How to Purchase a Fixer-Upper

With some work, this could be an attractive home.

Buying a fixer-upper is a great way to build equity. You can get the house at a discount due to its condition, then you can make it worth more by fixing the problems and making it lovely. It's a good strategy for someone looking to buy a bargain house for himself or for someone looking to do a rehab and make some money by selling the property for market value after the repairs are completed.

Instructions

1. Look at property. Have a real estate agent show you all the houses in town in your price range that need work. Use this time to familiarize yourself with the market. Find out what other houses in the neighborhood (that don't need work) sell for. That way you'll know what your house will be worth when you're finished with it.

2. Learn what repairs cost. You can get bids from a contractor or ask friends who have made repairs on their homes what their costs were. It also helps to read home improvement books or ask home improvement store employees to get an idea of how much time, effort and materials repairs will take.

3. Run numbers.You should know what the property could be worth if it were fixed up. You should know how much it will cost to fix the issues. You should also have a timeline that it will take to complete these repairs, which will inform you what your holding costs (loan payments, insurance, taxes, utilities) will be. This will give you a maximum purchase price.

   For example: A house has the potential to be worth $100,000. It needs $15,000 in repairs. The repairs will take six months, which will equal around $5,500 in holding costs. You'll also need to cover closing costs when you purchase the house and you want to leave room for profit, so you can figure you shouldn't pay more than $62,500.

4. Make an offer using the number you came up with in your calculations as the maximum price. If you can get the house for less, it's a bargain. If the sellers counter with a higher price, turn them down. It's not worth getting your offer accepted if you'll lose money on an investment.

   It may help if you submit a list of repairs that the property needs and the cost associated with each repair. That way the seller has a better idea of how a potential buyer views the house.

Tips & Warnings

• Ideally, you're looking for the ugliest home in a neighborhood of nice properties.

• Make sure to get a home inspection so that you know the true extent of the property's issues.

• Don't get bids from contractors on every property; they'll get mad if you have them provide bids and never hire them.

Resources

• This Old House: Should You Buy that Fixer-Upper?