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Today, I have an awesome post by Jennifer Riner from the Zillow Team.

Fixer-upper homes are sometimes considered risky – but they can be a smart investment under the right market conditions.

If you can snag a low-priced property in a developing neighborhood, finding the funds (and the patience) for renovations is usually the next hurdle.

In recent years, a limited supply of housing coupled with strong buyer demand has generated better market conditions for dated homes that need some TLC. With more buyers in the market but fewer homes to choose from, sellers can list their houses “as-is” without renovating or adjusting asking prices to reflect necessary repairs.

If you’re looking to invest in a fixer-upper property but fear a financial loss, consider the current market conditions and know what to expect before closing.

Are Fixer-Upper Homes Still Affordable?

The supply of homes available for sale across the nation is remarkably low.

In September 2016, the overall median number of homes for sale on Zillow (adjusted for seasonality) was down 5.9 percent from the year prior. Aside from a brief period between mid-2014 and early 2015, residential for-sale inventory has declined on an annual basis 49 of the 58 months prior to September 2016. These tight market conditions also facilitated a lift in overall home sales. Existing homes sold rose 0.6 percent year-over-year in September, while sales of new construction homes were up 20.1 percent.

Buyers searching for homes today have fewer options to consider, and sellers are less inclined to try to outshine what little competition they face. A Zillow analysis from October 2016 revealed a 12 percent annual increase in the number of fixer-upper homes on the market, with high-end fixers up nearly 35 percent. Meanwhile, mid-tier and low-end fixer-uppers rose 33.1 percent and 2.6 percent, respectively.

Overall for-sale inventory fell 7.7 percent during the same period. In Seattle, a strong seller’s market with skyrocketing home values, for-sale inventory dropped 10 percent over the past five years – while fixer-upper listings increased 33 percent during the same period.

Buying a Fixer-Upper Home 101

A recent analysis from Zillow Digs shows fixer-upper homes list for just 8 percent less than market value, making them somewhat more affordable than their move-in ready counterparts. In addition, the freedom to customize your home remains a dominant fixer-upper advantage.

To best plan and execute a fixer-upper home purchase for the first time, recognize your time commitment and assess your renovation abilities. Unless you’re a professional contractor or seasoned flipper, look for homes requiring minor improvements and bypass listings with major foundation, electrical or plumbing issues. Hire a qualified home inspector to determine what needs replacing so you can forecast your all-in budget.

Total up the cost of renovations before you settle on a price. Compare the total cost of the home, including the anticipated renovation costs, with recently sold remodeled properties in your area. For instance, if a similar-sized upgraded home down the street just sold for $350,000 and you’re considering a fixer-upper home listed for $300,000, avoid earmarking more than $50,000 for renovations. If the list price is too close to comparable properties, adjust your renovation budget, or your offer, accordingly.

Aside from the cost of materials, consider labor fees. For buyers without renovation experience, professional contractors or designers are often worth the expense, but keep in mind that you might not get onto their schedule immediately. Don’t expect paint, flooring and appliance upgrades to appear overnight. Even minor face-lifts can take three months or more, depending on the square footage.

Finally, make sure you understand local zoning laws before you purchase a home with plans to renovate. If you’re buying with the intension of adding a garage, check city guidelines first. In addition to property add-ons, the city council must approve interior and exterior changes to historical landmarks.

You may even qualify for a tax deduction for renovations, helping lessen the total burden. Philadelphia and Cincinnati both incentivize home improvements with tax credits.

The financial benefits of purchasing fixer-upper homes haven’t disappeared, but it’s a mistake to expect dirt-cheap prices for older homes in sellers’ markets. Preparing your total budget before making an offer protects your investment, whether you plan to stay or resell while the market is hot.

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