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By Dian Hymer
Buying a fixer-upper home can certainly be profitable. But if you're not careful, it can also lead to a financial misstep. Here are tips to keep you on the right track.
Many first-time buyers are attracted to fixers as a way to buy a home in a choice neighborhood that would otherwise be unaffordable. A successful fixer turnaround requires time, money and expertise. If you're a first-timer who works full time, is short of funds, and has little or no previous contracting experience, you should reconsider this strategy.
Regardless of whether you're a first-time or seasoned home buyer, you should seriously consider if you're well suited to the task before you buy. Remodeling is challenging and disruptive. It can end up taking longer and costing more than anticipated. Many relationships have crumbled during renovation projects.
Buyers who are convinced that buying and renovating a distressed property will be a personally and financially rewarding endeavor need to make sure that the property they buy is worth the price they pay. Overpaying for a fixer can jeopardize your equity. In fact, if you overpay and then overimprove for the market, you can end up with negative equity.
Beware of overpaying for fixer properties in hot markets with limited inventory. Some buyers get caught up in the frenzy of a bidding war and pay more than they should because they perceive an opportunity to make even more money.
HOUSE HUNTING TIP: Gambling on appreciation is risky. It's impossible to perfectly time the market. If oil prices were to suddenly skyrocket, sending interest rates higher, a rip-roaring market could be brought to a halt. To decrease the risk factor, make sure you pay no more than fair market value, regardless of how fast you think market values will climb.
In a slower market, a listing that has been on the market for awhile might be a good buy if the seller's ready to negotiate. But, if a fixer has been on the market for some time with no offers, ask yourself if it's a good deal at the price if no one else wants it.
Find out why the property hasn't sold. Is it the price, current market conditions or the condition of the property? If it's the latter, make sure that you have a keen understanding of the property's condition and the cost to correct defects before you buy.
Some fixers need expensive infrastructure improvements, like a new drainage system or a foundation retrofit. These improvements, while necessary, won't return 100 percent of the cost when you sell. If you buy a home that needs system upgrades, make sure that you will be able to offset the costs you won't recoup with cosmetic enhancements that will return more than you invest. Cosmetic fixers provide the greatest opportunity in terms of return on your investment.
If possible, get multiple estimates for significant work during the inspection contingency time period. In most cases, fixed-price contracts are a good idea if you are working with minimal funds. Time and material bids could run less than a fixed-price bid. However, they could also run over what you've budgeted.
Budget carefully and then add at least 10-15 percent for cost overruns due to delays, increases in the costs of materials, changes and additions. Save all reports and receipts for work done. Use licensed contractors for significant work and take out permits when required. Do it yourselfers with no prior building experience should limit their participation to less complicated projects such as painting and yard cleanup.
THE CLOSING: Save copies of old reports and documentation of defects you've repaired and improvements you've made. They will be useful when you sell.
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