What It Really Means to Take on a Home Renovation
For some, a fixer-upper can be an appealing opportunity. A home that needs work may sell for less than a move-in-ready property, giving buyers the chance to create a home that fits their needs and potentially build equity along the way.
But the purchase price is only the beginning.
Renovations can uncover problems that were not visible during a showing. Permits, materials, contractor costs, financing, insurance, temporary housing, and unexpected repairs can quickly add to the budget. Even a well-planned renovation does not guarantee that the finished home will be worth more than the total amount invested.
Before purchasing a property that needs significant work, consider both the financial and legal sides of the project.
Choose Your Projects Carefully
Not every renovation is equal.
Cosmetic improvements, such as painting, refinishing floors, replacing fixtures, or updating lighting, are generally easier to budget for than structural repairs, major plumbing or electrical work, roofing, foundations, or additions.
That does not mean major repairs are necessarily a bad investment. A new roof, updated electrical system, or repaired foundation may not produce the same immediate visual impact as a new kitchen, but these improvements can be essential to making a property safe, functional, and insurable.
The important question is whether the cost of the work makes sense given the property’s expected value, your plans for the home, and the surrounding market.
Before committing to a major renovation, consider the following:
- The property’s current condition
- Comparable homes in the neighborhood
- The likely value of the property after the work is completed
- The estimated cost of the renovation
- Financing and closing costs
- Property taxes, insurance, utilities, and other carrying costs
- Permit and professional fees
- A contingency for unexpected expenses
Be careful not to over-improve the property for its neighborhood. A high-end renovation may make the home more attractive, but the local market may not support the cost of those improvements when it is time to sell. Reviewing comparable properties and discussing the anticipated after-renovation value with a knowledgeable local real estate professional can help before you commit to a major project.
Know What You Are Taking On
Reality television can make a major renovation look surprisingly simple. In reality, projects often take longer, cost more, and become more complicated than expected. Work that appears straightforward can uncover hidden damage or require additional permits, materials, or specialized professionals.
Before purchasing, determine as much as possible about the property’s condition. Depending on the home, that may include evaluating the roof, foundation, drainage, plumbing, electrical system, HVAC system, windows, insulation, sewer line, and other major components.
Be Realistic About DIY Work
Doing some of the work yourself can help reduce renovation costs, but be realistic about your skills, available time, and the complexity of the project. Painting, refinishing, installing trim, and other cosmetic improvements may be manageable for an experienced homeowner. Electrical, plumbing, structural, and other specialized work may require qualified professionals and, depending on the project, permits or inspections.
Before taking on a project yourself, consider not only the potential savings, but also the time involved, the cost of correcting mistakes, and whether the finished work will meet applicable building and safety requirements.
Older homes may also require additional consideration. Renovations that disturb painted surfaces in a pre-1978 home can create lead-based paint hazards. Contractors performing covered renovation, repair, and painting work generally must be properly certified and follow EPA lead-safe work practices.
Other older building materials may require attention as well. If you suspect that a material contains asbestos and a renovation will disturb it, the EPA recommends having the material evaluated by an appropriately trained professional rather than relying on visual inspection alone.
The more you know about the property before closing, the better positioned you will be to decide whether the project is right for you.
Build a Realistic Renovation Budget
One of the most common mistakes buyers make is focusing only on the contractor’s initial estimate.
A renovation budget should account for more than labor and materials. Depending on the project, you may also have costs for architects, engineers, inspections, permits, financing, temporary housing, design work, waste removal, insurance, and other professional services.
You should also leave room for unexpected expenses. Older homes in particular can reveal hidden problems once walls, floors, or ceilings are opened.
Before purchasing, consider having one or more qualified contractors walk through the property and provide written estimates based on the anticipated scope of work. For substantial projects, you may also need estimates from architects, engineers, or other specialists.
Rather than relying on a universal percentage for contingencies, ask the professionals involved in the project to identify risks specific to the property and scope of work.
Your construction contract should also clearly address the scope of work, payment schedule, deadlines, change orders, materials, warranties, and procedures for resolving disputes.
In Illinois, the Home Repair and Remodeling Act generally requires a written contract or work order for residential home repair or remodeling work costing more than $1,000. Illinois law also provides consumers with additional disclosures and protections concerning home repair contracts.
Do Not Forget the Permits
Before beginning work, determine which permits and approvals are required by the municipality where the property is located.
Depending on the project, permits may be required for electrical, plumbing, structural, mechanical, or other work. Zoning requirements, homeowners’ association rules, and other restrictions may also affect what you can do with the property.
Do not assume that because a previous owner completed an addition or other improvement, the work was properly permitted.
If you are buying a property with an existing addition, finished basement, converted attic, or other significant improvement, consider investigating whether the work was properly authorized and whether municipal records match the property’s current condition.
Unpermitted work can create problems during the renovation, refinancing, insurance process, or eventual sale of the property.
Carefully Choose Your Contractor
A good contractor is an important part of a successful renovation.
Before hiring someone, ask for references and verify appropriate licenses, insurance, and credentials. Get a detailed written proposal rather than relying on a verbal estimate.
The contract should clearly identify the work to be performed, expected schedule, cost, payment terms, materials, and how additional work will be approved.
In Illinois, homeowners should also understand the potential for mechanics’ liens. Contractors, subcontractors, and suppliers may have lien rights when they are not paid for qualifying work or materials. Obtaining appropriate lien waivers as payments are made can help protect a homeowner’s interest in the property.
An attorney can help review the construction agreement and identify provisions that could create unnecessary risk before you sign.
Get a Home Inspection and Understand the Results
A professional home inspection can help identify problems that may not be apparent during a showing. Depending on the property, an inspection may reveal concerns involving the roof, foundation, plumbing, electrical systems, HVAC, moisture, drainage, pests, or other components.
For a fixer-upper, you may also want to have appropriate specialists or contractors evaluate particular systems. A general home inspection is valuable, but it is not a substitute for every type of specialized evaluation.
Your purchase contract should contain appropriate inspection and other contingencies. These provisions can give a buyer important rights if the inspection reveals significant problems, but the specific language of the contract determines those rights.
Depending on the contract and the issues identified, inspection findings may also provide an opportunity to negotiate repairs, credits, or other changes with the seller.
Do not assume that an inspection contingency automatically allows you to cancel a transaction or renegotiate the purchase price. Have your attorney review the contract before you make an offer so you understand your rights and obligations.
Consider How You Will Pay for the Renovation
If you are purchasing a home that needs substantial work, determine how you will finance both the purchase and renovation before closing.
FHA’s Section 203(k) program can combine a home purchase or refinance with financing for rehabilitation. HUD currently offers Standard 203(k) financing for major rehabilitation and Limited 203(k) financing for less extensive improvements.
Conventional renovation financing may also be available. For example, Fannie Mae’s HomeStyle Renovation mortgage allows eligible borrowers to finance certain renovation costs as part of a purchase or refinance transaction.
These programs have specific eligibility, appraisal, contractor, documentation, and lender requirements. Talk with your lender early so you understand which costs can be financed and how renovation funds will be handled.
Think Beyond the Purchase Price
When deciding what to offer for a fixer-upper, avoid looking at the purchase price in isolation.
Consider the entire project:
Purchase price + closing costs + renovation costs + financing and carrying costs + contingency = total investment
Then compare that number with the property’s realistic value after the renovation.
For example, a home that appears to be a bargain at $250,000 may look very different once you add $100,000 in renovations, closing costs, financing expenses, temporary housing, and unexpected repairs.
You should also consider how long you expect to own the property. A renovation that makes sense for a homeowner planning to stay for 15 years may not make sense for someone expecting to sell in two years.
There is no universal formula for determining whether a fixer-upper is a good purchase. The right decision depends on the property, the neighborhood, your finances, and the scope of the work.
Involve an Attorney Early
Getting an attorney involved early can help identify potential problems before they become expensive ones.
An attorney can assist with reviewing the purchase contract, evaluating inspection and contingency provisions, reviewing construction agreements, addressing title or lien concerns, and helping you understand your legal rights and obligations throughout the transaction and renovation.
At Anselmo & Wojcicki LLP, we believe clients should understand their options before making important decisions. Our real estate attorneys provide practical guidance and help clients navigate the legal issues that can arise when buying, selling, renovating, or investing in property.
