The last time you bought a home, did your realtor send you listings at the very top of your budget? Why is that? Why didn’t your agent tell you about the great fixer upper in your neighborhood?
Real estate agents want the highest possible commission! After all, they are in business to make money, just like the rest of us. It is in THEIR best interest to get you to buy that move-in ready home instead of finding a distressed property better known as the fixer upper. It’s just human nature for them to guide you in that direction. Don’t blame your realtor.
Now, let’s compare the two options as it relates to you, the new homeowner. On one hand, you can choose to buy one of the houses that your realtor sends to you. You can negotiate the best deal possible, put your money down, and spend the next 30 years paying your monthly mortgage. Alternatively, you can scour the depths of the internet and find that one home that meets every one of your criteria, except the way it looks. You decide to buy that house, bundle the construction costs into your home, and have a professional customize the house to your exact taste. Which one would you decide on?
While taking on a construction project can seem like an exhausting experience (and it can be trying on even the most adventurous homeowner), it can also simply be a good financial decision. The math is there to support your ambitious undertaking. Let’s break it down.
Scenario 1- Move-in Ready Home
Your realtor sends you a dozen homes and you settle on a nice home that is listed at 400,000. You put in a full price offer, which the seller accepts. As a first time homebuyer you can put around 3.5% down ($14,000). Assuming you bought your home for the exact market value, your equity is minimal at this time. But, congrats on your new home!
Scenario 2- Fixer Upper
You drive by a home that looks like it needs some TLC but is in your ideal neighborhood and decide to take on your own fixer upper (soon to be dream home). You are able to steal this property for $200,000. A licensed contractor tells you it will take $125,000 to bring this home to life. Your loan would be for $325,000. You put down your 3.5% ($11,375) and close of your new home. After completing renovations, your home’s ARV (after renovation value) is $400,000. You have just made yourself a whopping $75,000 AND you have the most beautiful, newly renovated, customized home.
Given these two scenarios, which would you choose?