Should You Buy That Fixer-Upper?

For people who love old houses — and love to work on them — the notion of buying a fixer-upper can be irresistible. Just think: You can snag a rundown place in a good neighborhood for way below market price, invest some time and money renovating it, and end up with a like-new house that's worth at least twice what you paid for it. Sounds good, right? Often, it is. But buying a fixer-upper can be fraught with peril. So before you take the plunge, make sure you have a realistic idea of what you're getting into.
"If people are unforgiving up front about assessing the costs of renovation, the value of the property and the neighborhood, and how much money they have, they can come out ahead and buy more house than they otherwise could ever afford," says Bradley Inman, CEO of HomeGain.com, a real estate sales and information Web site. With that in mind, here's what it takes to make the purchase of a fixer-upper pay off.

Do the Math
Figuring out what you should pay to buy a fixer-upper starts with a simple equation. First, add up the costs to renovate the property based on a thorough assessment of the condition of the house. Be tough with this estimate, which should include materials and labor — yours and other people's. Next, subtract that from the home's likely market value after renovation, drawn from comparable real estate prices in the neighborhood. Then deduct at least another 5 to 10 percent for extras you decide to add, unforeseen problems and mishaps that have to be dealt with, and inflation. What's left should be your offer.

It's essential that the real estate contract include an inspection clause. At best, the inspection will assure you that the house is a good investment; at worst, it will help you back out of the deal. Often with fixer-uppers, it's something in between. The inspector will document a serious problem or two, and you can use the findings to get the seller to pay for repairs or negotiate the sale price downward.

If the house needs significant structural improvements, many real estate experts recommend avoiding it altogether. That's because major repairs — plumbing and electrical system overhauls, foundation upgrades, and extensive roof and wall work — are usually "invisible" and hardly ever raise the value of the house enough to offset the cost of the renovation.

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