1. Add up the cost of renovations before you make an offer. Even things you can do yourself, like stripping wall paper, painting, filling a dumpster, etc. will cost you materials, supplies, and equipment rental fees. However, most of the repairs will likely require the skills of an electrician, plumber, roofer, or general contractor. After you calculate the estimated renovation costs, add in another 10-20% for unforeseen problems that can occur. Also, don’t forget to add in the cost of permits. Check with the county permit office to see what permits you need, and whether you need a licensed contractor to pull them.
2. Hire a structural engineer to assess any structural concerns. If the property is sold through an auction, you will need to spend the money on inspections BEFORE making an offer because the house will be sold as-is. However, if the property can be sold with a timeframe for inspections and a right to terminate, then make an educated offer and wait until you are under contract to spend the money for inspections. The average cost of a structural engineer is around $600. You’ll want to get additional inspections for expensive repairs, such as the roof, septic system and well, if applicable. Fortunately, most sales will allow a contingency period for inspections after a contract is accepted.
3. Check what financing options you have, and what it will cost you. Financing options will depend upon the condition of the property and how it is being sold. You’ll need to be sure that you have enough down payment, closing costs, and the funds for repairs. Check to see if Section 203 financing is available for the property. This program is designed to help buyers purchase homes that need major rehabilitation and wraps the cost of the home purchase plus the repairs into a single loan. Or, you can consider using a HELOC loan (home equity line of credit) to purchase the home and pay for repairs. This can often take at least 30 days to get approved, so you’ll want to start the process well in advance of making an offer.
4. Calculate your offer based on estimated repair costs. Ask your real estate agent to help you determine the fair market value of the property if it was already fully renovated. Then subtract the upgrade and repair costs. That will give you a number that you will not want to exceed as a purchase price. If you plan to flip the property, then you’ll need to factor your desired profit into the offer as well.