Every year, millions of prospective Texas homebuyers weigh the pros and cons of purchasing a fixer-upper property, whether it’s going to function as a primary residence or a rental property as part of a real estate investment strategy. This could be a very financially advantageous decision, setting you up for profitable revenue generation and explosive growth for years – but it could also be a massive headache that never seems to go away.
No matter how you look at it, purchasing a fixer-upper is a risk.
The question is, when is that risk worth it?
The Wins and Woes of Fixer-Uppers
There are some attractive reasons to be interested in a fixer-upper. These deteriorated and potentially neglected properties tend to be much less expensive than their counterparts, despite possibly having good foundational bones and a valuable geographic location. If you’re willing to put the time, money, and effort into fixing up the property, you could greatly increase its value; from there, you could flip it for a profit, rent it for ongoing cash flow, or simply enjoy a nice house for a fraction of what you would have paid otherwise.
Unfortunately, fixer-uppers don’t always turn out this way. Sometimes, the repairs cost much more than the buyers originally anticipated. Sometimes, the foundational bones aren’t as strong as they first appeared. Sometimes, buyers uncover more and more problems as they explore deeper into the house, eventually spending far more time and money than they initially thought they would.
In short, a property like this could be a major windfall or a total money pit – or something in between.
What Makes a Fixer-Upper Worth the Risk?
So what makes a fixer-upper “worth” the risk of buying it?
Unfortunately, there are no black and white answers here. There’s no single quality or feature that instantly makes a fixer-upper worth it. However, there are some positive signs and “green flags” that make a fixer-upper more worth considering as an addition to your portfolio or primary residence.
- An unusually low price. Market prices are hypothetically perfect reflections of market dynamics, but this is rarely the actual case. In reality, some houses are priced ridiculously low while others are priced ridiculously high. Even in the realm of fixer-uppers, it’s possible to find properties that are greatly undervalued and properties that are greatly overvalued. If you have reason to believe that a property has an unusually low price, given its current location and condition, it might be worth seriously considering. For example, if there are several degraded properties in a neighborhood selling for $60,000, and there’s a similar property in similar condition selling for $40,000, it invites further due diligence. Just keep in mind that a lower price could be reflective of deeper or more complicated issues.
- Experience with home repairs and flipping. Many of the problems associated with fixer-uppers are related to buyers underestimating the cost and severity of repairs needed. You might get stuck paying twice as much and working twice as long to get the house in habitable shape if you aren’t careful. However, if you already have some experience with making home repairs and flipping houses, you’re less likely to make this kind of error. It doesn’t mean your decisions are going to be foolproof, but it does give you an edge over the average buyer.
- An extended network of experts and contractors. Do you have an extended network of experts and contractors you can work with? If you have connections to lots of handy people and trade experts willing to offer you attractive prices on their services, you’re in a much better position to make a fixer-upper work.
- An assessment from an agent. A real estate professional, such as an agent or an Austin property management consultant, can give you a clear assessment of whether purchasing the property is worth it. These people have seen and managed thousands of properties over the course of their careers and they have a kind of expert instinct on the subject. If you find someone you trust, they’ll likely tell you exactly what they think, including if the property isn’t worth the time or money. That’s not to say that a single expert opinion is always worth following blindly, but it’s another piece of evidence you can use as part of your decision making.
- A clear route to revenue generation. Is there a clear route to revenue generation for this property? For example, if most of the other properties in this area are occupied with consistent tenants and relatively high rent prices, the property should look even more valuable. Even if repairs take longer or are more expensive than expected, you can quickly compensate for this if you start making money immediately upon completing the repairs.
- Tremendous growth potential. What does the future of this neighborhood look like? Nobody can predict real estate markets or neighborhood dynamics with perfect accuracy, but if you suspect massive growth potential in the future, the fixer-upper should look more attractive.
- An acceptable worst-case scenario. When crunching the numbers, speculate about a worst-case scenario. Imagine that there are far more issues than you first accounted for. Imagine that repairs take three months longer than anticipated and increase your cost estimates by 50 percent or more. Is this still a good deal? At what point does it become a bad deal? If the deal only makes sense when the variables are perfectly aligned, you should probably pass. If there’s plenty of wiggle room, you can feel more confident moving forward.
- A reasonable inspection from a pro inspector. Always get a thorough inspection for a fixer-upper home from a professional inspector. They should provide you with a comprehensive list of everything wrong with the property, from top to bottom. This report may not be perfect, but it’s a reasonable assessment to start with. If you don’t find any nasty surprises at this stage, take it as a reassuring sign that this purchase is worth finalizing.
Just keep in mind that even if all of these positive signs are present, a fixer-upper may still be an expensive headache. Every property purchase is a risk, even if that risk is small, and no property is going to be a guaranteed success.
Are you unsure about a fixer-upper property in Austin that you want to add to your portfolio? Or are you having trouble keeping up with all the responsibilities of being a landlord in Texas?
Green Residential is here to make your life easier with our property management services. For a free consultation, contact us today!