It’s normal for many homes to require some repairs when you buy. It may be that the home wasn’t maintained properly, or it may just be that the normal ravages of age require a few repairs. Whatever the reason for the repairs, it’s vital that you very carefully evaluate the necessary repairs when you buy. Getting an estimate for repair costs is the first step to determining how much the repairs will cost, but keep in mind that the costs may not stop there. Whether you negotiate an escrow allowance or a price discount for repairs, make sure you allow yourself ample room to cover the costs.  

Repairs Often Cost More

It may be tempting to believe an estimate for repairs – especially if you really like the home and want to justify its purchase. If you get an estimate for repairs for $7,000, it’s easier to believe that it will cost $7,000 instead of thinking it will expand to $20,000, and it may be wise to reconsider your purchase decision. However, it’s vital to understand that the scope of repairs can change based on what you uncover during a repair.

What may seem like a simple, straight-forward repair initially could turn out to involve re-doing foundation, walls or a roof; all of which cost far more money than you’d expect. You might also find yourself re-doing prior repairs or remodeling if it wasn’t properly inspected and completed the first time; all of which can cost tens of thousands of dollars more than a surface estimate.

Escrow Allowances or Price Discounts Fall Short

Understanding that repairs often cost more than their estimates, if you ask for an escrow allowance or price discount in the amount of the repair, it’s likely to fall far short of the mark. As a general rule, try to double the escrow allowance or price discount that you request for repairs. If the sellers won’t agree, make the purchase contingent upon them completing the repairs at their own expense before you close – but make sure you have it inspected!

Repairs and Renovations may Lead to Other Necessary Costs

One of the biggest problems that many homeowners run into when they begin repair or renovation projects is underlying costs. In many cases, one thing leads to another; you may plan a bathroom renovation, for example, but then discover that the sub-floor and plumbing in your bathroom needs to be replaced once the contractors start tearing things up.

Things like wiring and plumbing upgrades or improvements are the biggest expenses that homeowners fail to anticipate when planning a simple renovations. However, sub-par construction, termites, mold and other problems that aren’t visible on the surface can lead to big costs once you get into a project.

Get a Full Picture Before You Begin a Project

The single most important thing you can do when you’re thinking about doing renovations or home improvements is to get a full picture of what’s involved before you begin a project. Have the contractors actually come to your home to provide you an estimate. Research the most likely problems and how much they could cost before you begin your project.

Get estimates from multiple contractors, and it may be worthwhile to have an electrician or plumber come to inspect your home before you begin a major project. Getting an accurate idea of your costs isn’t always possible, but the more information you have, the better you can plan for the true costs of your “simple” improvement project

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So your new dream home is perfect – except for one little thing. During the walkthrough, it comes out that your older electrical system isn’t compliant with current building codes, or perhaps a built-on den sits too close to the property line. The homeowners and real estate agent may rush to assure you that “it’s been this way forever” and nobody cares. In reality, though, nonconforming and illegal property uses can become costly problems, and you must evaluate the risk when you buy.

Grandfathered Isn’t Forever

One common nonconforming property issue that many homeowners encounter is a change in zoning or building code that permits a “grandfathered” home to be non-compliant. However, grandfathering clauses don’t apply in all situations, and they can be changed.

For example, if you’ve got a 60-amp electrical system, and current building code requires a 100-amp system, you might be “grandfathered” into the system and permitted to keep your older 60-amp system. However, if you have a fire and need to repair your electrical system, the “grandfather” language might stipulate that you have to bring the entire system up to code at that point, turning a $200 repair into a $2,000 electrical project.

Exceptions to current building code and nonconforming property issues aren’t written in stone; they can be changed and can create a costly situation for you.

Enforcement Changes

In other cases, there might be laws on the book that aren’t currently enforced. For example, you might purchase a four-unit building in a neighborhood that limits units per building to one or two. Just because there are other three- and four-unit buildings doesn’t mean that enforcement of this law won’t change in the future.

If neighborhood population grows and people start complaining, or if a new official gets into office, enforcement of typically un-enforced laws and regulations can change. Find out how much it would cost to make your property compliant and make sure that’s a risk you’re willing to take when you buy.

Think that comparable sales tell you everything you need to know about the current real estate market? Think again. Economic factors aside, real estate markets tend to operate in boom-bust cycles. If you buy at the end of the boom, you’ll be faced with a long period of softening real estate market and potentially falling home prices. The key to making a good investment in real estate is to predict where market values are heading – not just where they currently stand. To do that, take a look at how much it costs to build your home.  

The Cost to Build can Signal Market Activity

Real estate markets are very delicate economic ecosystems. When property values are good and rising, builders want to build more homes to capitalize on the potential profit. As builders create more homes, increased supply can soften the market. This can cause home sales to stall, and may even cause home values to fall. Combined with economy troubles, a softening real estate market can leave you with a home you simply can’t sell.

To figure out where you are in the cycle, look at how much it costs to build homes that are comparable to the home you’re thinking of buying. If the home you’re buying costs $140,000, and it only costs around $110,000 to build it, you might be paying too much for your home. It either signals that there’s a lot of room for profit in comparable homes, in which case builders are going to cash in on it and your market could soften, or your home is overpriced to begin with.

Ideally, you want to look for home values that are within 10 percent of what it would cost to build your home. That signals that there’s still room for growth, but it’s not likely to cause a saturated market that could ultimately hurt you long-term.

Many buyers want to get the perfect deal. Maybe you’re determined to do all of your research up front so you know exactly how much to budget for repairs, home improvements and resolving any issues in your new home. That’s a reasonable desire, but don’t let the fine print ruin your deal.  

How not to buy a home.

So you want to be prepared and know what you’re getting into before you make an offer on a home. That’s a perfectly understandable attitude. If you don’t know what the home is going to entail, how can you decide if you’re willing to accept it?

Instead of making an offer up-front, you can request a home inspection. And then you get quotes from contractors about the issues you want to resolve. And then you negotiate with the sellers on price based on your new information. But then the cost of materials goes up, or you have to add contractors, so you go back to the sellers – only to find out that after investing all this time in tweaking your deal, the sellers have sold it to someone else.

If you want the home, make an offer.

Don’t forget the number one fundamental fact of buying a home: you don’t have a home without a signed contract. Don’t make extensive plans and spend a lot of time and money investigating a home until after you have a deal. If you don’t get it in writing, the sellers are free to sell the home to the next person who comes along – there’s no guarantee that you’ll get it. Ask the right questions up front, but then get a signed deal before you go any further.

Get your questions answered after you sign a contract.

You can still protect yourself and get the signed deal you need to know the home is yours. Simply make the contract contingent upon certain conditions. Make it contingent on the home inspection, or other conditions that you want to ensure the home meets before you fully commit to buying a home. As long as you’re reasonable and you work with a professional who can make sure you get the right language, you can tweak your deal after the home is safely under contract.

With the presence of all of the home improvement and flipping shows on television, it’s easy to succumb to the allure of buying a fixer-upper, making some changes to the home and then realizing an amazing profit or finding yourself living in your dream home. Unfortunately, renovations turn out to be a disaster at least as often as they’re successful, if not more; so when is buying a fixer-upper a good idea?  

Look at the price discrepancy between the house and comparable properties.

Renovating can be a great way to add value to a home if you buy it somewhat or significantly below market value. The trick is to not spend more on renovating than the home is worth. A good way to determine how much that might be is to look at the price discrepancy between the home you want and comparable properties.

If similar properties are going for $50,000 more than your home, you conceivably have a $50,000 budget to work with before you exceed your home’s value. If you spend more than that, you risk pricing yourself out of the market if and when the time comes to sell.

Price out home improvement projects ahead of time.

Don’t just assume that $50,000, for example, is a lot to work with. Some renovations cost significantly more than others. Don’t estimate; get a professional contractor’s opinion and budget for the home improvements you’re considering. If possible, have several contractors visit the home and provide bids for you based on the work you want to do. A contractor may be able to spot potential problems before you start, and can give you a much more accurate idea of your cost than any estimate you’re able to make.

Get a thorough inspection by an experienced professional.

Even if something looks good on the surface, and you’ve got plenty of budget to make the improvements you need, you may still find yourself running into trouble once you begin your project. Get a thorough inspection by an experienced professional before you decide to buy and renovate. Inspections can turn up vital facts, like faulty electrical systems, plumbing that needs to be replaced or even problems with the foundation or roof. These vital issues must be corrected first and foremost, and can eat up a substantial portion of your budget when buying a fixer upper, so make sure you know what you’re getting into before you buy a home.

Buying a home is a big expense, but the expense doesn’t stop at the down payment and purchase costs. If you’re in the process of buying a home and calculating your mortgage payments and budget, make sure you budget for maintenance and repairs.

New homeowners may find this part tricky; how do you budget for maintenance and repairs if you’ve never owned a home? Maintenance budgets tend to follow a few tried-and-true rules, so you can successfully budget for a home even if you’ve never done it before.

Budget 1% of your home’s purchase price per year

The general rule for budgeting for maintenance and repairs is to budget up to 1% of your home’s purchase price per year. For example, if you purchase a $200,000 home, you should budget $2,000 per year for maintenance and repairs. Put this money aside in a separate savings account; don’t mix it up with your primary savings, and put it aside no matter what.

A home repair budget is a variable thing. While you may not spend $2,000 per year repairing and maintaining your home in the beginning, you might find yourself spending $10,000 on a new roof at some point, which would require five years’ budget to offset. Therefore, even if you find you’re not spending 1% per year, save it, because you’ll need it eventually.

Have access to emergency funds

Sometimes it seems like home repairs happen at the most inconvenient times. You might not have enough saved in your home maintenance budget to handle emergency repairs, so make sure you have access to emergency funds for unexpected repairs. This might be a primary savings account, or even credit cards, although that’s a last resort. You can also use a home equity line of credit to pay for emergency repairs, although again that’s a last resort.