House That Needs Work

Is it worth it to buy a house that needs work?

Buying a home is a very emotional process. If you allow those emotions to get the best of you, you may fall prey to a number of common home buyer mistakes. Since homeownership has far-reaching implications, it’s important to keep your emotions in check and make the most rational decision possible.

Your aim is to end up with a home you love at a price you can afford, but unfortunately, many people do things that prevent them from achieving that dream.

Existing home sales—as opposed to new construction—accounted for more than 5.5 million real estate transactions in February 2020. About 2% of them were considered “distressed sales,” and it can be presumed that they might have needed a little work. This doesn’t necessarily have to be a deal-breaker if you know how to handle it.

Perceptions vary widely when someone is buying a house that “needs work.” Many agents believe this is the case if it isn’t updated, but some buyers and sellers might not share this viewpoint. Whether a house needs work is based on personal opinion, and “work” can depend on the type of property you’re thinking of buying.

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Top House-Hunting Mistakes

House That Needs Work

Not Knowing What You Can Afford

Once you’ve fallen in love with a particular place, it’s hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered, like the lovely tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances, etc.

However, if you can’t or won’t afford that house, you’re just hurting yourself by imagining yourself in it. So, to avoid temptation, it’s best to restrict your house-shopping to properties in your financial neighbourhood. If you end up looking at places that are outside your price range, you’ll end up lusting after something you can’t afford. That can put you in the dangerous position of trying to stretch beyond your means financially or cause you to feel unsatisfied with what you actually can buy.

Start your search at the low end of your price range. If what you find there satisfies you, there’s no need to go higher. Remember, when spend another $10,000 to buy a home, you’re not just paying an extra $10,000; you’re paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of your loan. You may be better off putting that money toward something else.

Skipping Mortgage Pre-Approval

As we all should have learned from the subprime mortgage crisis, what the bank says you can afford, versus what you know you can afford (or are comfortable with paying), are not necessarily the same.

Conversely, what you think you can afford and what the bank is willing to lend you may not match up, especially if you have poor credit or unstable income.

Make sure to be pre-approved for a loan before placing an offer on a home—or even before you go house-hunting in earnest. If you don’t, you’ll be wasting the seller’s time, the seller’s agent’s time, and your agent’s time if you sign a contract and then discover later that the bank won’t lend you what you need—or that it’s only willing to give you terms you find unacceptable. The pre-approval process can also help you locate the aforementioned financial neighbourhood for your house-hunting expeditions.

Be aware that even if you have been pre-approved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, such as finance a car purchase. If your actions cause the deal to die, you may have to forfeit any deposit or earnest money you put up when you entered into the contract.

Not Shopping Around

While you should be realistic in your search, and willing to compromise to some degree, don’t cave on important things.

For example, don’t get a two-bedroom home when you know you’re planning to have kids and want three bedrooms. don’tDon’t buy a condo just because it’s cheaper than a house if one of the main reasons you’re over apartment life is that you hate sharing walls with neighbours. It’s true that you’ll probably have to make some compromises to afford your first home, but don’t make a compromise that will be a major strain.

Unless you are a high-end buyer looking at custom homes, the chances are that there are quite a few others that are close to it for any home you find that you like. Most neighbourhoods have multiple similar or similar homes; the same builder may have constructed them. Even if you can’t find an identical model for sale, you can probably find a house with many of the same features. If you’re considering a condo or townhouse, the odds are also in your favour.

Being open to continuing your search will save you from making rash decisions you might regret later.

Not Using an Agent

Once you’re seriously shopping for a home, don’t walk into an open house without having a real estate agent or broker. Agents are held to the ethical rule that they must act in both the seller and the buyer’s best interests. But you can see how it might not put you in the best bargaining position if you start dealing with a seller’s agent before contacting one of your own.

Lacking Vision

Sometimes a homebuyer can feel like Goldilocks in the three bears’ house: This is too big, this is too small. Distinguishing between what’s fixable and what’s not is a key part of house-hunting.

Even if you can’t afford to replace that hideous wallpaper in the bathroom right now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home otherwise meets your needs in terms of the big things that are difficult to change, such as location and size, don’t let physical imperfections turn you away.

Overlooking Important Flaws

Look for homes whose full potential has yet to be realized, especially if you’re on a strict budget. The bump in equity from your upgrades will help you to move up the property ladder.

That being said, if you’re going to buy a house that needs work, don’t buy a fixer-upper that’s more than you can handle in terms of time, money, or your ability. For example, if you think you can do the work yourself then realize you can’t once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in labour—and that may not be in your budget.

Ignoring the Neighborhood

Don’t just focus on the residence—look at the surrounding area. It’s impossible to perfectly predict the future of your chosen neighbourhood, of course, but inquiring about or researching its prospect now can help you avoid unpleasant surprises down the road.

Rushing to Put in an Offer

It may be necessary to make an offer fast in a hot market if you find a home you like. However, you have to balance the need to make a quick decision to make sure the home will be right for you.

Don’t neglect important steps, such as making sure the neighbourhood feels safe at night as well as the day (try to visit at different times), and investigating possible noise issues like a nearby train.

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Dragging Your Feet

It’s a tough balancing act to make sure you make a careful decision, but don’t take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences.

Let’s say you are self-employed. Perhaps for you, more than others, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the home-buying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage.

Tips for Buying a House That Needs Work

Beauty Is in the Eye of the Beholder

Rooms in properties built in the 1940s were smaller and separate from one another, and kitchen counters were often covered in four-inch tile, not trendy stone. The cabinets are probably painted wood, and the floors are linoleum.

A millennial buyer will say a house in this condition would need work, but a purist who loves the character of 1940s homes might prefer the house in its original condition.

It’s generally a good idea to replace the floor covering before selling if the wall-to-wall carpeting is worn and stained. Still, it would be foolish to haul a Wedgewood stove to the dump or remove original hardwood interior trim simply because it’s of a certain vintage.

Buying a Fixer-Upper

Fixer-upper homes are generally priced for sale in “as-is” condition. These properties often show deferred maintenance because the sellers were unable or unwilling to care for the home properly. Maybe there was a death in the house, or it passed through probate to heirs who didn’t want it.

Sellers will generally choose a sales price based on comparable sales to compute a price on a fixer-upper property. Comparable sales or “comps” are houses in the same general type of neighbourhood and the same age, square footage, and a number of bedrooms, and they can share other characteristics. An asking price is arrived at then reduced by an estimate for repairs.

The seller might deduct a little more from the price for a fast sale or an all-cash sale. Whether it becomes a flipper house for an investor who’s hoping to turn a fast profit or a house for a first-time homebuyer who’s willing to put in a little work, depends on profit margins and the amount of work that’s necessary.

However, there could be other problems if the home has longer days on the market than the average sale time of other properties. Perhaps the work that’s needed exceeds the seller’s expectations, or it could be that the home appeals to a smaller pool of buyers.

Don’t make the mistake of automatically assuming longer days on the market means that the home is overpriced.

Purchasing a Mint-Condition Vintage

A mint-condition vintage home could sell at a premium price even if it’s not necessarily modernized or trendy. Think about folk Victorians, Italianates, Queen Annes, or Craftsman bungalows. Mid-century homes—those built between the 1950s and the 1960s—are also becoming increasingly popular. This category might also include houses that have historical prominence due to past owners or residents.

A seller would probably add a premium price pad on top of the comparable sales figure to price this type of home and might receive multiple offers simply due to the attractiveness of the design. The sales price could go even higher if the fixtures are original.

It’s possible that a vintage home in perfect condition could be overpriced if it’s been on the market for longer than others. Not every seller is eager to part with a property of such calibre, and some will price it high enough to make it worthwhile for them to relocate.

Homes in historic districts will have high asking prices with little wiggle room. A buyer will typically pay the asking price if they want the place badly enough because the seller might or might not budge on price.

Newer but Outdated Homes

You’ll spot a lot of these types of properties in areas that were once thriving but have become depressed. Maybe the area was overbuilt, and supply exceeded demand, jobs left town, or other tract homes opened up a few miles away for less money.

Whatever the reason, owners often have little interest in remodelling a home just because trends change. They figure the house was fine when they bought it, and it’s fine to sell now. What they don’t realize is that buyers don’t want homes without updates. They want turnkey properties that don’t require additional work. They expect a discount if they’ll have to tackle a home improvement project.

A few changes, such as replacing the fixtures, choosing modern paint colours, and installing newer appliances are often enough to generate interest at a better sales price. Still, buyers generally won’t agree to pay top-of-market for an outdated home, even if it’s newer and clean.

Foreclosure Sales

A foreclosure is a bank-owned home, taken by the lender because the owners defaulted on mortgage payments. These properties are almost invariably sold in as-is condition.2 

They’ve often sat vacant for extended periods of time. The bank will have done little—if any—maintenance or landscape upkeep. A bank can’t be held responsible for disclosing facts that they don’t know.

Banks are reluctant to offer discounts for the work needed if a buyer finds a defect that turns out to be a major repair cost.

Buyers might spot pre-foreclosure houses on certain popular websites, but these aren’t always for sale, and they might never be for sale. This is usually just a process that a bank will go through as a seller goes into default, but before they take full possession of the home.

Short Sales

A short sale happens when a lender accepts less than the total amount of the mortgage balance due from the buyer.3 This is perhaps the most misunderstood type of sale, especially when the house needs work.

Sellers probably can’t afford to make repairs or fix up the home if they can’t even make their mortgage payments, and the seller’s lender has little incentive to cooperate with a short sale unless the price is in line with ​the current real estate market.

Banks typically won’t discount the price they’ll accept for short sale homes, even if the property needs work, because they’re already selling it for less than the loan balance against it.

A bank could make out better financially or get more money if it forecloses rather than short sales. The broker price opinion (BPO) value won’t matter in that event because the investor will be adamant on a net to match the foreclosure net.

Pack Rat Homes

Packrat houses might be the worst. These are the properties where you’ll have to navigate through on tight paths woven around stacks of personal belongings throughout the house. Sometimes the bedrooms are so full of furniture and boxes and junk that you can’t get the door open. Packrats and hoarders collect and save stuff…a lot of stuff.

Combine a packrat house with years of neglect, and you could find piles of dead rodents or moisture problems that have gone undetected for years. Renting a couple of 30-yard dumpsters will get rid of the debris if you’re lucky, but any underlying problems could be much more extensive.

The sale prices of these houses are often knocked down dramatically.

Effect on Negotiations

How you would pursue a purchase offer on a home that needs repairs will likely depend on the type of property you’re buying.

Buyers shouldn’t automatically presume that the listing price has already been adjusted due to the place needing work. Still, most sellers already realize that the home they’re selling needs repairs or updating, and they’ve accounted for that when pricing it.

As with any purchase offer, a homebuyer’s best bet is to rely on the comparable sales, then deduct for the work that’s needed. Base the deduction on written estimates from licensed contractors. Providing this information to the owner might be enough to encourage them to reduce the price.

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The Best Way to Sell a Home that Needs Work

Once again, selling a fixer-upper isn’t about trying to make the house look perfect and sell it as something it isn’t. So, even once it’s cleaned up and ready to list, don’t overprice it. “If the money’s not there, it’s not there,” explains Deist. However, while you’ll have to give away some equity, you don’t want to underprice your home either.

With the help of your Realtor, calculate what the value of your home would be if it were remodelled. Your agent can help asses comps nearby to help figure this out. Then list out and calculate the cost of the upgrades needed to get your house in that condition. Which upgrades are necessary? Which of those can you afford to do yourself? Which will you leave to the buyer? Whatever the buyer will need to absorb should be subtracted from the value of the home.

Deist has a fixer-upper property she’s working on now that received multiple offers without a single renovation. “We’ve sold this property as-is. [And there were] multiple offers. We are at the actual true value,” she explains.

So, don’t count your fixer-upper out just yet. With a little TLC, some cleaning supplies, and a great real estate agent who will make sure buyers know their options, your house will probably sell faster than you expect, even though it needs a little extra work.

Deciding whether it’s worth it to buy a more affordable home in need of some improvements should be one of the first steps to buying a home people take, especially because it can help guide the whole home shopping process. Lowering expectations can make the dream of buying a home more realistic, especially for first-time buyers. Most people recognize that according to this survey—though whether people are willing to settle when it comes time to buy remains to be seen.

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