The real cost of buying a home that needs renovation

Many home buyers are understood to be turning their backs on move-in ready homes. According to ABC News, many are warming up to the idea of purchasing fixer-uppers or houses in need of heavy repairs that are up for grabs at more affordable prices.

What are fixer-upper homes?

"Fixer-upper" is real-estate slang for older and rundown properties that require heavy renovation or repair work before they can be comfortably liveable. Owing to their state of disrepair, such properties are usually available for below average market value, allowing home buyers to secure a home at a relatively cheaper price point. 

However, you are likely to spend a substantial amount of time and money fixing a fixer-upper home if you're interested in buying one. Purchasing a fixer-upper could turn out to be an effective strategy if you are aware of what you are getting into. Getting an expert to help you determine the extent of repairs you'll need to make and what they are going to cost you could help you make an informed decision.

What to know when buying a fixer-upper home?

The aim of buying a fixer-upper is to save money and end up with a home that's worth more than the amount you paid for it. While you may be able to purchase a fixer-upper home below average market value, you also need to factor in the cost of renovation and repairs. 

Renovating an older bathroom or kitchen is generally straightforward, especially if you don't have to change the location of the plumbing. However, if you have on your hands a property with serious structural issues, you are probably looking at a major redesign or rebuild, which is going to be neither cheap nor quick. Here are some signs to help you identify serious structural damage when inspecting properties: 

• Any cracks or bulges in the walls.
• Cracks in the ceiling.
• Peeling or discoloured paint and any other evidence of water damage such as mould or leakage.
• Uneven gaps around the doors.
• Any sagging in the floors or the rooflines.
• Termite damage.

While you can spot some of these problems by diligently inspecting the property on your own, an expert can help assess the property's condition better. A professional building and pest inspection could help you avoid nasty surprises like poor drainage or pest infestations that you cannot identify yourself.

It's also worth thinking about your living situation while the repairs are going on in your new house. Will you stay in the house during the renovation process, continue living in rental accommodation, or bunk down with your parents for a few months? 

Being older properties, many fixer-uppers may require a complete redesign or renovation. This means you cannot move into such a house immediately. While such properties may come cheaply, you'll be paying money to live in rental accommodation during the renovation process unless your parents allow you to move in with them for some time.  

It's also advisable to check the local legislation in the area where you're buying. Council rules and restrictions for renovating a property depend on the location of the property. There might be restrictions on building an extension, changing the property's facade, or removing trees from the site. Knowing about such restrictions in advance could help you plan your purchase better.

Financing a fixer-upper property

Getting a home loan for a fixer-upper isn't always possible, as the property's value may not be enough to secure a mortgage. In such a case, you can apply for a construction loan that can be used for financing extensive building or renovation work.

A construction loan is structured differently from a traditional mortgage. Unlike a conventional home loan, you don't receive the money as a lump sum at the start of the term. Instead, the money is advanced to you in stages, often at the completion of each of the milestones in the construction process to pay for the work done. 

Most lenders allow you to make interest-only repayments during the construction phase. You are only charged interest on the amount that is already drawn down instead of the entire loan amount. Once the construction work is complete, the mortgage reverts to a traditional principal and interest loan. 

While the phased payments help you save some money in interest, they also keep the lender more involved in the construction process. Most lenders conduct regular valuations during the construction phase to ensure the work is on track and the property maintains its value. Some lenders may have additional criteria to qualify, such as getting the job done using only licensed builders and having some insurances in place. 

Alternatively, if the house you're buying is in a liveable condition and you only need to make some cosmetic changes, you may consider taking out a personal loan or using your savings to finance the work. Or, if you could wait for a few years before making the changes, it may be possible to use the equity in your house to finance the repairs. 

Equity refers to the difference between the current value of your home and the amount outstanding on your mortgage. This difference can be leveraged through refinancing to increase the amount of your borrowing to 80 per cent of the property's current value and use the additional funds for a renovation project. However, increasing your debt will most likely increase your monthly repayments. It’s worth assessing your financial situation to make sure you can afford the additional debt before applying for an equity loan to increase your borrowing. 

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