When Andrea Munro and Antonio Cordero searched for a house to purchase in Northwest Washington, D.C., in 2018, they encountered a problem familiar to many buyers today: Too few houses were for sale.
“We preferred a move-in-ready home, but it was way too hard to find one unless we could pay cash because the market was so competitive,” said Munro, a 38-year-old emergency medical physician.
The married couple eventually decided that whether the house was turnkey or not, their top priority was to buy in the Mount Pleasant neighborhood, said Cordero, a 48-year-old technology worker for a bank.
They found a house there in 2018, but it was more than 100 years old and needed some work – a fixer-upper, a choice many buyers shy away from, especially if they lack experience with owning and repairing a house.
Meanwhile, the limited inventory of houses for sale has been exacerbated by surging mortgage rates since early 2022.
Many homeowners enjoy rates that are about half of what is typical of home loans made today.
That can make a fixer-upper more attractive, but it’s still not for everyone.
“Before you consider buying a fixer-upper, you should ask yourself if you’re a handy person and can do some demolition or painting,” said Pia Reyes, a real estate agent with Coldwell Banker Realty in D.C. and Alexandria, Va.
“Do you enjoy doing home projects? Do you have a vision for how a house could look if it’s updated?”
Reyes helped clients update a 1960s house in Springfield, Va., to boost the resale value, and she enjoyed the process so much that she bought her own fixer-upper in Alexandria in 2022.
She saved money by doing some of the demolition and landscaping on the 1950s house, and she hosted a painting party.
Advantages and challenges
Munro and Cordero found renovating their first house so rewarding that they’re doing it again, with a larger house, also more than 100 years old, in Mount Pleasant.
The first house worked well for them and their first baby, and they renovated a basement apartment for Munro’s mother.
Now, that they have a second child, they need more space.
“Buying a fixer-upper is how we can afford to live in the neighborhood we want instead of trying to figure out how to pay for a $1.8 million turnkey house,” Munro said.
The couple worked with Kevin White, a real estate agent with RE/MAX Distinctive in D.C., to find both houses.
“A fixer-upper solves a couple of problems,” White said. “First, a house that needs some work is usually priced 5 to 10% below comparable homes. Second, you eliminate a lot of competition because lots of buyers only want move-in-ready homes.”
Another advantage, White said, is that people who buy fixer-uppers have more control over where they spend their money and how they increase the value of their houses.
“It’s an opportunity to emphasize what you care about, such as the kitchen or adding livable space in the basement,” White said. “Sometimes it’s the only way to get into a popular neighborhood.”
Still, in a tight housing market, it can be tough to find a fixer-upper, and, in some cases, the competition includes investors.
Cash buyers, most of whom are investors or second-home buyers, accounted for 26% of all types of home purchases in the United States between April 2022 and March 2023, according to the National Association of Realtors.
In the D.C. region, fewer than half as many houses were on the market in July 2023 as in July 2019, and the number of active listings was 29% lower than in July 2022, according to Bright MLS, a multiple listing service for the Mid-Atlantic market.
In addition to the difficulty of finding the right fixer-upper, there is the challenge of finding contractors to provide renovation and remodeling services.
“You need to have a trustworthy home inspector and trusted contractors to look at a home before you buy to evaluate what needs to be done and how much it might cost,” Reyes said.
Munro and Cordero asked their neighbors for the names of contractors who had worked on older houses in the neighborhood and who knew how to navigate the D.C. permitting system.
Choosing the right fixer-upper
As with any home purchase, buyers need to establish a budget, set priorities and get preapproved for a loan before shopping for a fixer-upper.
But there’s another layer of evaluation for a house that needs work.
Reyes recommends getting estimates on renovations before making an offer on a house.
“Check out the foundation, the plumbing, the electrical panel and the insulation because those things could be expensive if they need work,” Reyes said.
“The house I bought had three bedrooms and one small bathroom, so I added value by adding a bedroom to the basement. I eliminated a bedroom upstairs to expand the space for a primary bedroom and bathroom with a walk-in closet.”
Ideally, especially for first-time buyers, a fixer-upper will require mostly cosmetic work, White said.
“Some projects you can learn to do yourself by watching a YouTube video, or you may need to hire a handyman,” White said.
“If you need a professional, it will cost more, but it can still make sense as long as you’ve consulted a general contractor for an evaluation.”
Unless you’re experienced, avoid buying a property that needs waterproofing or shows signs of foundation issues, White said, because such problems can take lots of time and money to fix.
“We had no idea how hard it was to do work in D.C.,” Cordero said. “We’re in a historic neighborhood, too, so that creates extra hoops. Getting the permits for the house we’re in now [their second fixer-upper] could take eight months.”
Timing is a factor in choosing and fixing up a house, White said.
“You must wait to take ownership of the home before you can start any work, but often it makes sense to have the work done before you move in,” White said.
“It’s best to have contractors ready to start as soon as possible after the closing date, especially if you’re having mechanical, electrical or plumbing work done or replacing the floors.”
Financing a fixer-upper
Munro and Cordero purchased their first Mount Pleasant house for $960,000 with a 20% down payment.
They paid for renovations with about $80,000 from savings, which covered installing a kitchen for the basement apartment, adding a washer and dryer to the second floor, and other upgrades such as a tankless water heater and electrical work.
“We added value to the property by opening up the inside for a more contemporary floor plan and more functional space,” Munro said. “But we maintained all the great architectural features.”Reyes, too, tapped savings to pay for upgrades to her Alexandria house, and she estimates that the purchase price was about $150,000 less than a fixed-up house in the same neighborhood.
“Anyone buying a fixer-upper needs to be clear about their access to funds to pay for renovations and their tolerance for the time and money it will take,” said Dominic Turano, a senior vice president and area manager for Atlantic Coast Mortgage in D.C., who bought a house for the first time in 2001, a fixer-upper.
“I underestimated how big the project was and the amount of money it required.”
Buyers need financial options for unexpected expenses, Turano said, such as a major mold-remediation project discovered during a minor bathroom renovation.
Buyers who meet income and credit qualifications can finance the purchase of a house and its renovation with a single loan backed by the Federal Housing Administration (FHA), Fannie Mae or Freddie Mac.
Some lenders also make renovation loans, often with a minimum down payment of 10 percent, Turano said.
FHA-insured 203(k) loans are available with a down payment of 3.5 percent and have more flexible qualification standards than the Fannie Mae and Freddie Mac programs, but they require mortgage insurance for the life of the loan in most cases.
“A streamlined 203(k) loan allows up to $35,000 in renovations to be financed by your mortgage without needing a special HUD [Department of Housing and Urban Development] consultant,” Turano said. “For more renovations, a full 203(k) loan requires a HUD consultant to be involved with the project.”
Fannie Mae- and Freddie Mac-backed renovation loans require a down payment of at least 5% and a credit score of 620 or higher.
Those loans and FHA-backed 203(k) loans require an appraisal that assesses the current value of the property and adds the cost of planned renovations to generate an estimated future value.
“The biggest challenge is that you need to coordinate with a contractor and have a signed contract with them before you close on the loan,” Turano said.
“Most fixer-upper loans also include a contingency reserve of 15% or so to account for unexpected expenses.”
Turano recommends finding a lender experienced with renovation loans and contractors who have worked before with this type of financing.
Consult a lender on the options for financing a fixer-upper, and ask your agent about the possibility of negotiating the payment of closing costs by the seller so you have more cash on hand for repairs, White said. Do a careful evaluation of renovation options.
“When you buy a fixer-upper, you need to base every decision on what’s important to you and what return you’ll get on your investment in the property,” he said.
With careful planning and an eyes-wide-open approach, buying a fixer-upper can be a smart way for first-time buyers to find a property in a preferred neighborhood and add value to it.