Myths and Facts to know before buying your next Fixer Upper
If you’re planning on buying a Fixer Upper as your next project you should do some research into what to expect when investing in these types of properties. Most purchasers tend to have a “HGTV” version of the entire process, only to be shocked and surprised when confronted with the harsh reality of fixing these homes to make a profit. Fixer Upper homes can often represent a good deal, but there are some points that a homebuyer should be aware of before moving forward with this type of purchase.
MYTH #1. . .
I’m going to make a boat load of money in the real estate market by buying a run- down or foreclosed on home, for several thousands of dollars less than the move in ready home. Fixing it up, and then immediately selling it for full price and or more.
FACT #1. . .
Most Sellers looking to sell their “requires work/updates” home understand that they will have to list their home at a price that reflects the cost involved in restoring the home to it’s move-in condition. Thee asking price of a fixer upper is usually adjusted so that the savings represented by the lower price is roughly equal to the amount of money that a buyer could expect to spend on necessary renovations to bring it up to today’s standards. Adding to the home or upgrading to higher-end finishes, is not included included in these calculations. Be very wary about spending too much money on renovations, it could be difficult to recoup all of your investment.
MYTH #2. . .
I don’t need to do a home inspection on this property, I already know what I have to fix.
FACT #2. . .
A home inspection is always recommended to be included in an Offer To Purchase and Sell Agreement, and it is arguably even more important to include one when you are looking to buy a fixer upper. Structural defects, attic issues, asbestos, aluminium wiring, septic deterioration are all expensive repairs and may not be caught during the initial visit and yet they will cost much more to repair than the obvious cosmetic fix-ups. Most licensed home inspectors will not only detail the defects that they find but can also give you a good idea of the costs involved in fixing them.
MYTH #3. . .
Paying less to buy a “fixer upper” in a undesirable area is better than more for a “fixer upper” in a better neighbourhood.
FACT #3. . .
I’m sure you’ve all heard this before “the three most important things to look for when buying a home are: location....location...and location!” While this is obviously meant to be funny marketing strategy, it does show home buyers how important it is to consider where you will buy your next home. Purchasing a fixer upper in a desirable neighbourhood will definitely cost you more initially, but the at the end of the day you will have personal peace-of-mind and generally a higher return on your home investment when you sell.
MYTH #4. . .
Once I’m done with these renovations, this home with be worth double what I paid for it.
FACT #4. . .
A home will only sell for what a buyer is willing to pay for it based on today’s market conditions. This means no matter how many upgrades and updated were made, or however much money has been invested, a home will only sell for what the market can bare. There are many different factors to consider when figuring out your potential return on your investment.
1- Location: What kind of neighbourhood is the home located in and what can it support.
2- Neighbours: How do the neighbouring properties compare to this home.
3-Surrounding - What features and amenities are located near the subject property
MYTH #5. . .
Turning a single family home in a multi family home will bring me a greater return on my investment.
FACT #5. . .
This statement is generally true but the property may not allow it. The city of Ottawa has strict zoning laws that not only dictate the maximum allowable occupancy within any given area, but also dictate the size and design of a home when building new, or creating additions to an existing structure. Once you’ve completed your research to confirm that this can be done legally, you need to tabulate your costs.
1. Purchase price of property
2. Average Recent Sale Prices of Similar Updated Homes in the Area
3. Estimated Repair Cost
4. Unexpected Expenses (15% of estimated repair cost)
5. Closing Costs (real estate fees, lawyer fees, closing costs)
6. Amount of Profit You Desire versus Amount of Actual Profit
1. $300,000.00 = Purchase price
2. $375,000.00 = Average Sales Price
3. $ 35,000.00 = Estimated Repairs
4. $ 5,250.00 = Buffer for Repairs
5. $ 6,000.00 = Closing Costs
6. $ 50,000.00 = Desired Profit Versus Actual Profit of $28,750.00
Your Actual Profit shown is only $28,750.00 based on an immediate flip. If, however, your intend on personally living in the home or renting it for a few years before selling, you would normally expect to turn a much higher profit based on two reasons:
• Historically speaking in Ottawa, real estate value tend to go up year over year, which would lead to a higher sales price and more equity in your pocket.
- Secondly, paying down your mortgage and potentially avoiding capital gains tax based on an owner occupied property. As with all investments, even though nothing is guaranteed never over extend yourself financially.
Please note that the figures in the calculations shown were used for example purposes only. Local housing prices, repair costs, and selling costs will vary greatly from one location to another. It is recommended that all Buyers thoroughly research their local costs and legal restrictions before purchasing any property.