upper price.
Treat this like an unbreakable rule because it is easy to fall in love too quickly with a home that the listing says “just needs a little TLC.” Do your homework first, and if the price is right, then fall in love. I personally add a cushion of 10% to my fix-up cost estimates for contingencies before I let myself get too enthusiastic about the home.
You can find out the current price by looking at what similar homes in the neighborhood have currently sold for and what were the upgrades, amenities, materials, structural components etc. compared to the cost of the home you are interested in after paying for upgrades. If you want to do the research yourself several websites, such as Realtor.com and Zillow can assist you with this. R
emember on these websites you will be looking at listing prices not the sold price.
I highly recommend you work with a REALTOR®. A REALTOR® will have have access to the MLS and other tools to help you assess the prices of comparable homes. If this is your first such transaction, look for someone who has experience helping clients when purchasing a fixer-upper. The Realtor will not only help you with comparables and they can let you know how much money you can invest in the home before you over-improve for the neighborhood, a mistake you want to avoid, especially if you plan to sell in the near future.
Rule #2. Treat a fixer-upper like a business not a hobby.
Never get so swept up in the planning of the project that you fail to treat everything from beginning to end like a business.
Determine your budget based on the market value of homes in the neighborhood. You do not necessarily get more money for all the improvements you will put into the house. Your home’s value will be limited by the market value of what nearby houses are selling for.
Some improvements fall into the category of “eye makeup and lipstick”. These are improvements, such as painting or front yard landscaping, which you can accomplish with sweat equity and would not be very expensive if contracted out. These carry almost no risk for resale. Other improvements — such as major repairs, like a new roof or a kitchen remodel, carry more risk of not recapturing the cost. These items usually require the work of professionals and can be very costly. If you are buying a fixer-upper to live in, you may decide to do more remodeling than someone who is buying the home only for investment. Either way, put your business hat on and objectively evaluate what you will have paid for the home after fixer-up expenses and what would be the selling price afterwards.
The following data from the National Association of Realtors “Remodeling Impact Report” (RIR) list the top four fixer-upper projects that are most likely to to be equity-builders.
New roof: This is your best bet. A new roof may not be the remodeling project of your dreams — until you realize it could actually pay you. You’ll spend about $7,600 to install it (based on a national average determined by contractors responding to the RIR survey), but when you sell, it could recoup 105% of that or $8,000, according to REALTORS® surveyed.
Hardwood floors: If they can be refinished this is also a good bet. It costs about $2,500 on average nationally to refinish hardwood floors. If you bought a house that already had refinished hardwood floors, you could pay about $2,500 more for the home. But if you’re looking at a fixer-upper (at the right price) that needs the floors redone, that’s like getting the floors for free! New hardwood floors are also a good choice at a cost of about $5,500 to install, and could recoup $5,000 of that at resale.
Insulation: Good bet if you plan to live in the home. A fixer-upper offers a great opportunity to replace or add insulation. New insulation costs about $2,100 on average nationally, and can recoup $2,000 at resale — as if saving 10% to 50% on your energy bill wasn’t compelling enough.
New siding: Last is new siding. Droopy, old siding can be great news on a fixer-upper. Vinyl siding costs about $12,000 to install on average nationally, and recoups about $10,000 when you sell. Great bet if you can get the home at a price that covers the cost of the siding
While those four areas are pretty safe bets — homeowners who responded to the RIR survey gave them high happiness and satisfaction marks — remember almost any project can be worth it if the price is right. For example, a complete kitchen renovation can cost $60,000 and recover only about $40,000 when you sell. If you live in the home for five years it may be worth it to you, if not reconsider what you need to spend on the kitchen or offer less and hope you get the home.