The other honest appraisal
As much as possible, you need to know everything about the house. A home appraisal and a thorough home inspection should tell you what you need to know. What's it worth? If it's an old house (and most fixer uppers are), how is the foundation? How old is the plumbing and wiring? Is there evidence of mold or water damage? Does it need a new roof?
Once you know what it needs, you need to ask whether you can afford to fix these things. Unless the house is dirt cheap, or you have access to inexpensive materials, you may need to find another house. Issues like mold or a foundation in disrepair are expensive to fix, so you may or may not get your money back in home equity.
A tale of two housesWe've owned two homes. And while both needed a lot of work, they were completely different. So what was the difference? The first house sat on the edge of a town with notoriously low prices for real estate. It was a mediocre house in a mediocre neighborhood. Because of that, we needed to buy the house at a price lower than the surrounding houses. Which brings me to rule #1… Rule #1: Buy a fixer-upper at a cost (way) below the rest of the houses in a good neighborhood. By following this rule, your improvements will bring your house up to (or slightly exceed) the value of the surrounding properties. You won't recoup your costs if your renovations result in “too much house” for the neighborhood. Rule #2. Find a fixer-upper with quality construction. That first house was cheap, costing less than our combined annual income at the time. But everything about it was cheap, including the materials used in its construction. And that led to a rodent infestation, among other things. (I think our record was catching 14 mice in a 24-hour period.) On the other hand, our second house has “good bones.” Maybe it needs lots of work, but at least the extra work will be built on a good foundation. Ah, but “lots of work” means mostly major, expensive projects.