Should you be buying fixer upper homes? How do you evaluate the investment?
I have many investor clients and first time home buyers that are looking for fixer upper homes thinking that they are a good buy. My investors are all cash. They want to buy, fix it up and flip it back on the market for sale. First-time buyers need to be aware that you will most likely be competing against an all-cash buyer.
One of the most important things you need to do is to figure out how much it will cost to repair the home. How much work does the property need? Are you going to do it yourself or do you have a construction crew?
Evaluating Fixer Upper Homes
I have one investor who has an Excel spreadsheet that helps her figure out the rate of return on her investment (ROI). When I enter the cost of the property, estimated expenses to fix it up, and the future value, her program yields a percentage ROI. If it is at 10% or close, then she buys. This is her inside secret for buying fixer upper homes…ssh.
The other investor I work with just wants me to send him the property so he can figure it out. Everybody has their own angle or system for evaluating fixer upper homes.
Some home buyers think that a home that needs cosmetic repairs will cost them hundreds of thousands of dollars, when it may just need carpet and paint. An inexpensive fix.
Does Your Fixer Upper Need Kitchen Cabinets or a Full Remodel?
If the house needs a kitchen to make it perfect, go evaluate the expense at Home Depot, or Lowes home improvement stores. The cost of updating the kitchen could be only a few thousand dollars not hundreds of thousands. It just depends on damages or how outdated is the home when you see it.
What to Look For When You Walk Through a Home for the First Time?
There is excitement of viewing homes whether they are fixer-uppers or not. I suggest that you look at the house in several ways to evaluate it.
Rate each part on a scale of 1 to 10 based on condition. Where a 10 is perfect and a 1 is not. Write down what you observe. Ask your Realtor® questions.
- Walk through the home and look at the floor plan. Does it flow or not? Would that have to be changed to make it more sellable if you are buying to resell it?
Look at the walls and ceilings. Do you see any water damage or something that is just not right looking?
Go into the kitchen and look under the sink. Do you see any water damage there? In fact, look under the sink in all bathrooms too.
Observe the flooring. Does it look like it needs to be replaced? Is the floor level?
Check the electrical panel or have a home inspector or contractor do it.
- When you look at the roof from the outside, are the shingle layers flat or starting to peel or bow? You may need to call a roofer during escrow to assess the cost of a new roof.
During Escrow You Can Inspect the Fixer Upper Property More Thoroughly
When you are in Escrow with an accepted offer on a fixer-upper, the seller will be providing you with disclosure documents to review. During the escrow period, most of the time, you and your home inspector can, with the seller’s permission, check out the property more thoroughly.
Have your home inspector or contractor during this time, evaluate the foundation of the property. This could be a deal breaker for some home buyers. I have investors who love foundation problems.
- If the property is on a slope, you want to have a geologist or another appropriate professional evaluate the stability of the slope.
- Permits: you can go to City Hall and talk to them about permits on the property. Just give them the address and check to see what has been done tothe property. “Jay, will you do this for me?” No. You should go and talk to the appropriate parties.
Get a Termite Report from a local termite company and evaluate the report and expenses.
A plumber can evaluate the pipes at the property after the home inspector gives you some wisdom about them.
Some properties are a mess and the seller may want you to check them out before writing an offer. Each property is different. I will update you as to the best practice for the type of property and situation for that property.
In California, there is a Buyer Inspection Advisory document that shares with you ways to inspect a property for sale. If you choose to hire a home inspector, you will be paying them to create a report of findings.
All California real estate is sold “as-is” in its present physical condition. The seller is not obligated per our purchase contracts to fix any item that is not working.
Keep this in mind when buying real estate.
Please Be Prepared When You are Buying Fixer Upper Homes
Bring your checklist. Know what you are doing and what to look out for. Your Realtor® is your advisor and will help you with all of the details. I truly want you to make a good investment in your next home to keep or to fix up and resell.
