Pros and Cons to Consider BEFORE You Buy a Fixer-Upper

We all have at least one friend, relative, or coworker who has sacrificed every weekend this year working away on their "easy" fixer-upper home. Unfortunately, for every ultimate DIY house that turns out exactly how the buyer envisioned, there are at least half a dozen folks who end up over their head with half-finished projects and a mound of debt. So, how can you determine if that fixer-upper is worth the investment? Here are a few things to consider.

What is a Fixer Upper Home

A fixer-upper is also referred to as a starter home, a house that can be lived in but does need renovations and repairs. For many people, especially in urban areas, move-in ready single-family homes are getting more and more expensive and hard to find, so even though a house needs some work, It can be a more affordable option.

Pros: Lower Sticker Price

Buying a fixer-upper house is, without a doubt, cheaper than a move-in ready home upfront. Since no two houses are the same, it's hard to do a true, apples-to-apples comparison to find out exactly how much money you'd save, but be warned that your savings may not be as high as you think after project costs.

Cons: Easy to Go Over Budget

You may want to plan to go over budget since 4 out of 5 fixer-uppers do. Most experts suggest adding 10-25% to your remodel budget for surprise costs. Think of unexpected asbestos in your subfloor, resulting in paying for new flooring and the cost to dispose of the toxic substance or removing the wallpaper or drywall only to find rot in the beams.

Pros: Choose Where Your Money Goes

One of the best things about a fixer-upper is the opportunity to invest in parts of the house that matter most to you. Spend a lot of time in the kitchen? Make that one of your top priorities when you're remodeling. With a move-in ready house, you either rip out a perfectly good kitchen or stick with the previous owner's interests and style.

Pros: Less Competition

San Francisco, Seattle, and Portland aside, you're far less likely to end up in a bidding war for a fixer-upper than an up-to-date (or close to it) home. Fixing up a house is a lot of work, and there are almost always unexpected costs that often result in a riskier investment for the buyer.

Pros: Increase Your Equity

The opportunities to increase your initial investment can be much higher if you know what to look for. As with any major purchase, be sure you do the math to find out just how much your renovation plans will cost you and whether you'll get that money back when the time comes to sell. Projects with the best return include bathroom updates and outdoor curb-appeal improvements, like a new front door or updated siding. Where are you least likely to get your money back? Adding a deck, home office, or swimming pool (depending on where you live of course). Read more on that in our article Remodeling Projects That Add the Most Value to Your Home.

Pros: Move into Your Ideal Neighborhood for Less

If you're eyeing a specific neighborhood but there aren't many homes listed, then a fixer-upper could be a great option, especially since the homes in your area have an impact on your fixer-upper's final value. Just be sure to keep your updates in line with the neighborhood. You might have trouble making back the money you spent remodeling the house when you sell it down the road if you invest a lot more money into your home than your neighbors did.

Cons: Expensive Surprise Repairs

Finding the money to pay for your projects can be one of the more difficult things to navigate. Because no two remodels are the same, there aren't many standard options available for financing, leaving many homeowners to finance equipment and projects with credit cards. That being said, avoid credit cards if you can! Credit cards should only be used for small projects that you're sure you can pay off in a month or two because they're one of the most expensive ways to fund your project. Interest rates are much higher on credit cards than on a remodel loan that you might get from a bank or credit union, and the interest that you pay on credit cards isn't tax deductible.

If you have a sizable amount of equity in your home, then a home equity line of credit, or HELOC, could be a good option. When you're approved for a HELOC, you'll have a specific maximum amount you can borrow from when you need to, kind of like how a credit card works, but you use the equity in your home as collateral. Expect to make interest-only monthly payments during a draw period (WaFd Bank's is 10 years), followed by principal-and-interest payments during the repayment period (15 years at WaFd). To learn more, check out How to Qualify for a Home Equity Line of Credit or read more information about a WaFd Bank HELOC.

What is a Fixer-Upper Loan

This is different than a traditional mortgage and is a mortgage type you choose when you're getting ready to buy. Basically, this mortgage type will allow you to buy a home based on the estimated value of your home after the remodel. Why is that an advantage? Extensive remodel work can outstrip the available equity in your home, especially if system upgrades or major structural work are in your plans.

At WaFd Bank, we offer an Construction-to-Permanent Loan. To determine that value up-front, we order an appraisal based on your plans for improvements. The entire project is underwritten at one time, and you can lock in a permanent, fixed interest rate before you even start the project. When it's finished, the loan automatically converts to a standard mortgage, which is a fully amortizing loan with principal and interest payments spread over 15 or 30 years.

WaFd Bank is Here to Help

We are primarily a portfolio lender. Since we started serving communities in 1917 we prefer to keep loans on our books so we're always there to work with our clients, so you'll know where to go with questions or to get help. This means we're able to make our lending decisions based on common sense principles—not just guidelines from the Federal Housing Finance Agency. If you're looking for a home, we're here to help you find the best fit for yourself and your family. With more than 105 years of experience, we know what it takes to get the job done. Talk to your neighborhood loan officer or give us a call at 800-324-9375 to find out more. All loans are subject to credit approval.

All loan programs are subject to credit approval. Program restrictions may apply.

Check out WaFd Bank's remodeling calculator!

A remodel loan is often more affordable than using credit cards or other loans. Use your potential home's existing home value, add in what you think your projects might cost (whatever number that is, add in a bit more just in case), and see your estimated monthly payment.

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