Fixer upper homes can be found in even the most
expensive cites for much less than other homes. Even here in
Tucson, where a small home will usually be over $200,000, an
investor at our real estate investing club just told us he
found one for $35,000. Before you get excited by the idea,
though, here are the two most important questions you should
ask yourself before buying a fixer upper:
1. Do you want to deal with it? You don't
necessarily have to fix the house yourself, as you will see in
the example below. Still, you will have to deal with hiring
contractors, and you'll have the stress of unexpected problems
that always occur with fixing houses. There are always
2. How much is it worth to you to deal with it?
Suppose you end up with total of $125,000 into a house that is
worth $145,000. Does that $20,000 equity gain make it worth
it? It is entirely up to you to decide how much you want for
your trouble. How do you know what you'll gain in equity?
Figure it like an investor would, as in the following
Putting A Price On Fixer Upper
When you look at a fixer upper, decide what you
would need to do to make it a nice place to live. It might
need a new roof, new carpeting, paint and a dozen smaller
things done. Make a list all the things you will do if you buy
With the help of a real estate agent or
appraiser, estimate what the house would sell for if it was
the way you want it. Now you have your finished value. Work
backwards from here to arrive at the price you will offer.
Suppose the house will be worth $179,000 when
it is done. It will need carpet, wall repairs, yard work,
paint, a new door, new appliances, and a few other things.
Calling around to get a few quotes, you determine this will
all cost $12,000 unless you do some of the work yourself.
Subtract this from the $169,000.
Subtract "holding costs." This includes
interest on the loan, taxes, insurance, and utilities during
the time you can't live house while it's being fixed. You can
skip this if you get to move right in, but we'll assume $2,000
for our example. Subtract another $2,000 for anything
Subtract the amount that "makes it all worth
it." For our example, we'll assume it's worth the trouble for
you if you get an instant equity gain of $13,000. Now, having
subtracted the repair costs, holding costs, unexpected event
money, and your "profit," we arrive at $150,000.
$150,000, then, is the most you should pay for
the house. Offer less, maybe $144,000, so you have some
negotiating room. If you can't get it $140,000 or less, you
should probably walk away. This is the short lesson on how to
buy fixer upper homes.