As a REALTOR, something that comes up fairly often for everyone from first time homebuyers to investors is the question about how purchasing and renovating works.  Or buying a “Fixer Upper”.  Where this can be an appealing option for the right person, this home buying option does have it’s pros and cons.

One great thing about FHA and Conventional Purchase and Renovate (or rehab) loan products, is that the buyer can typically afford more “house”, for less.  And although houses that cost between $100,000 and $250,000 decline in stock year over year, those sales still makeup over 40% of the marketplace.

So, buying an “as-is” property that needs work, or just buying a smaller house that you know you can add onto to get what you need can be a very appealing option for the buyer that is ready and willing to put in the work.

With FHA products, you can have a fair to average credit score to get approved and typically won’t need to put as much down, which makes this a great option if you have a lower than 650 credit score and not as much saved up as you’d like.  The lower your score, though, the more you will likely need to have saved up.

But talk to a mortgage broker about this – this type of loan may not be the best for you if you’re looking for a long term living solution because it does typically come along with a higher APR up front.  If you can save up, or can borrow from parents or something, you have a little more flexibility and other loan products you can get into that will help overall with your monthly budget and the long term cost of the loan.

The most common issue with these types of loans?  Not getting great estimates.  If you’ve ever done a renovation you know this, but contractors can come across fees as the job goes along that they may think you should have known about, but they don’t necessarily always put in a budget.

Builders and contractors forget sometimes that some of us don’t know anything about building a house or renovating one.  Things like consultant fees, inspection fees, permits – the things that the builder might not be totally responsible for are fairly often left out of bids.

So be sure to get an accurate estimate, with all the line items accounting for anything that can come up – well as much as possible.  When I’m budgeting, I typically allow for a 10-20% budget creep due to unforeseen expenses and circumstances.

One last word on this – be sure that if you’re going to buy a smaller house to add square footage onto it, that you are not going to out-price the market wherever you are.  This is an easy mistake to make, and you may not think it’s a big deal, but dramatic increases in market prices are what make it harder for buyers to buy houses.

As a seller, a unique house is harder and typically takes longer to sell.  A real estate agent can help you determine what the market will bear, and how much “house” is just enough.

If you have any other questions on this matter, feel free to hit me up anytime.