Even though a buyer might pay considerably less for a fixer-upper than similar houses in the neighborhood, they need to take into account what it will cost to fix the house when making an offer. Even if they plan to do much of the work themselves, there are still material costs to consider. Only a full accounting of their expected expenses will tell them if the project is within their budget.
The website for the home improvement show “This Old House” offers this formula:
Start with the market value of the house after all of the proposed work is done. Use comparable properties in the neighborhood as a guide.
- Add up the costs of each project planned to fix up the house.
- Bump that amount up by 5-10% to account for price fluctuations on material, extras you decide to include, inflation, and a margin of error.
- The future market value minus the inflated cost estimate gives an approximate amount to offer for the house.
It is a good idea to make an offer on a fixer-upper contingent on an inspection. This is often the only way to discover the complete list of things that need to be fixed in the house. The inspector is a great resource for prioritizing and adding up the cost of the work. They can help determine what is urgent and what can wait. For example, they may report that the furnace should be fine for 4 or 5 more years, but that the roof needs replacing before the next rainy season.
Another advantage of having an inspection contingency is that the buyer has a way to back out of the deal if the repairs prove to be more than originally thought.
It is important to remember that there is almost never a dollar-for-dollar return on investment when fixing up a house. For example, replacing old knob and tube wiring will cost about $8000. That doesn’t mean the house’s value will automatically jump by $8000 once it is done. Getting rid of an obsolete system by updating to something modern is expected and is a somewhat “hidden” improvement.
Some changes, however, pay for themselves when the house is resold. For example, adding another bathroom can be worth twice as much as what it costs upon resale. But if the owner plans to live in the fixer-upper, resale value is secondary to what these improvements will add to the functionality of the home.