Fixer-uppers can be an opportunity to greatly increase the return on your investment, create a job for yourself or create a total nightmare in your life, so I suggest you evaluate your skills, temperament and the deal very carefully before you undertake one of these highly speculative projects.  Done correctly, a fixer-upper can give you much higher returns because the purchase price of the property will be much less than a similar property that is in “turn-key” condition.

Evaluate

The evaluation is conducted prior to the purchase.  Evaluation and negotiation will generally take place throughout the escrow period.  When making an offer on a fixer-upper you will want to get a ballpark estimate of the fix-up cost prior to making your offer, then you will make the offer “contingent on your due diligence investigation and inspections”.  The formula I use for an initial offer on a fixer is to take the fair market value after rehab, less selling expense of 10%, less the fix-up expense (cost to be as if you were hiring a general contractor), less whatever profit you want to make (8-15% of the retail price that you could sell it for).  I recommend you negotiate any fixer-upper purchase this way, even if you intend to live in the home for ten years and you plan on doing all of the work yourself.

Budget Your Time

Too many talented people look at a fixer-upper as an art project or hobby and don’t budget for themselves to be paid a fair price for the service they are providing.  It is important to realize that even when you are fixing up your newly purchased home you are providing a service to the seller of that home.  If they want to get top dollar when they sell their home, they would need to hire a contractor to make those repairs, so why would you do it for free?

Financing

Financing your fixer-upper can be more challenging.  Just make sure to explore all of the financing options and make sure you will have sufficient funds when they are needed to complete your project.

Conclusion

The benefits can be great, but this type of purchase needs to be viewed as a business opportunity!  By the way, If you live in the house for two out of five years you can sell it and take all of your profits tax free up to $250,000 for an individual and $500,000 as a couple.  Just make sure you check with your CPA on this strategy. It can be a powerful wealth building tool when applied repeatedly over time. 

Finding the right price, location, and size of home