That Old House: Is It Worth Your Money?

They say you should buy the worst house in the best neighborhood. That way, you can save money on the purchase price and invest more in renovations and updates that will drive up property value.

However, what they don’t say is that renovations and updates cost a lot of money, and often, they don’t provide a suitable return on investment. If you are considering purchasing an old fixer-upper, you should investigate deeper to determine whether the property is worth your time, effort and money. Specifically, you should ask yourself a few questions about your finances, your DIY savvy and the property’s health.

What Can You DIY?

Your ability to make a good investment out of a rough-looking property depends almost entirely on your ability to perform renovations by yourself. Contractors are expensive; not only do you pay a premium for the materials they use, but you will also pay for their labor, the insurance and warranty you receive from their work and more. By DIY-ing your remodeling efforts, you can purchase discounted materials and complete the work itself for free, since you’ll be doing it.

However, this approach requires you to be handy. Depending on the scale of your remodeling vision, you might need to know how to frame a structure, hang drywall, install plumbing and electrical, tile and/or paint. If you don’t already have experience with any of these tasks, your home isn’t a good place to learn. A small mistake could be exceedingly dangerous, imperiling you and your property for years to come. For anything you don’t know how to DIY, you will need to hire a service provider – and those costs can add up quick.

What Will Renovations Cost?

You can get an estimate of how much renovations will cost by talking to a contractor. During the inspection phase of your home contract – when you can still back out if you find the property unsuitable – you should walk through your property with a contractor and discuss your remodeling ideas. If you plan to rely on your own DIY skill, you can use the report provided by your home inspector and the internet to calculate costs of supplies. In either case, you should increase your costs by about 20 percent to cover unforeseen problems, which always arise.

Once you have these costs, you should look into what your remodel will likely earn you in resale value. You can look up estimates for this online or use tools provided by your real estate agent.

Can You Get Insurance?

Some properties that are especially worn-down will only get a big pass from insurance companies. Houses that are too old or too derelict have too many risks associated with them, and home insurers are unwilling to pay to protect them. Because you need home insurance to receive a home loan, this could be bad news for your fixer-upper dreams.

On the other hand, if you can get homeowner’s insurance, you will likely be able to get a home warranty, too. Home warranty’s cover various systems in your home and will help you pay for their repair or replacement. Unlike typical insurance, a warranty activates when problems arise due to normal wear and tear. Thus, if your home is old and the appliances, plumbing and electrical systems start failing simply due to their ending lifespan, you can use your warranty to help pay for these updates. Even better, most home sellers include a one-year home warranty plan as part of the sale, as a show of good faith that their property is a good investment. That means you can try out a home warranty before committing to paying for one yourself.

Do You Like the Property?

This might seem like an inane question; why would you buy a property you don’t like? But, the truth is that many homeowners feel pressured by their real estate agents, home sellers, lenders and others to close on properties that don’t actually fit all their needs. Because a fixer-upper is such a potentially risky investment, it is imperative that you actually like the property you are about to buy before you put any money down. Some questions you can use to understand your true feelings include:

• Do you like the floorplan? You might imagine the floorplan like the house’s bones — you can’t change it much. Thus, you have to like the floorplan to like the house.
• Have you seen any houses you like more? You should keep house hunting even after you make an offer on the property. If you step into another home and immediately like the look of the new space more, you probably don’t like the old one very much.
• Does your gut say yes? If the idea of living in this house for 10 years or more makes you nervous, you shouldn’t pull the trigger. To make home investment worthwhile, you need to spend at least five years there, but 10 years is better.

Your last step in acquiring an old house the right way is to seal the deal – but not so fast. Using the information you’ve gathered through inspections and renovation research, you should be able to negotiate a lower purchase price. Then, you can put what you save into an account for your renovations.