Should You Buy a Fixer Upper as Your First Home?

Should You Buy a Fixer Upper as Your First Home?

TL;DR For first-time homebuyers that like to roll up their sleeves and are comfortable living through renovations, buying a fixer upper can be a great way to save money, buy sooner, live in your ideal town, make your home your own, and build equity fast. That said, fixer uppers are not for the faint of heart – delays, cost over-runs, and plan changes are to be expected.

- Stephen Freudenberg, Head of Homeownership @ Gravy

No homeowner ever really moves to Easy Street. Things will break even if you purchase a brand-new home.

While every homeowner will need to embrace their "handy side" at one point or another, it's important to know what to expect if you fall in love with a fixer upper.

Here's what you need to know if you're thinking of buying a fixer upper as your first home.

4 reasons to buy a fixer upper as your first home

These reasons might compel you to swing a hammer if it means you can get the deal of a lifetime on a home.

#1: You can make it your own

While conventional wisdom says that getting a fixer upper is settling, some buyers actively seek out fixer uppers because they want spaces they can make their own. It's about turning a home into a living story. Sparkling cookie-cutter homes aren't everyone's cup of tea.

The fun thing about fixing up a house is that you can add all the custom touches you want without the need to pay to build a house from scratch.

#2: You may have less buyer competition

The truth is that many buyers want a home that comes straight out of the box. That's why they're paying premiums for new builds and "flips."

That's good news for you because it means you won't have to duke it out with buyers who are only eyeing picture-perfect houses. In addition to making your life easier, this also spares you from the heartache of losing out on offer after offer.

That lack of competition also means that you'll have more bargaining power with the seller compared to other buyers who are only focused on homes that attract offers like magnets.

#3: You may pay a lower purchase price

When you buy a fixer upper, the seller is keeping the price in perspective based on what people are paying for homes that have all of today's "desirable" features already built in.

Going for a fixer upper is sometimes the only way to get into a specific area or neighborhood on a tight budget. In addition to enjoying lower price points, you're also unlikely to encounter as much competition when it comes to offers that could force the final price higher than the listing price.

Talk to a realtor in Gravy’s network that specializes in finding fixer uppers in great neighborhoods to land a home in your dream town on a budget. Download the app here to get started.
realtor connection on the gravy app

#4: You can build in equity fast

Buying a fixer upper isn't just about "getting in" low. Many buyers enjoy a lifetime of savings based on the simple decision to select a fixer upper instead of getting stretched too thin with a crisp new property.

Once you start pouring your sweat equity into a fixer upper, the cheapest house on the block can easily become the most expensive. What that means for you as a homeowner is pure equity.

When you increase your home's value by making updates, you're gaining equity for every dollar in value gained versus what you paid for your home. If you plan to stay in your home for a long time, that equity can help fund your retirement.

You can also use your equity to borrow against your home to get favorable loan rates that can be used for everything from funding college to building an addition.

What if the fixer upper you're buying today is just a "first home" stepping stone to your next home? The equity you build in your underdog fixer upper now can potentially cover the down payment to help you make the leap to a more luxurious home.

Making upgrades that build equity in a fixer upper can be especially beneficial if you put in a low down payment because the gains in value will help to offset the lower equity that you started with.

4 reasons NOT to buy a fixer upper as your first home

Is there any reason to feel doom and gloom over buying a fixer upper? Don't get too attached to the "ugly" house on the block until you take these four things into consideration.

#1: You’ll need a lot of cash after the sale to fund renovations

The lure of the fixer upper is that it's affordable. However, taking a step back to get a holistic view of what owning a fixer upper means for your finances is necessary.

The true cost of a fixer upper has to be calculated on a case-by-case basis. When a fixer upper only needs cosmetic updates to be considered a gem, you can be confident about your ability to get the home up to speed. While this is ideal, it's not necessarily the norm.

Some fixer uppers require major updates before you can even safely live in them. Roof issues, foundation issues, water damage, or nonfunctional heating systems can all require large investments right after closing.

Getting your home in good condition may not be feasible if the mere purchase of the home is going to tap out your cash reserves. If you'll be using financing to fund renovations, you have to conduct an analysis of how much interest rates will add to your budget in the long run to see if fixing up is truly cheaper than simply buying higher.

#2: You’ll live in a construction zone for an extended period

Some owners of fixer uppers end up paying for housing "twice" during the renovation period. You may need to pay for housing if renovations make it impossible to live in your new home.

Even being able to live in your home while construction is going on isn't necessarily a picnic. While it's easy to be idealistic about the renovation process after watching DIY shows and tutorials, the reality is that living in a home that's being torn apart, put back together, and everything in between can be incredibly chaotic.

Be honest with yourself about how living in this type of situation will impact your productivity and quality of life.

#3: You may have to do work that’s not value-adding to the house

It's time to talk about a rarely discussed trap that catches some owners of fixer uppers. While making structural repairs and updates will be critical, it won't necessarily add value to the home. Why?

The truth is that just getting a home into a livable condition only gets you to the bare minimum. It's the "fun" cosmetic touches that create kitchens, bathrooms, bedrooms, and foyers with "wow factor" that add true value to a home.

What makes this reality a hard one to embrace is that the cosmetic fixes that add value often cost much less than the high-ticket work needed to fix "invisible" structural problems. The truth is that most homeowners who envisioned that they'd be creating an Instagram-worthy home put most of their budget toward just being able to live safely in a home.

#4: It is often difficult to fully estimate repairs needed before closing

That "love at first sight" moment that many people have with a fixer upper can often really be a case of "love is blind." It's hard for the average person to get an idea of all of the repairs that will be needed to get things up to snuff.

Unforeseen issues that hide beneath the surface can make the reno budget skyrocket if there's even one problematic finding by an inspector or contractor. This can include foundation issues, unpermitted work that needs to be torn out, work that wasn’t done to code, rot, mold, or dangerous substances.

8 tips for buying a fixer upper as a first-time homebuyer

You can do this the smart way. These eight tips will help you go in with your eyes wide open.

#1: Research fixer upper mortgage loan options

The best option for true fixer uppers, houses that need a lot of work, is called HUD 203(k), and is available for qualified buyers purchasing fixer uppers with FHA loans.

Can you buy a fixer upper with a conventional loan? It depends on the house. If the house is livable and just outdated, that is fine. However, if the house has lots of maintenance issues and is not in liveable condition, an appraiser will deem certain things required for the house to be satisfactory collateral for the loan, which may mean you can’t get approved.

If you'll have extra cash on hand after making your down payment, you'll need to consider how much cash you'd like to use to cover renovation costs. You also have to decide how comfortable you feel about taking out other loans, using credit cards to fund renovation purchases, or waiting to make more updates until you can save more money.

Talk to one of Gravy’s select partner lenders to learn more about your budget and fixer upper financing options. Download the app here to get started.
Lender partners in the Gravy app

#2: Know your budget inside and out

You have to stay true to the budget that you know works for you. While a lender may approve you for a "number" that will allow you to purchase a home, you'll be the one in charge of controlling the funds that come from savings, loans, and credit cards as you pay for every piece of your home edit.

Once the thrill of the renovation process begins, you may feel tempted to tell yourself that it's "okay" to keep borrowing, charging, and overspending for the sake of getting projects completed even though you're going beyond the budget you set at the beginning. This is why it's so important to know your budget in an unshakable way!

#3: Understand that not all fixer uppers are created equal

It's common to get inspired to buy a fixer upper after seeing someone else's successful journey. However, no two fixer uppers are alike.

Fixer uppers have all been built decades apart using a wide variety of different building materials, techniques, and standards. The way that previous owners treated one house versus the next can also drastically change the buyer experience. Look at every potential home with fresh expectations.

#4: Get multiple quotes for renovations before you close

The quotes you get for renovations before closing serve two purposes. First, they can help you to decide on the loan size needed to cover renovation costs. These quotes also provide you with realistic estimates for the true cost of your home.

Get at least three quotes for every project to get an honest average. Don't forget to ask contractors to include permitting costs in their estimates!

#5: Don’t overestimate your DIY skills

Being overconfident about your DIY skills can leave you with a big mess once demolition day comes. Poorly done renovations can actually harm home value, increase your total project cost, and cause you unnecessary misery as a homeowner.

While HGTV may suggest otherwise, DIY renovations are very difficult for anyone who doesn't have a background in construction or trade work. The process of sourcing the right tools and equipment alone can stop well-meaning DIY hopefuls in their tracks.

While there are many resources out there for completing small to medium-sized renovations, you can't become a pro overnight just by watching YouTube videos. It's important to understand just how high the stakes get when you're actually tearing into drywall, support beams, stairs, and other foundational elements of a home.

#6: Research common costs of materials and labor for your list of projects

DIY stars can make it seem like renovations happen with the snapping of fingers. In reality, it takes a team to get dramatic renovation results. It also often requires machinery, equipment, and costly materials to transform a space.

Research costs for common housing materials that will determine your budget. If you're going the DIY route, don't forget the cost to rent or buy equipment needed for installing flooring, adding tiles, putting up a fence, and more.

#7: Prioritize your project list the right way

It's not realistic to assume that you'll get every renovation done all at once unless you intend to hire a contractor to do a full-scale renovation while you live elsewhere. For most homeowners landing fixer uppers, it's necessary to prioritize projects.

While a kitchen with new granite countertops may be what you want to prioritize, this won't be a priority unless the home doesn't currently have a functional kitchen. You'll actually need to focus on projects related to safety and function first.

You also want to focus on projects that stop "decay creep." For instance, replacing a leaking roof should be prioritized because every day of excess moisture harms the integrity of your home.

#8: Don’t just expect delays – plan for them

The fixer-upper lifestyle isn't for the overly optimistic. While you know you'll be sipping coffee on your deck beside a perfectly polished home one day, you'll have to spare yourself the disappointment of actually assigning a date to that day when you can finally take a deep breath, sit back, and gaze at your perfect home.

Delays are inevitable because renovating a home requires you to coordinate a roster of moving parts. Product availability, material costs, contractor schedules, weather, unexpected discoveries in a home, local permit issues, and budget resets can all slow down a project that was planned "perfectly" from the start.

Buy your fixer upper faster with Gravy

Gravy is a tool to help you go from renter to homeowner faster. How?

Every month when you pay rent, Gravy gives you 5% cash-back on your rent payment in the form of Gravy Rewards.

When you redeem Gravy Rewards with Gravy partner lenders and realtors, you’ll get credit towards closing costs, and you may even earn a Homebuyer Bonus – this translates to a check in the mail after you move in! (A great way to jumpstart renovation project #1).

Learn more about how it works, and download the app today, for free.

Stephen Freudenberg
Stephen Freudenberg
Head of Homeownership at Gravy
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