Whether it’s for budget reasons, you enjoy doing it on your own or whatever reason; buying a fixer upper can prove to be a great investment. But is your bank going to lend you the money for it?
If you are considering a home that needs some work, there are a number of things to take into consideration before you take the plunge. The first thing we recommend is that you add in a condition into your contract that allows for a home inspection. The last thing you want is to move in and find out that your little renovation project quickly became a money pit. One of the best ways to avoid this is to do a home inspection before you make the purchase. Also, banks may require this to do any financing.
If there are minor renovations, you may not need to worry, however, if there are major structural issues, many times banks and lenders will not finance your home. That’s why it’s important that you put a financing condition in as well. This will protect yourself and your lender from any unforeseen issues.
But what are you options for paying for the renovations? The first and most obvious is cash. This may not be the best option for everyone, as not everyone has 10’s of thousands of dollars in cash hidden under their mattress. If this is the case for you, then it may be a great option.
What happens if you don’t have that kind of money in your account? One option is to get a construction loan. These can be great opportunities to fund your project, however, there are extra costs, usually have higher interest rates and are usually paid in instalments as the projects progress.
Another option, and one I have used personally is a program called “Purchas Plus Improvements”. Basically the bank or lender will allow for an allowance tacked onto your mortgage based on the value of the home and what you can qualify for. Usually it’s between 10-20% of the value of the home you are purchasing that will be added onto your mortgage. You must submit a work estimate from a licenced professional. If they renovations are in their approved list and it meets their criteria, they will lend you the money. The big thing to note is that this money cannot be released till AFTER the work has been completed. So you will either need a contractor to do the work up front and know they will get paid after. The other option is you can pay for the work upfront out of your pocket (or credit card…) and they will release the money to you once the work has been completed.
Another option is to get a line of credit. If you have equity in your home, or are able to get a line of credit, this is sometimes the easiest option. Just don’t forget that you still have to pay back the money!
And finally another option is to borrow the money on credit. This is the way many people finance their renovations. Just be careful as most credit cards have extremely high interest rates and it can be easy to just charge everything to your card and not realize how much you are spending.
At the end of the day, buying a property that needs some work can be a great way to build some sweat equity, it’s just important to ensure that you are going to be able to finance the renos. I can’t tell you how many times I have seen properties that have been taken back by a bank from an overly eager buyer who misjudged how much work, time and money a renovation was going to cost. Or you may end up on a reality TV show on HGTV showcasing your lack of renovation skills and have to call in the pros.
If you are ready to take the plunge and are looking for a renovation project, you can start by looking at some of the available fixer uppers and project homes we have available on our site. Just click the link below…
CLICK HERE to find fixer upper properties that need your personal touch