What to consider when your entry level property is a renovator

With property prices racing to new heights around Australia, many buyers are looking to purchase properties that are in need of some loving in order to get their foot into their desired suburbs.

One of the most important factors when considering a fixer-upper property is whether you can customise the home to your needs at a lower purchase price than an already-renovated home in a lesser desired suburb.

The ability to create the home you want in a desirable neighbourhood can’t be overstated. As the homeowner, you will have control over how the property will look like, inside and out, on completion of the renovation project.  

As long as it’s planned ahead, much of the home can be customised to the exact needs of the homeowner, from adding architectural details to custom cabinets and flooring to an open floor plan.

The price factors

When buying a fixer-upper, you’re competing in a different arena. Fixer-upper property purchasers must compete with builders, flippers and other buyers looking for affordable entry level properties, all of which can drive up sellers price expectations.

And in regards to financing, you may need to be able to provide at least 20 percent deposit, be it as cash or equity since some lenders will approve the loan as construction project.

A note of caution, some lender will lend a maximum 80 percent of the land value plus cost of renovation only and not on what your perceived post renovation value will be.

You should also budget to spend at least 20 percent over budget during the renovation to cater for all the ‘what ifs. That’s why you need to get a fixed builder’s contract before work begins.

Be firm on the final cost you’re willing to invest before renovations begin or the project can quickly get out of control.

Check how your home loan compares

When doing a major renovation, knowing and prioritising your needs is very important. Add your must-haves first, and then your maybes. In a fixer-upper, it’s tempting to want to do everything immediately.

But starting with the must-haves will give you a better idea of what you could do without.

The time value of money factor

Depending on how extensive the renovations are, it could take a while. So, consider the time factor in your decision. The purchaser must be prepared for long and expensive renovations and longer timelines than originally planned.

Often, if a large amount of work is required on a home, a purchaser may not be able to move in until work is complete, which could take six months or longer.

Would you have somewhere to stay if the home is uninhabitable? Would you be able to juggle two mortgages, or a mortgage and rent payment? What about living with your parents or in-laws for several months?

Renovation shows on TV fit projects into 30-minute or 60-minute time frames, so they don’t cover everything that goes into renovating a house. Many of the shows do not highlight the permit process or the reality of workers not showing up, which delays a project timeline.

And these delays create a ripple effect. The expense of labour and labour delays, product changes due to construction materials out of stock or a serious unexpected issue that arose on the job site could contribute to costing more than buying a new or already renovated home.

DIY renovation

And if you plan on renovating without the help of contractors or a project manager. Signing the contract of sale on your new property is just the beginning since all of the labour and project management responsibilities fall on the homeowner.

If any surprises come up that weren’t found in the inspection, the homeowner is responsible for addressing them, either personally or by hiring tradies. Note, if you are planning on buying and renovating yourself, banks will consider this to be an owner builder and finance tends will be very restrictive.

Knowing When to Draw the Line

The key to successfully renovating a fixer-upper lies in the ability to envision the end result before you start. You must weigh the pros and cons before deciding if something is worth it or not, in order to avoid stress and potential financial loss.

For example, if you have to move walls or do a complete add-on, this will dramatically increase the cost. Plumbing can also create large snags in the cost or process, so it is essential to find out where the plumbing already is and know where you want to add plumbing.

For example, if you want to add a bathroom with a bath tub on the second floor — but on the opposite side of the house, this will increase your reno costs.

It would be best to look at the homes you like in the area and stick to some parameters when improving your home. The last thing you want is to approach your lender to cover cost variations because you have gone over the budget as the answer is likely to be no!

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This article via Freshome does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.