One conversation that Ken and I have frequently with our buyers is whether or not it makes economic sense for our clients to buy fixer-upper properties. The market for buyers is hot so some buyers have questions about whether or not they should get a fixer-upper as a way to circumvent high buyer demand and not have to pay over the list price for properties.
HGTV and Home Depot have made home projects look fun, inexpensive, and easy. But how do the numbers really add up? It is more expensive to buy a fixer-upper or buy a home where the projects have already been completed? And does buying a fixer-upper make navigating the market easier?
Recently, we wanted to put the numbers down on paper. We put together this worksheet to illustrate the difference between buying a $400,000 fixer-upper property vs. buying a $500,000 property in which no immediate repairs or remodels are needed.
On our worksheet, we took into account the mortgage numbers, a 5% down and 20% down payment scenario, cash-out-of-pocket needed for repairs/remodels, and how these numbers play out in the first year and in the first 5 years.
So how do you think it played out? It isn’t intuitive, however, homeowners will spend the least amount of cash, in terms of mortgage payments and repair/remodel costs, by purchasing the more expensive property that is move-in ready.
Additionally, when you consider that remodel projects only return a fraction of their cost upon the home’s sale, it is most likely that the wisest economic decision is to purchase a home in which the repairs and remodels have already been completed.
This brings us to the market question. Buyers may be thinking “the market is so hot, I need to buy a fixer-upper. I’ll see less competition in the marketplace and be able to get a deal.” In fact, fixer-upper properties see the same amount of market activity as other homes (I believe due to misconceptions about the costs and returns of remodeling projects). Fixer-uppers frequently get multiple offers and go for over-the-list price. Its unlikely buyers will be able to purchase at a discount in buying a fixer-upper.
So what is a buyer to do? We usually advise our clients that the best course of action is to be patient and wait for a more updated home in a desirable neighborhood (away from busy roads, train tracks, and other features which could detract from the home’s future value) to come on the market. We think (and have personally experienced) that our buyers usually have higher satisfaction and enjoy living in their homes more if they buy a home where fewer projects are urgently needed. And it’s true- this market is a hot one for buyers. But our clients are having success in this market. If you have questions about how to compete, give us a call and we are happy to discuss this.
Also, because Ken loves this stuff, he also put together an Excel spreadsheet in which we can input real property scenarios to sketch out the short and long-term economic impacts of buying the fixer-upper vs. the move-in ready home. If you’d like to chat with Ken about that, reach out to us directly. His spreadsheet is a bit too in-depth to include as part of this newsletter but he would be happy to help you evaluate your property purchase using real numbers and market data.
Until next time!
Allison and Ken