home projects

5 Questions to Ask Before Investing in a Fixer-Upper

by Brandon Turner | BiggerPockets.com

 

So should you invest in a fixer-upper? Despite a few cons, I would say yes, you should definitely consider it because of the overwhelming pros. However, before you jump into your next project, ask yourself these five questions about the deal.

5 Questions to Ask Before Investing in a Fixer-Upper

1. How bad is it?

There are many levels of severity when dealing with fixer-uppers. Some properties need just a few thousand dollars worth of paint, while others need a complete overhaul. As common sense would suggest, the less work a property needs, the less risk you’ll have that something will go wrong during the rehab.

At the same time, however, the less work a property needs, the more competition you’ll face. This is why I generally look for properties that appear to need a lot of work to the general public but that actually just need minor fixes. For example, homes that have a bad smell because of pets or cigarettes are a prime candidate for me, because smells are easy to rectify. An ugly exterior paint job or a bad roof are also fairly easy (if costly) to remedy, but they scare away more potential homeowners. So, before you buy a fixer-upper, I encourage you really look at the property and have an accurate estimate of what it’s going to take to fix it up. Don’t go into a fixer-upper blind.

 

2. Is it worth it?

Let me ask you a question: Is it better to buy a house for $120,000 that needs $30,000 worth of repairs, or a house that is $150,000 that is 100% finished? With all other factors being equal, the finished house clearly has the advantage. However, many investors fail to comprehend this logic and instead think “fixer-upper” automatically means “great deal.” It doesn’t!

Often, the cost of rehabbing a project will negate any discount you might get. On the other hand, if you could get that same property for $90,000 and put $30,000 into it to make it worth $150,000, now we’re talking!

3. Do I have the time?

Whether you plan to do the work yourself or not, fixer-uppers take time! You have to be present at the property often to make sure the work is being finished correctly, or maybe you’ll end up having to do the work yourself. I have a friend who bought a fixer-upper triplex with plans to live in one unit and rent the other two out, but it took him three years to fix up the two other units and get them rented! While this friend may still have a great investment on his hands, he lost close to $40,000 in potential rent over those three years because he didn’t have time to handle a fixer-upper.

4. Do I have the skills?

Most people who are looking to get started with fixer-upper rental properties plan to do the work themselves. I actually encourage this, as long as the work is on a small scale. Being able to do your own rehab can save you a ton of money and can help you get a good feel for how long projects take so you can better manage the hiring out of those projects in the future. However, if this is your plan, do you really have the skills to take on the project? If not, see the next question in this list.

5. Do I have the drive?

Or more importantly, do you have the mental skills and motivation needed to learn how to accomplish those projects? My first home was a fixer-upper, and I had never swung a hammer in my life! However, I picked up a book on home improvement and began learning on the job. I also called in a lot of favors from other people I knew and had them teach me how to do things. By the end of the project, I could install carpet, tile a bathroom, lay laminate wood flooring, solder copper pipes, and fix a leaky roof—not because I had the skill, but because I had the desire and motivation to learn.

By answering these five questions for every project you are about to take on, you can better decide whether it is the right path for you. Fixer-uppers can be a great way to supercharge your wealth creation, but they also present increased risk. Just be sure to do your due diligence on any fixer-upper you plan to buy and accurately account for the hurdles you might face. Then take action, and get a little dirty!

 

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How To Remodel Your Home Within Your Budget

The budget conversation — it’s sometimes awkward, often slightly uncomfortable and usually comes with a bit of anxiety. Because of the nature of construction, things often cost more than what homeowners think. There are endless debates on why that is, but the result is that we designers often have conversations with clients that end with an awkward silence. The silence usually means that certain aspects of their project might be out of their reach. And truth be told, we really don’t like being the messenger in these conversations. We want our clients to be satisfied with the process and get what they really want.

But the flip side of that conversation is that budget constraints can make a project better. Just hear me out… What we find is that financial considerations make our team and clients focus on what’s really important. That pressure helps edit down the myriad choices and allows a more coherent story to emerge. And it all comes back to sticking to that budget. Here’s how.

Establish Your Budget Early

We have been in situations where clients have not told us their budget until we have completed some of the initial phases of work. This, no surprise, can slow down the process. It’s like going to a personal trainer but not telling them how much weight you can lift, and so you spend time trying a few exercises to figure out what the proper weights are.

 

Close-up of a mid adult man looking at a mid adult woman writing with a pen

There are situations where homeowners generally don’t know what a new custom home or addition will cost, but a key part of the process is considering how much you would be comfortable spending on the project. Obviously spending $50,000 will produce a dramatically different result than if you spent $500,000. And what you spend will be influenced by a wide variety of factors, including neighborhood, type of project and level of finishes.

Without knowing a budget range, we could get through the first few meetings with clients and then give them a rough ballpark figure, which is sometimes double or triple what they thought it would be.

Don’t try to second-guess your design team by holding your cards close to your chest. Help us work with you to get the most value for your hard-earned dollars. Most designers don’t look for opportunities to waste money just for the sake of it. Sure we all want a great project at the end of the process, but we also want to make sure our clients are happy. So establishing your budget early in the process will be helpful to your team, as it will give them one of the key ingredients that will go into making a design you can live with.

Ensure Your Budget Is Realistic

It’s easy to look at TV shows and get the wrong idea about what things cost. In most cases those budgets are not realistic for a bunch of reasons, most of which revolve around how suppliers and trades price their services to be included on the show. There is an old project management saying that goes, “Price, speed, quality — pick any two.”

It’s not totally untrue, and it underscores that there are no easy trade-offs in a construction project. It would be problematic for me to suggest pricing in this article, as it varies substantially based on a number of factors, including location, number of trades in the area, level of finish, complexity of construction etc.

 

Piggy bank, architecture drawing and equipment/ home remodel saving concept

The budget number that most clients care about is the “all-in” number. That includes everything they will write a check for including moving expenses, fees and construction. (More about that later.)

Pricing tip: Pricing can change substantially in certain areas over as little as a few years, so be sure that the projects were completed recently for the best idea of pricing. After you create your budget, subtract 20 percent. Construction being what it is, there are always situations that arise that will increase the cost, and those are hard to foresee at the beginning of construction. It’s a very complicated process involving many people and a lot of communication, so there usually are things that happen that will eat into that 20 percent contingency. The contingency should not be used for upgrades to counters or splashy fixtures.

After you create your budget, subtract 20 percent. Construction being what it is, there are always situations that arise that will increase the cost, and those are hard to foresee at the beginning of construction. It’s a very complicated process involving many people and a lot of communication, so there usually are things that happen that will eat into that 20 percent contingency. The contingency should not be used for upgrades to counters or splashy fixtures.

On a recent project, our clients had to spend thousands of dollars to get their utilities hooked up again, as the electrical feed from the street was torn up by mistake. On top of that, since the utility’s own drawings said that the feed still existed, there was a three-month delay on top of the re-connection order so that the utility could update its drawings. Even though this these will never be seen, they were absolutely critical and had to be completed before construction could be completed.

Keeping a 20 percent contingency allows our clients to end up spending what they thought they would spend initially, and they can sleep at night.

Understand What You’re Paying For

Hard costs, fees, furniture — what is in the contract? Your design team will also help you understand what is in those budget numbers. Hard costs include the costs of the construction materials and fixtures required to actually build the structure. Soft costs generally include fees for permits, consultants and designers.

Home renovation and decoration concept

It’s important to establish what your team is referring to in conversation to make sure everyone is on the same page about budget numbers. For example, construction is often expressed in dollars per square foot to give a rough guide during planning. Generally this does not include appliances or soft costs. So it’s important to know that if your contractor says your new house can be built for $750,000, there are soft costs likely not covered in that estimate. Work with your design team to understand the costs and how they relate to a schedule, and how there are items you might not have thought about, to get an overall sense of what is required.

What if You Run Out of Money?

We have had this conversation with clients on more than one occasion, and truly it’s not easy for either the clients or us. It’s frustrating to hear how something that you’ve been planning for is out of your reach.

There may be opportunities to reduce costs by changing the scope of the project. For example, instead of fully constructing a basement bathroom in a new house, you might just rough in the plumbing so it could be finished at a later date. Or it could be possible to reduce the cost of fixtures and finishes such as flooring or faucets.

During a recent conversation with clients, we recommended that they wait before starting the project so they could gather more resources before proceeding. In the discussion we realized that it wouldn’t be possible to “de-scope” or redesign the project to fit their needs, so the best course of action was to delay. Was this difficult for all involved? Absolutely, but we felt strongly that starting a project that didn’t address their needs wouldn’t serve their overall best interests.

Whenever you are dealing with money, there is the potential for some uncomfortable conversations. But if you understand what you are dealing with early in the process, those conversations will be less stressful than if you’re standing in the middle of a half-completed project in the middle of winter wondering where all your hard-earned money has gone.