Many property buyers are tempted by the idea of acquiring a building that needs work. The proposition is that you can add to the capital value by carrying out some home improvements. If you’re not fazed by the amount of decorating and renovating that may be needed, taking on what’s known in the trade as a ‘fixer-upper’ or ‘doer-upper’ can indeed be an excellent investment strategy. But while doing up an old house may sound exciting on paper, do you really know what’s involved?
Anyone moving to a new home will agree that there’s always a bit of work needed to personalise the property. From colour schemes to kitchen designs, chances are that the previous owner’s taste is different to yours. What’s more, no house or flat is in perfect condition; even new builds often require large amounts of snagging. That being said, buying a property in the full knowledge that large amounts of money will have to be spent on refurbishments, and the time, stress and mess involved in getting the place shipshape, is a different story altogether.
For a project of this size, it is crucial that you go into the process with your eyes wide open. Whether you are looking to create a long-term family home or you’re hoping to flip the property for a healthy return, there are certain key considerations we urge you to consider first.
Location, location, location
A sought-after location will always command a premium price, ask any estate agent. After all, you can change any property but the one thing you can’t do is move it somewhere else. If you have your heart set on a particular neighbourhood but can’t find a nice house in your price range, buying a fixer-upper may be the answer.
A run-down property in the perfect location could be a great opportunity to transform it into a desirable home and add value. And if the current state puts other potential buyers off, this should be reflected in the asking price, which you can use to your advantage. As long as you don’t mind doing the work, the worst house on the best street is your best bet for offering the most potential. Here’s a great example of what can be achieved.
Make sure you carry out plenty of research into your favoured locations and speak to local estate agents to get a feel for market prices in the area. Which are the best streets and what price would constitute a bargain? Can you fix up the property and still be quids in, compared to neighbouring houses in top condition? If the financials aren’t in your favour, it’s really not worth the effort.
Make a forever home
If you are looking for a place to settle down long-term, you may not need the property to be in perfect decorative order when you buy it. In fact, part of the process of making a house a home is all those little upgrade jobs you do over time. If this sounds like you, focus your property search on finding an ‘unloved’ house that you can lavish some TLC on.
Luckily for you, a property that’s in a poor decorative state or just badly presented for sale often fails to sell at the optimum price even though there may be nothing majorly wrong with it. This includes outdated décor and peeling paintwork, dripping taps, loose tiles or squeaky floorboards, ‘blown’ windows, sticky doors and a host of other minor niggles that are easily fixed. So, if you can spot an opportunity to add value, you may be on to a winner.
But – and this is a huge but – what if it’s worse than it looks? The single most important thing you should do before you commit to any property purchase, and especially if you’re thinking of taking on a fixer-upper, is to instruct an independent surveyor to check over its structural condition. Whether you commission a full RICS Building Survey or a Specific Structural Inspection for a known defect, the findings will give you a clear insight into what’s wrong and recommend the best remedial action, along with cost estimates, so you can make the right decision.
“Next, work out your refurbishment budget, what exactly needs doing and how long it should take. Take advice from building experts, including surveyors, builders and tradespeople, to help you get a clear idea of the scope of the project you would be taking on,” advises one expert in the field.
How to add value
It should be stressed that the process of buying and doing up a property isn’t a magic formula for generating a profit when you come to sell it. If you bought the house at a reduced price because it was in poor condition and you then spend that discount on refurbishment works, you end up with a very nice house that’s on a par with the rest of the street. But you won’t actually have made any money at all.
There are only really two approaches for generating a profit on your efforts. The first one requires strict budget control. Invest substantially less in the renovations than the discrepancy between your purchase price and the property’s eventual market price, while still achieving a desirable result, and the rest is profit.
The second one focuses on upgrading the property over and above the average street price. Focus on home improvements that create the most uplift. Kitchens and bathroom redesigns, open-plan kitchen diners, garage, loft or basement conversions, building extensions – these are what homebuyers value most.
According to Zoopla figures, an additional bedroom in the loft, a new kitchen or a converted garage can each add an average of 15-20% to the value of the property. What’s more, with energy costs now front of mind for every homeowner, solar PV installations and up-to-date home insulation can put 25% and 22% respectively on the value of the property. It should go without saying that any home improvements should be finished to the highest standards in order to generate maximum returns.
Underestimating and overspending
Ultimately, it is your budget that will dictate how much or how little refurbishment work you can realistically take on. Which, in turn, determines the kind of property that will be suitable as a fixer-upper. If the plan is to buy a property in need of renovation, do it up and thereby increase its value to the point of making a healthy profit, the whole idea only works if your financial calculations stack up.
Choosing the right building in the first place, and at the right price, is obviously critical. To this end, the services of a good structural surveyor are invaluable in helping you acquire a ‘good’ building and drawing up a realistic plan for your planned works. Bear in mind that older properties are likely to throw up additional challenges. Period homes may woo you with their original architectural features but their renovation may require different techniques and materials that could end up costing a lot more than updating a modern home. And if the building in question is located in a Conservation Area or has been designated a listed building, there are additional planning restrictions to overcome too.
At the end of the day, when you look to take on a fixer-upper, budget discipline is key. In fact, best practice suggests that you should reserve at least an extra 10% in addition to your allocated budget for contingencies. Chances are that there will be some unplanned expenditure on surprise findings, especially if you are planning structural alterations or if you are dealing with an old building.
How to flip a property
Many people are tempted by the idea of property flipping, that is buying a doer-upper, renovating it and selling the newly refurbished house within the year at a good profit. It can be a lucrative investment strategy if you do it right but the risks of getting it wrong are not to be underestimated. Here are the four steps to a successful project
· Do your homework
The more research you do before you make a purchase, the better prepared you are to make good decisions. Take your cue from the old military adage, the 7Ps: Proper planning and preparation prevents poor performance. Your eventual profit will depend on your overall costs, including the property’s purchasing price, so that’s a good place to start.
As mentioned above, choose your location carefully and take advice from local property experts about market projections for the year ahead. Draw up your refurbishment budget, specifications and timescale, consulting with building experts including surveyors, building contractors and trades to flesh out the scope of the project.
Check and double-check your financial calculations to ensure that you will end up with a worthwhile profit at the end of the project. Ask your accountant or tax adviser about Stamp Duty Land Tax (SDLT) and estate agent fees as well as for tips on minimising your tax exposure.
· Get funding in place
Once you have a clear plan and know how much money is required, your next step is to source adequate funding, both for the property purchase and its renovation. Of course, if you have independent funds available, you can proceed straight away. Though it is advisable to check that tying up large sums of cash in a property project won’t leave you financially exposed in other areas.
For most house buyers, a cash project won’t be an option, meaning appropriate finance will have to be arranged. You should be aware that neither residential mortgages nor buy-to-let mortgages will be suitable for this type of property venture, so you’ll need to identify other, short-term borrowing vehicles.
Many investors choose to use some of their own cash and top up the difference with a bridging loan. This is a loan used to ‘bridge’ the financial gap between buying and selling a property. Think of it as a very short-term mortgage (up to 36 months) secured on your fixer-upper. Interest rates are high – 0.4%-2.0% per month at the time of writing.
· Complete the works
When it comes to carrying out the proposed upgrade works, bear in mind that in order to achieve the best resale value, the property needs to appeal to the target audience, which your initial market research should have identified for you. Make sure you understand their tastes and requirements and give them what they want and need, choosing materials, fixtures and fittings that are in line with their expectations. A bottom-of-the-range kitchen in an elegant Edwardian family home, for example, may put buyers off.
The next decision to make is about who is going to actually do the work. Many DIY-savvy house buyers carry out their own DIY, which is a great way to keep costs down as long as you are realistic about your skillset. The same goes for project management. Saving money by doing it yourself only works if you can actually do the job competently. Play to your strengths and do what you can, and get professional help for the rest.
· Put the property up for sale
Having finally finished all the hard work, it’s time to put the newly upgraded property on the market and realise its full value. For that, the house must be properly presented and marketed through the right channels. Home staging is a burgeoning industry, often used by housebuilders to dress new-build show homes to make them feel, well, homely, and sell the lifestyle. Whether you need professional assistance to get your property looking irresistible depends on whether you have a flair for interior design.
Now, speak to some local estate agents to ensure you choose the right asking price. The property market may have changed since your initial research, so check the assumptions you made back then and look at how much comparable properties in the area are selling for now. Your asking price should be competitive enough to elicit plenty of interest but high enough to return a healthy profit on your investment. You should also consider putting the property on rent to recoup the longer term rewards of the property. Getting in touch with a letting agent, or even an online letting agent would be a great first step for this approach.