If you’re an aspiring homeowner on a tight budget, don’t be turned off by those dirty, run-down and miserably out-of-date properties in the real estate listings. Sure, a few of them look like a scene out of the The Munsters. But those cobwebbed fuse boxes, creaky joists, linoleum floors and hideous kitchen cabinets could be your ticket to an urban neighbourhood that would otherwise be unaffordable.
Just think: you could snag a rundown place on a great street for much less than you would pay for a house with curb appeal. Then you can invest some money and a lot of sweat equity and end up with a like-new house worth twice what you paid. Better yet, you can finish the home in a way that perfectly suits your tastes and needs and turn that rundown shell into your own urban sanctuary.
But buying a fixer-upper can also be fraught with peril. Before taking the plunge, you’ll need a realistic idea of what you’re getting into—and that goes beyond setting a budget and arranging a mortgage. We’ll show you what factors can make the difference between a handyman special and a money-pit nightmare.
Get your fix
When Chander Chaddah was starting out as a realtor in Toronto more than a quarter of a century ago, fixer-uppers were everywhere. He estimates one in five houses could have been declared uninhabitable, and only a handful of people were interested in buying them. That’s changed. These days, bargain-basement fixer-uppers aren’t as plentiful and the competition is much greater. “Reno shows on TV, access to materials and workshops held by big-box hardware stores have made renovations much more accessible to homeowners,” says Chaddah. This has increased the appetite of handy homeowners to tackle the job.
Janet McCauley and her sister Maureen managed to find their detached century home in a trendy section of Taber, Alta. “It’s a home we all knew as kids growing up,” Janet says. “But it was in such a state of disrepair and was selling as a foreclosure, so the bank just wanted to get rid of it.”
The sisters knew they had found a true fixer-upper, complete with bouncy kitchen tiles, a half-finished main-floor powder room and linoleum dating back to the 1930s. It was a good deal, but only if they could keep the renovations to a strict budget. “A few hundred thousand and this home would be back to its former glory, but we’d be broke,” laughs Janet.
So the McCauleys devised a plan: make a list of all work required, establish a budget, then determine what renovated houses were selling for in the area. That allowed the sisters to come up with the maximum purchase price for their fixer-upper.
“It’s important to do your homework and to talk about the work required and the costs associated with it,” Chaddah says. “Pay for skilled labour rather than unskilled labour. Do the demo yourself, even if you’re just getting the reno project ready for the professionals—every bit helps and every bit cuts costs.” Once you’ve added up all your costs, add another 10% for the unexpected costs that crop up along the way. Be thorough and realistic, Chaddah says.
Even if you’re not planning to flip the house, this number crunching will ensure you don’t overpay or over-renovate the fixer-upper and potentially end up losing money if you’re suddenly forced to sell.
Pay the piper (and the electrician)
One of the biggest questions when buying a fixer-upper is where to get the money to turn your shabby shack into a dream home. Just because you qualify for a mortgage doesn’t mean your lender will approve an additional line of credit. One reader expressed his frustration when he recently tried to purchase a $450,000 home requiring $100,000 worth of renovations. Despite being approved for a $650,000 mortgage, he was not able to buy a cheaper fixer-upper because he didn’t qualify for the line of credit he needed for the renovations.
One way to secure credit is to have collateral other than the home you’re buying—another property, a large investment portfolio, or some other valuable asset. Another option is a “purchase plus improvement” mortgage. With this type of loan, the lender gives you credit towards the expected higher value of the home based on your improvements, to a maximum of 10% of your purchase price.
For example, if you plan to buy a home for $400,000 and do extensive renovations, the lender could set up your mortgage as though the home’s value was $440,000. That would allow you to access some additional cash to pay the contractors. Some critics say these mortgages are dangerous because homeowners may be piling on excessive debt—in this example, with the minimum 5% down payment, the mortgage principal would be $418,000 on a home currently worth less than that.
An even riskier alternative is to pay for all renovations up front using credit cards or store lines of credit, and then apply for a secured line of credit against the remodelled home. Pulling this off successfully requires a lot of pieces to fall into place. First, the equity in your home must be at least 35%, as banks will only lend up to 65% of your home’s value. Say you purchase a house for $400,000 with 10% down, and once the renovations are complete the home is appraised at $650,000. The maximum you could get on a line of credit would be $62,500 (65% of the value of the new home is $422,500, minus your mortgage of $360,000). You need to be sure that will be enough to pay off your other creditors.
Worse is the number of things that could go wrong. If house prices decline precipitously, the banks may not value your home as high as you originally estimated, or the lender may decide your overall debt ratio is too high and refuse you credit. This could leave you stuck with high-interest non-tax-deductible debt.
The final and safest option is to save for the renovations in advance. This is what the McCauleys did: each sister contributed $15,000 for the initial work. “We have a five-year plan and will continue to renovate as we save the money,” Janet says.
Know when to walk away
Even after all this number crunching, how can you be sure a fixer-upper is a good buy? Most home buyers are advised to pay for a third-party home inspection. But even in a slowing Canadian real estate market, the competition can be fierce, and any type of condition is a potential deal killer, Chaddah says. “Ultimately, a condition means there’s a chance the buyer will back out of the deal. That’s why most sellers opt for a clean, no-condition offer to ensure the sale of a less than optimal property.” One reader lost out on a west-end Toronto fixer-upper—despite offering $10,000 more than the accepted bid—because she made the offer conditional on securing financing.
Submitting a clean offer doesn’t mean neglecting your due diligence, explains Chaddah. It just means doing a little more homework than the average house buyer. For instance, find a mortgage professional who is willing to virtually guarantee financing. No mortgage broker can seal the deal before an offer is accepted, but many can collect all pertinent information and run the final numbers (rather than estimates) through the underwriters. By doing this you negate the need for a financing clause—just be sure you know how close you are to the lender’s debt ratio calculation, so you know how much wiggle room you have. But never drop this condition from your offer unless your mortgage broker is confident that financing is available: if you don’t get approved, you could be scrambling for a high-interest bridge mortgage or risk legal action from the seller.
To avoid a home inspection condition in your offer, consider booking an independent evaluation during your scheduled viewing. To do this you’ll need to ask your realtor to schedule at least a two-hour visit to the property (this is double the typical scheduled visit). This is easier if the house is vacant. If it isn’t, or if you’re planning to do significant renos, consider skipping the inspection altogether. “Home inspectors don’t have X-ray vision. They can’t see behind walls, and if you know you’re gutting the house anyway, why bother to spend $450 or more on a home inspection?” Chaddah asks. Instead, take copious notes on what needs to be done, and remember to include labour as well as material costs.
If you forgo the inspection, don’t be surprised to uncover a serious issue later: it’s best to just accept that and build it into your cost estimates. “I’ve never met a fixer-upper that didn’t have at least one of four major problems: electrical, plumbing, structural or the need to remediate toxins, such as asbestos, mould or vermiculite,” explains Mark Pervan, president of Henge Homes Inc. and a Toronto-based general contractor. (Disclosure: Mark is my husband.) “You’ll need to budget for at least one major overhaul—more if the house is very rundown or very old.”
He’s quick to add, though, that you should never take on a fixer-upper with a structural problem. “If the house needs significant structural improvements, walk away.” That’s because expensive repairs such as waterproofing a foundation, correcting a significant slant, or lifting a home to replace damaged footings rarely raise the value of a home.
Living in a construction zone
No one enjoys living through a renovation. “Who wants to live in an active construction site? It’s a lot of stress not having a working kitchen, or having to flush the toilet with a pail of water,” says Pervan, who has overseen three fixer-upper rebuilds with our own family. The problem is, many of us can’t afford to carry two homes for months and months while renovations are being completed.
To get through the ordeal you’ll need a plan that goes beyond time lines and budgets, says Alex Gellman, wellness coach and chief negotiator on W Network’s Save Us from Our House. Gellman asks his clients to take the popular Myers Briggs test. “This test reveals personality traits and helps people gain insight into their own motivations and preferences.” Armed with this information, each client is then asked to find ways to meet their needs while the renovation is taking place.
Perhaps the most important key to a successful fixer-upper is patience. One couple spent two years looking in their chosen area before finding and purchasing their perfect handyman special. By narrowing down the neighbourhoods, getting your financing in order, recruiting a real estate team (including realtor, mortgage professional, home inspector and contractor), and developing a comprehensive list of costs, you can successfully turn that Munster family home into your own urban sanctuary.