The other honest appraisalAs 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 houses We'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.
Rule #3. Pick a fixer- upper with cosmetic upgrades instead of major, expensive projects. Well, of course! We didn't put lots of money into our first house. Instead of fixing the foundation or updating the kitchen, we did inexpensive things like painting, pulling out old, overgrown bushes, and replacing the carpet.And the new house? In the five years since we moved in, here are the projects we've completed: refinished all the wood floors (all 1,800 square feet of them); replaced the roof and some windows; rewired the house; renovated the bathroom; fixed the barn roof; replaced the leaking toilets and one of the rotten bathroom floors. That doesn't even include the projects we had to hire out like replacing part of the barn foundation or putting in a new septic system. It also doesn't include the projects yet to come. Despite the copious amounts of cash we've poured into this place, it still looks like a fixer-upper on the outside. We're used to the squirrel-gnawed siding and the peeling windows, but we recently got a glimpse of how it looks to others. This summer, we hosted a shrimp boil on the front lawn with lots of people, including a couple dozen kids. As I walked around the tables handing out cocktail sauce, one 6-year-old said, “Hey, who lives here?” “I do,” I replied. “Well, you need to paint this house!” No, buddy, what we really need is new siding. Counting the siding, new windows, and a few other things that we really need to do, I estimate that we have another $25,000 of updates to go, before we start the bathroom and kitchen renovations…and that doesn't count the $30,000 we've already spent. According to the last appraisal, the house is worth less now than when we bought it. Ouch. Next time I'll be following my own advice AND applying this formula: Price of house plus cost of repairs equals the average home price in the neighborhood. So before you fall in love with a fixer-upper, ask yourself if this is a decision you can live with in.