Six Things to Expect When Buying a Fixer-Upper
Shows like Flip that House or Fixer Upper make buying a home that’s in need of some TLC look easy. Home improvement programs glamourize renovation projects with fairy tale renos that take you from idea to reno to profit in a half hour. It’s great television. In reality, although buying a home that’s in need of repair can be rewarding and lucrative, not all of these “fixer-upper” stories have fairy tale endings. Whether you have a passion for restoring old properties, can’t resist a good deal, or are looking for an investment property, we, at The Faris Team, want you to have a happy ending. Here are some things to think about if you’re considering the purchase of a fixer-upper.
Know your limits, reno within it
If you’re buying a home that needs work and you plan to do the renovations yourself, now is the time for an honest self-assessment on both your skill level and available time. (Here’s a tip: your partner may be a good barometer for both.) If you can do the job properly but it’s likely going to take you 12 months working at night to finish, you may want to rethink whether you want to take this on. This is particularly relevant when you start budgeting. You’re going to save yourself a lot of hassle (and possibly money) if you’re realistic about what you can and can’t do.
Make sure “we” are all on board
In the words of Sean Connery…what are you prepared to do? All of you. If you’re buying a home with someone or have a family, it’s vital that you’re all on the same page. If one of you is eager to roll up your sleeves and start ripping out walls and the other can’t imagine living through months of renovations, you may need to have a conversation before you make a decision. Taking on a home renovation project is a commitment for you and your family or significant other. Be sure that you’re all prepared to fully commit before taking the plunge.
Do the math
Getting pre-authorized for a mortgage is a wise and fairly easy step to take. If you’re buying an investment property, there are some things you need to know. Mortgage lenders require a 20% down payment and don’t typically loan you more than 80% of the value of a non-owner occupied property. If you’re buying a property to generate rental income and you will be living in one of the units, that number increases to 90-95% of the value depending on the number of units. Speak to a mortgage specialist for more details.
Ensure you factor in all costs
- Purchasing closing costs (lawyer fees, home inspection, land transfer tax)
- Monthly carrying costs (mortgage, taxes, heat/hydro, water, any rental costs, home insurance, maintenance of the property)
- Unexpected repairs (e.g. mold), water issues, delays and costs for permits, repair costs (always more than you think)
- Realty costs
- Lawyer fees
- Unlike your principal residence after everything is closed, you will need to inform CRA of capital gains and pay taxes.
At the end of the day, you need to make a wise purchase in order to make it worth it after all these costs are factored in. You need an expert to help guide you to ensure the home will fetch the right price so that you can make a profit worth your time and compensation for the risk you are taking.
Location, location, location
Next you’ll need to find a knowledgeable Realtor® who can advise you on location. The ideal scenario is to buy low in a neighbourhood that can support a higher value property once you’ve made significant investments in improving a home. This can be tricky with housing prices at an all-time high, so speak to a professional in order to make the best strategic move possible. A Realtor® can also give you a realistic idea of what the house you’re looking at will actually sell for. From there, determining how much money is left in the budget for renovations is straight math, however, the more difficult task is assessing the actual cost of a renovation.
Expect the unexpected
You’ve been pre-approved for a mortgage, enlisted an excellent Realtor®, narrowed down a home with lots of potential in a great neighbourhood, and you’re ready to put in an offer. The home inspection typically comes after the offer, but in the case of a multiple offer situation, you may need to remove your inspection condition and go in with a “firm” offer; however, if possible, a pre-offer inspection would be a wise investment and position your offer much stronger to the seller. An experienced home inspector will document any issues the house may have, which will give you a more complete picture of the extent of repairs. Although you may not recoup all of the anticipated costs, your Realtor® can also use the home inspector’s report as a negotiation tool to drive the price of the home down further. Remember that even the best home inspector can only estimate renovation costs, so it’s wise to have a cushion in your budget to cover the “surprises” your contractor may discover once renovations begin that can’t be seen until you start ripping things out. It’s also important to keep in mind that, if you’re spending big money on major overhauls to critical systems like the foundation, plumbing, electrical, roof or walls, though essential, it often won’t raise the value of a home enough to offset your expenditures.
There are some excellent opportunities for buyers looking for a fixer-upper. Being prepared can help you make better choices and have a smoother journey in renovating a property.