Buying A Fixer-Upper Home? Beware The Money Pit & Do The Math First

Binge-watching home improvement TV shows can leave you with the impression that buying a fixer-upper is always a great opportunity to buy a home below market value and turn it into a dream dwelling. While that might turn out to be true, it only tells half the story. Renovating a fixer-upper is not for the faint of heart. It takes patience, sweat equity and deep pockets.

Thanks to a limited inventory of affordable entry-level homes and the aging of America’s housing stock, a growing number of home buyers are considering fixer-uppers. A new survey by LendingTree, the nation’s largest online lending marketplace, finds that watching home renovation shows also seems to make people more likely to want to buy a fixer-upper. LendingTree surveyed 2,094 home buyers who watch home improvement TV shows. Of the HGTV or DIY Network channel-watchers who tune in at least once a week, 81% would consider a fixer-upper. About two-thirds (66%) of people who never watch those shows also say they are open to buying a fixer-upper.

While a fixer-upper might have an appealing price tag, the markdown might not make up for basic renovation costs. Do the math. “A lot of people have a misconception about what they have to do with a fixer-upper,” says Tom Silva, a general contractor who stars on PBS’ home improvement show “This Old House” and its companion series, “Ask This Old House.”

“They have to think about the age of the house,” explains Silva. “They have to think about what are they planning on doing, if anything, themselves. Are they just going to buy the house and hire out people individually, or are they going to get a contractor to take the job on? It can be an overwhelming process if you don’t really know what you’re doing. You have to be careful that you don’t get in over your head.”

In 2015, Lauren Mochizuki and her husband, Kyle, bought a Spanish-style, two-story home in San Juan Capistrano, California that was built in 1976. It was in a great neighborhood, but the four-bedroom, three-and-a half bath home needed work to bring it into the 21st century. Mochizuki, who is 33, recalls thinking, “It has great bones, it has great potential. I could see that if we took out certain walls and we opened up certain things that eventually it could become what we wanted.”

The nurse and mother of a 5-year-old boy and 3-year-old girl watches home renovation shows when she has the time.  “I love to draw inspiration from different designers, see the latest trends, and get ideas for DIY projects,”  she says.

The Mochizukis stayed in their home for two years while they figured out what would make them feel better about their living space, paid off debts and saved money for a whole-house renovation. In November 2017, they opted to move out temporarily to avoid dealing with the inconveniences and discomfort of a large-scale remodeling project such as the dust, noise and workers coming in and out of the house throughout the day. The family returned to their remodeled home in February 2018.

Dan DiClerico, a home expert at home services company HomeAdvisor, says, “When you’re talking about buying a fixer upper, the whole calculus changes because you really need to factor in the cost of the renovation. If the home is move-in ready or close to it, you’ve just got to get to the down payment or closing costs. Figuring out the actual cost of what this renovation is going to cost me, that’s one of the hardest parts of the whole process.”

A good rule of thumb for all homeowners is to expect to spend at least 2% to 5% of your home price on maintenance and repair costs annually. 

Many older homes aren’t up to code and are bought and sold as is. An FHA 203(k) loan allows you to combine the cost of purchasing or refinancing a home with the cost of renovating it. FHA requires that you use a minimum of $5,000 toward eligible repairs or improvements and that the repairs are completed within six months after the loan’s closing, depending on the extent of work to be completed. This first $5,000 primarily covers eliminating building code violations and modernizing or making health and safety-related upgrades. Some lenders will only offer conventional loans for smaller cosmetic repairs rather than structural renovations.

Mochizuki says it pays to plan and budget for a renovation at least a year ahead of your planned project. In fact, she writes a blog about living within your means. “We started shopping around for floors, appliances and light fixtures well in advance,” says Mochizuki. “This worked towards our advantage as I was able to get lots of our vanity mirrors, cabinet hardware and bathroom sconces on sale since I wasn’t in a rush to purchase them.”

The couple hired a contractor and his crew to complete most of the work, though Kyle, a firefighter, tackled some demolition himself to cut costs. “What we asked of the contractor when he created his bid was to give us as big of a breakdown as you can room per room so we could see what we were up against,” says Mochizuki. “That was really helpful in making our budget decisions along the way. We had money set aside.”

In the bathroom, for instance, they didn’t change the positioning of the toilet, sink or shower since moving the plumbing would be a big expense. “The biggest plumbing expense was when we altered things in our kitchen. That we knew was a priority, and that’s where we knew where we would want to spend our money as far as the plumbing category went,” says Mochizuki.

The bottom line for their kitchen renovation was about $68,000, including appliances, labor, the removal of two walls and the installation of a beam. This also included the price and installation of windows and accordion doors. Other big-ticket items included the refrigerator, oven and stair railing. 

Before you start swinging sledgehammers and tearing down walls, be realistic about your expertise. You might want to leave some projects to the pros. Also, find out if permits are required. Antiquated or faulty wiring and plumbing systems can be dangerous for an inexperienced do-it-yourselfer. Silva warns that lead-based paint and asbestos could be lurking in houses built before the 1970s. He says the key to a good home makeover is to renovate one room at a time. If everything is torn apart, you are likely to feel snowed under.

“I always tell people if you’re doing the work, it’s going to take longer than you think,” he explains. “The smartest thing that you can do is pick a room that you know you’re going to renovate anyway, like, for example, that bathroom. Hopefully, you have another bathroom that you can use in the process of the renovation. Do whatever has to be done to make that bathroom legal and complete. The key word is complete. Once that room is complete, move on to a kitchen or a bedroom or whatever because it’s going to be a long process to do the first room.”

The old adage of buying the worst house on the best block can be an effective real estate strategy, says DiClerico. But he cautions, “You have to do the math, and the numbers have to work because if you get stuck with that fixer upper and you’re not able to make the necessary repairs and improvements, then you haven’t done yourself any good, and you’re probably going to come out of it on the short end of the stick.”

Buying a fixer upper gave the Mochizukis an opportunity to turn their house into their forever home. “We don’t see ourselves moving,” says Lauren Mochizuki. “The reason why we did something in almost every room is because we knew we were going to be here forever.” 

This post first appeared on Forbes.com. To see the original, click here.