For many first-time homebuyers, purchasing a fixer-upper is the only way they may actually be able to take their first steps on the property ladder, especially if they are looking at buying in a location that is out of their price range.
And as the age-old adage goes: Rather buy the worst home in the best neighbourhood than the best home in the worst neighbourhood.
Property renovations and flipping have attracted the attentions of television audiences all over the world, but it has also glamourised a trend that may not necessarily be as easy, or cost-effective, as it may seem; of course, if you do it right you could reap great rewards.
Samuel Seeff, chairman of the Seeff Property Group, says you may be able find an older or smaller property at a lower cost which offers great potential for renovating and extending the property.
“Minor cosmetic upgrades such as new floors, cupboard doors, tiles, and sanitaryware is often a more affordable way to update a property and could add to your enjoyment of the home while adding value to the property.”
If you are considering going this route, however, do not get caught up in the romanticising of this trend on social media and television, says Skoko Sebola, Principal at Leapfrog Midrand, who adds that such shows have exalted property renovations to pure entertainment.
“It's not that it's not fun to renovate a property. It's just that it needs to be approached with an open mind and lots of patience.”
Explaining further, she says the term ‘fixer-upper’ is used to describe a property that needs structural and/or aesthetic improvement. The state of disrepair often means that these properties are available at a lower purchase price than the market average.
"For some buyers, the fixer-upper is a way to get into the market, or even a specific area, while others simply love the process of fixing a dilapidated property. Either way, it can be a very rewarding project and add significantly to the value of the property.”
Before you commit to such a project, though, Sebola states that you need to take these things into consideration:
The worst property in the best area is a far better purchase than the best property in an undesirable area, and this is “definitely” a guiding principle when purchasing a fixer-upper.
"The reason is simple. Much can be done to improve the look and feel, and even the structure of a property, while it's a lot more difficult to improve an entire neighbourhood. In other words, if the fixer-upper is the way to 'get into' your neighbourhood of choice, then do it.”
– Good bones
While a fixer-upper, by its very name and nature, will need to be improved on, it helps if the configuration of the property is to your liking. Moving the kitchen from one end of the property to the other is a lot more involved – and costly, than simply renovating the kitchen in its existing place.
Also, you must ensure the property is structurally sound or be sure of what you need to do if it is not. Otherwise, you may need to replace the roof with the budget you can earmarked for the bathroom renovations.
"If possible, recruit the services of a building inspector to give you a professional assessment of the condition of the property and where you can expect to spend money.”
Before you start with anything, make a list to distinguish between structural and aesthetic changes as the former is likely to be more crucial than the latter.
– Return on investment
You may have picked up your fixer-upper for a bargain price, but it will cost money for the property to reach its potential. Therefore, a good approach is to use what you save on the purchase price to fund the improvements.
“It may also be possible to register a bigger bond and access that capital for the renovations. A trusted advisor is a useful resource in this regard and will be able to advise on an individual's specific scenario.”
Sebola advises that you draw up a plan that clearly outlines what the final product should look like, taking into account time, budget into consideration, and the ultimate goal.
– Be patient
Seasoned renovators will tell you two things: The first is that you will have to get your own hands dirty (literally) somewhere along the way, and the second is that there will also be an unforeseen expense, or two.
“Know what you're in for, clearly define your goals and budget, and keep your eye on the desired final outcome, and it will be fine.”
Some of the best profits are made on homes that have deteriorated below neighbourhood standards and can be inexpensively refurbished, says Rhys Dyer, chief executive of ooba Home loans.
Echoing Sebola, he says cosmetic – as opposed to structural – improvements tend to be the most lucrative in the long run, and that, for the best returns, look for a fixer-upper in a safe suburb with reasonably high property values.
“A good definition of a fixer-upper is a home that has been allowed to deteriorate below neighbourhood standards. One of the great aspects about buying a fixer-upper is that the purchase is not contingent on the temperature of the property market.
“Whether hot, cold, or neutral, any time is a good time to buy one.”
If you’re considering investing in a home that needs TLC, Dyer says these are some of the qualities you should be looking for:
– A property that requires mostly cosmetic improvements
You don’t want one that is going to require too much investment. Look for properties that can be significantly improved with cosmetic changes like paint touch ups, drywall repairs, and floor refinishing — which generally cost much less than what they return in market value.
Updating the kitchen, which is the heart of the home, can be especially effective in raising its market value. Bathrooms can also make for potentially lucrative improvements.
“When choosing a property to invest in, total up the estimated expenses for making repairs and add this number to the cost of the property. Then, be sure that you will be able to make a comfortable profit after all of these costs.”
– A property without serious defects
Some defects are repairable, while other forms of structural damage are extremely difficult to repair, so be sure to hire a professional contractor to inspect the home. This way, you can be aware of any structural defects and then determine whether it’s worth the investment.
“Elements such as the plumbing, electrical, and water system will be very tricky to deal with, while broken windows and deteriorating paint can be easily fixed,” Dyer says.
– A property that is likely to rise in market value
Fixing up the home will increase the value by default, but it doesn’t hurt to research the market and see whether prices in the area are likely to be going up or down. Buying a fixer-upper in an area where house prices are likely to rise lends more financial potential to your investment. Additionally, he says, renovating a home in a luxury residential district means you could improve its value while still keeping its price lower than the average cost in the district.
How to prepare your finances for renovating a fixer-upper
One of the most challenging aspects of purchasing a fixer-upper is paying for the renovation.
“Understandably, most people don’t have much extra cash after paying a deposit and transfer costs, so coming up with additional money to cover repairs or remodelling can be difficult.”
Dyer says one option is to calculate the anticipated cost of these renovations and build them into your savings budget. But another option that you may not be aware of is, to apply for a larger than required bond, creating a surplus amount that you can access for the desired renovation.
“If your home loan lender offers this option, these loans can be borrowed against the home’s value after the work is finished, subject to credit approval.”