Fixer Upper Not a Good Deal?
With so many fixer upper reality TV shows, it can often seem that there is almost no home that would be a bad investment. However, this is simply not the case. While many home ownership’s can be a great investment, there are certainly times when people have overpaid for a home that is not worth the money they invested.
When this occurs, it can mean that a homeowner must hold onto the home for a long time in order to recover their investment. In some case, they may never recover from overpaying for a home. During the housing collapses of the 1990’s and early 2000’s, many people lost tens of thousands of dollars on homes. While some were overpriced fixer uppers, many were just regular homes that lost substantial value when the market bottomed out. In a regular real estate market, a fixer upper can be a losing investment for many reasons.
Understand Current Market Trends
For people who are in the market to buy a home or sell, it is important to know that not all market conditions are the same. In general, Spring and Summer are the busiest and best times of the year to buy property. However, there are real estate market trends that go beyond a generic seasonal shift. They include regional and national market trends which can significantly impact local markets. Consult your local professional real estate agent for more information on these trends.
If the state that a property is located in starts to lose jobs and the economy is spiraling in a downward trend, this can affect the market of any town. This is true even if the jobs lost are not in the town where the property is. The fiscal stability of a state can affect almost any town within a state. Likewise, national trends such as the market collapses of the 1990’s and early 2000’s can reach and affect almost any corner of the country. Doing a little homework on current trends can be especially helpful when investing in any home.
The top reasons why a fixer upper becomes a poor investment include:
- Buyer Overpaid for The Home
- Home Has Undetected Major Damage
- Home is Taken by Eminent Domain
- Home is in a Poor Location
- Previous Home Improvements Were Undetected as Poorly Done
- Buyer Uses Bad Financing
- The Property Market Bottoms Out
- There is an Unknown Cloud on The Title
Ways to Reduce Risk
While no one can see behind walls, buyers should always have a home their looking to buy inspected for: faulty construction, faulty mechanicals, insect and rodent infestation, lead paint, asbestos, and radon. Homes with wells and septic systems should also be examined by professionals in those fields to ensure there are no major issues. Doing these tests before a purchase is complete will significantly reduce the risk of substantial financial losses from these issues.
It is also suggested that buyers not go in blind to geographic location. Each neighborhood has its own value imprint. While a home may be located around the corner from some very nice homes, the neighborhood of the home being invested in may not carry a well-received view by buyers for a variety of reasons. Learning about the home’s neighborhood is highly advisable.
Property Title Research
All home buyers should have a complete “Title Search” done on any home they are attempting to purchase. This can be done easily, with the assistance of your local Realtor. The Realtor will have relationships with Title Insurance companies, and can have a title search conducted for free, or in some cases, a nominal charge. The title search certifies the property title is “free and clear” of potential claims or encumbrances against it. As part of most home sales, the seller provides a title insurance policy to the buyer, to reassure the buyer that no encumbrances, liens, or claims exist against the home. Old debts of previous owners have the potential to create great financial problems for a new buyer, and the importance of an insurance policy provides protection and peace of mind that any hidden or overlooked claims are covered.
One of the riskiest parts of buying a fixer upper is having poor financing arrangements. If the property is to be held for a long period of time as an investment, having poor financing conditions can be quite costly. Some of the worst financing options occurred during the sub-prime mortgage market in the early 2000’s.
The sub-prime mortgage market was a time period when people were buying homes beyond their financial means, many times with interest rates that had a sudden balloon refinancing condition. Other loans had a significant increase in the interest rate that caused the sub-prime rate they received to almost double. For many people, this put their monthly mortgage payment into prices ranging from double, to up to four times the original payment amount. Most people could not afford this sudden increase and their mortgages went into default.
It is important to know what you can afford and not exceed your buying power no matter how good the deal looks. If you count on flipping the house quickly and the market shifts, you could stand to lose a significant amount of money.
The best way to avoid falling victim to losing substantial money on a fixer upper, is to not get caught in an unknown set of circumstances. Buyers should always do their best to thoroughly investigate any home they are considering purchasing. For additional information, contact an experienced Real Estate professional in your area.