Buying a home that needs work—whether it's cosmetic touchups or a complete renovation in order to make it livable—is a time-honored way to break into the housing market. The property's list price will probably be set fairly low, to attract interest. And, as with any real estate purchase arrangement, you can offer even less if you think that's appropriate. (If the house is in really, really bad shape, it's possible that the original owner has died, in which case there's no one to insult with a low price!)
But unlike buying a house that's move-in ready, figuring out the market value of a fixer-upper isn't a simple matter of comparing it with nearby houses that have the same number of bedrooms and bathrooms and so forth. Let's take a closer look at how to decide the amount to offer for a true fixer-upper—a home that's in need of some serious work, including:
Although every home is unique, your local real estate market is not unpredictable. Within certain boundaries (a neighborhood, for instance), a real estate agent or anyone who has been going to open houses and following recent sales can probably tell you what a "typical" home of a certain size will sell for. (This might have little to do with the amount the seller listed it for.) Websites such as Zillow will give you recent sales prices and rough (very rough) estimates of value for a particular home.
Using both professional opinions and recent records of sale prices, you should be able to come up with a "comp" (comparable) value for a home.
But most homes on the market are not fixer uppers. Any theoretical comp value that you arrive at won't really apply to a house in which, say, the floor around the toilet has a hole through which you can view the basement, the roof is a patchwork of old and loose shingles, and the linoleum is peeling badly.
That doesn't mean you shouldn't look at comp values for homes with the same basic parameters—in the same neighborhood, with the same square footage, having the same number of rooms, and on the same-sized lot. In fact, this figure will be an important starting point in figuring out how much to offer. But there are more steps ahead in figuring out how much to offer for the property.
To set a logical home price for the fixer-upper in which you're interested, you'd want to start by figuring out the value of the home if it didn't need work, then subtracting the cost of the needed work.
So, for example, if two-bedroom, one bathroom homes in your desired neighborhood typically sell for $300,000 and the home you're looking at needs $100,000 in work, an offer price of $200,000 might make sense.
We discussed arriving at the first figure already. Now let's look at how to calculate the cost of repairs.
Time to bring in the experts. Unless you are a contractor, engineer, or in some related specialty, it can be almost impossible to calculate how much the repairs and renovations on a house will cost.
Hidden problems such as dry rot, pests, and an inadequate foundation can add tens of thousands of dollars to the total. In some cases, the cost of work might be so high that razing the structure to the ground and starting over will make more sense.
You'll want to hire, at a minimum, a home inspector and a licensed general contractor to tell you what needs doing and how much you'll be charged.
That will get you close to the figure you'll subtract from the home's "normal" market value in order to reach the maximum price you should offer. But first, you'll want to make some adjustments to that figure.
The amount you'll owe the contractor for labor, materials, and permits is not the end of the story. To the extent possible, you'll want to add in:
Another "cost" is the sort you can't really put a dollar figure on—your own sanity and energy while you oversee or even do the work.
What if you were to buy a fixer-upper and, a few years from now when it's all finished, realize that if you'd just waited to buy, you could have bought the equivalent home for the same total cost (purchase price plus repairs), without enduring all the in-between? Unless you love the process and are eager to customize a home down to its every detail, that prospect can lead to only one conclusion—a real bargain is a house that you can buy for even less than it's "worth," so that its eventual value exceeds the purchase and repair costs.
Of course, it's possible that home prices in your area are appreciating at such a rate that you feel like it's "now or never" for buying a house. But this consideration is still one worth pondering.
Beware of unexpected sources of competition when deciding how much to offer for a fixer-upper. Yes, getting a bargain is important. But home contractors and flippers, in particular, might be ready to bid higher amounts than you. This is their business, and they can efficiently fix up and turn around a house for a lower cost than the average buyer will face.
Believe it or not, you might actually have to raise your offer price a bit in order to compete with the professionals. Do this only if you really love the land and the location, and won't be strapped for cash for years to come.