This story first ran in the Sept. 1 issue of Home Design magazine.
In Charlotte’s hot real estate market, it feels like everyone aspires to be the next Chip and Joanna Gaines. If you bought a fixer upper a few years ago in one of Charlotte’s up-and-coming neighborhoods, there’s a good chance you can sell it for a higher price today.
But as the market cools down a bit, buyers looking to make a profit should be a bit choosier about the homes they purchase. Here are a few tips to help you decide if buying a fixer upper is worth your time and energy.
Determine the rehab level
Jeff Johnson of Better Path Homes specializes in rehabbing homes. He’s been flipping houses since 2009 and currently has nine rehab projects going on at once. Over time, he’s been able to develop a system for determining the level of rehab a home will need.
Level 1 is a “lipstick” job—a home that simply needs a new paint job, or new carpet. Level 2 is a home that needs some cosmetic changes and perhaps a few bigger projects, like a new HVAC. Level 3 homes require more extensive changes, such as new windows, new cabinets, a new roof and more. Level 4 is a home that needs a complete gutting.
Johnson says it’s important to determine the level of rehab your home will need before getting started. Hire a contractor you trust to give you an accurate description of what you’ll need to do. Once you know the level of rehab, project an estimated cost. He estimates a Level 1 “lipstick home” will cost roughly $10-15 per square foot, while a Level 4 home will cost around $50-60 per square foot. This is just a guide, obviously, and the more information you can get from a knowledgeable contractor, the better prepared you will be to undertake the project.
Beware of cost creep
Johnson says there a lot of ways “cost creep” can creep up on you, slowly draining your resources. If you are borrowing money to buy a home or make repairs, you are slowly losing money as you pay interest over time. If you are paying repairs outright, you can buy yourself more time, but you still want to make sure you aren’t letting costs creep up on you. Johnson says many people don’t realize how much cost is involved just in the “doing business” aspect of buying and selling a home. The closing costs, inspection fees, realtor cost, attorney fees, insurance and other soft costs add up quickly, often eating up a significant portion of your profit. Make sure you take these into consideration in the beginning.
Look beyond the surface
Potential homebuyers, particularly ones planning to live in the home while they fix it up, can easily fall victim to the trap of paying attention to only what meets the eye. It can be tempting to see a home as full of potential because of the spacious kitchen, but neglect the water-damaged crawlspace. Johnson also emphasizes the importance of paying attention to the larger systems, like the HVAC, plumbing and electric systems. Floors and paint are cheap, but a new roof is expensive. For most homes he buys, he counts on spending 10-15 percent of his budget on work in the crawl space alone, especially because older homes don’t have proper drainage, and water damage can take a huge toll. (In fact, he says most sales are ruined by crawl space issues when potential homebuyers find out about them in the inspection report.)
Johnson says it’s also important to figure out which walls can be moved if you are planning to do an extensive remodel. Some homebuyers think it will be easy to knock a wall out without taking into account whether it is load-bearing. You could end up having to add new beams, which can be very expensive.
But flipping a home isn’t all bad news—if you know what you’re doing, it can be very worthwhile. Johnson recommends joining a real estate investment group, such as Metrolina Real Estate Investors Association (Metrolina REIA), where you can learn from experts and ask questions about the process. He also recommends taking a class, such as the one he teaches, where newbies can learn tips before getting started. The key to undertaking the project is making sure you do your research and are prepared for unexpected hurdles.
As Johnson says, “Anyone can do it, but you have to do it right.”