Pros and Cons of Fixer-Uppers

My husband and I bought our first home about five years ago. It was old and hadn't been taken care of in a long time. But, we got a great price...or so we thought.

Our plan was to gut the inside of the house and fit it to our needs. Since we spent so little acquiring the property we had extra in our budget for renovations. As we started tearing up the old flooring and taking down interior walls, we noticed something big: our house wasn't as structurally sound as we thought. One day, about three weeks into renovations, my husband pushed on an exterior wall and it separated from the rest of the house. He's a pretty strong guy, but we both knew it had less to do with strength of my husband and more to do with the lack of strength of our home. That's when we knew we'd gotten in a little deeper than intended. We tore down what remained of the house, poured a new foundation and started again. This time from the ground up.

I tell you this because I want you to know that I speak from experience. I bought a fixer-upper and it didn't go anywhere near as planned. Selecting a fixer-upper may be the right choice for you and it may not. You have to determine what your comfort level is when it comes to renovations. Do you think that painting or swapping out hardware is as much as you want to deal with, or are you looking to gut a home and design your own living space?

Consider the Risk

There are other considerations with regards to fixer-uppers – how much risk are you willing to take on? My dad is a contractor so he was able to coordinate the entire process for us. My family also generously spent most nights and weekends for the majority of the summer working on the home. Both of these contributions significantly reduced our out-of-pocket cost.

Are you a risk taker? Do you have a plan if things are worse off than they look? Are you willing to put more money into the project than originally intended? One big benefit of a fixer-upper is that you have the possibility of establishing some "sweat-equity" in the home. Sweat-equity is a term that means that as a result of your physical labor, the home is worth more than what you invested in it financially.

Another big benefit to purchasing a fixer-upper is you can get creative and really make the space your own. By changing the floor plan, cabinets, counter tops and countless other options you can reinvent the space.

Do you have a way to mitigate some of the costs like I did? If you have a lot of friends and family with renovation experience nearby willing to work for pizza then purchasing a fixer-upper might be the right choice. But before you sign on the dotted line, use all resources available to you so that you can make the most educated decision possible on this investment:

• Talk with your real estate agent and get as much information as you can on the condition of the property, from structural soundness to appliances.
• Order a home inspection so you can identify major issues.
• Consider what work you can do yourself and what work you will need to contract.
• Consult with a few contractors and get estimates for renovation costs.

Only after considering these factors should you decide whether to proceed with the purchase of a fixer-upper. Go in knowing there could be other problems that arise. As you start the renovation process be prepared for extra costs and surprises.

On the other hand, if you don't want to handle the type of uncertainty that comes with a fixer-upper, consider narrowing your search to homes that would only require minor superficial changes or none at all. A majority of homebuyers will fall into this category. Purchasing a move-in-ready home is the best option for many military home buyers who don't have a lot of extra wiggle room in their budget or schedule. It's also ideal for those PCSing with few established contacts in the area.

Using the VA loan on a Fixer-Upper

If you want to use your VA home loan benefit, there are certain restrictions on what you can purchase. Generally the home has to be move-in-ready. So what does that mean? For a home to be considered move-in-ready it needs to be safe, structurally sound and sanitary.

If you are a remodeling novice and just want to make superficial updates to the paint color, cabinet hardware or flooring the VA loan is probably the way to go. But if after considering the risk associated with a fixer-upper you decide you want to buy a home that will require necessary renovations to make the home structurally sound, sanitary or safe then the VA home loan probably isn't the right loan product for you.

An additional note is that in a purchase the VA home loan can't include additional cash out for remodeling. So if you want to purchase a home with a contract price of $100,000 that appraises for $150,000 you will not be able to take out the additional $50,000 to use toward home improvements and renovation. The exception here is pursuing an energy efficient mortgage (EEM).

With an EEM you can generally include up to $6,000 for energy-efficient structural improvements to the home. Common examples of these are new windows, caulking and insulation. There are some additional steps and qualifications to complete before receiving the OK for an EEM, so it will be important to consult with your VA loan expert early in the process if you want to pursue this option.

Which Route is Right For You

I love our new home, but we ended up spending much more time and money on it than originally planned. We still ended up with a significant amount of sweat equity due to my family's generous contribution of their nights and weekends, but it isn't quite the "starter" home we had planned for. Sit down and consult your budget, talk with friends and family who have homebuying experience and do some research before deciding whether you want to take the plunge into purchasing a fixer-upper.

If you have any questions about this topic or others, please don't hesitate to email me at samantha@vu.com.