Some people buy houses in need of repair, rather than move-in ready places, to save money. Others buy fixer-uppers to renovate and resell for a quick profit – or keep as their own.
If you’re in the former group, though, you may end up spending more money than you saved. And if you’re in the latter group, you may no longer be able to rely on cheap fixes and market appreciation to make a buck.
First, let’s take a deeper dive into the repair-and-hold sector through the eyes of a recent survey, which asked 1,000 homeowners whether they purchased a turnkey house or a fixer-upper, and why. The poll was conducted by Porch.com, a site that matches homeowners with qualified professionals.
The study found that for the 52 percent of those who managed to stay within their home-repair budgets, the savings over buying something move-in ready wasn’t terribly great. And for the 44 percent who finished over budget, their “bargain” houses turned out to be no bargain at all. A fortunate 5 percent came in under budget.
Save $50K? Or Avoid the Agro
Here are the numbers: The average price of a move-in ready house was $250,495, while the average price of a fixer-upper was $199,819 – a difference of $50,676.
Saving 50 grand is certainly a powerful incentive, even when you consider all the aggravation involved with living in a house while the kitchen is being remodeled, the bathrooms are being gutted and the flooring is being replaced.
But the average spent by buyers who went over budget on renovations was $75,922, meaning they ended up spending $275,741. That’s $25,000 more than they would have spent had they just bit the bullet in the first place and went with a turnkey property.
Those who stayed within budget did better. They spent only $47,072 on repairs and improvements, so their total expenditure was $246,891. But that’s just a few grand less than if they, too, had taken the move-in ready route.
Admittedly, the Porch survey has some flaws, as the service itself points out. For one thing, it was self-reported, and that kind of data is subject to selective memory and exaggeration. For another, responses had to be grouped into certain buckets. For example, if the house need “very few repairs,” it was considered a move-in ready property. If it needed “some repairs,” it was placed in the fixer-upper category, along with those that needed “virtually everything repaired.”
Despite these shortcomings, the poll presents would-be buyers with a picture of what they might be up against if they opt for a fixer
On average, people who bought a place needing work spent 38 percent more than they expected, the survey found. The most frequent over-budget jobs were heating and air conditioning, plumbing, basements, bathrooms, new appliances, roofs, kitchens and electrical work.
People buy fixers for all sorts of reasons. Money, of course, is the main factor. But many simply like the house or the neighborhood, and a healthy minority figured they’d enjoy working on the place. Moreover, even though many didn’t save any money, 60 percent of those who broke their budgets said they’d do it again.
Face of Flipping Has Changed
“Flip” became a four-letter word after the 2008 housing flop and resulting recession. And with good reason, said Daren Blomquist of Auction.com, an online marketplace for distressed properties. “Speculative home-flippers added little value to homes, relying on price appreciation to fuel their profits.”
Judging by the late-night TV shills hawking their books and videos on how to make a quick profit by buying low and selling high with a few repairs in between – a slap of paint here, a nail or two there – a lot of that is still going on. But lately, flipping has become less, shall we say, shady and more on the up-and-up.
“Flippers are shifting away from price speculation and toward adding value to properties,” according to a CoreLogic study.
Blomquist agreed. More and more professional flippers, not those lured into the field by TV commercials, are employing a high-quality renovation approach, he said.
These flippers are still buying at a discount. But they’re transforming their properties into move-in ready homes through extensive renovations. And in the process, they’re raising home values and helping stabilize neighborhoods.
No matter what side of the coin flippers are on, they should budget carefully, just like those who buy fixer-uppers for their own use. Otherwise, there may be no profit or savings at all.
Case in point: According to Discover Personal Loans, more than three-quarters of the nearly 1,000 people it surveyed were way off when asked what it would cost to remodel a kitchen. They missed the mark by $9,500.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. He may be reached at firstname.lastname@example.org.