Budgeting for repairs
Many people who responded to the "Great first-time buyer expectations" entry mentioned their concerns about buying a fixer-upper and having to shell out big bucks on repairs when they would already be tapping their savings to buy a house.
It’s smart to consider all the costs of homeownership before buying, and whether you can really afford it or not. When figuring out a budget before purchasing a home, buyers should factor in repair and maintenance costs on top of having a down payment, closing costs, moving expenses, monthly mortgage payments, utility payments, homeowner association fees, etc.
To get some sense of what it might cost to do minor repairs on a mild fixer-upper, I poked around on the Internet. Of course, maintenance and repair costs can vary wildly depending on the type of projects involved, so it’s not possible to come up with a hard and fast number that applies to everyone. But I did find a report by the National Association of Realtors that found 60% of buyers took on remodeling or home improvement projects within three months of buying their home.
The study further found that the typical buyers spent $4,350 on home improvement projects within the first three months of buying their home.
As a rule of thumb, the book "Home Buying for Dummies" advises budgeting 1% of your home's purchase price each year to cover maintenance costs. So if you bought a home for $150,000, you would budget $1,500 annually.
Some buyers deplete their savings just to come up with a down payment, closing costs, and moving expenses; which can make it hard to come up with cash to pay for even minor fixes difficult shortly after moving in. And that means some people turn to credit cards to cover repairs -- a potentially costly option.
How many buyers out there have factored repair and maintenance costs into their budget? Will you have an emergency fund available to cover repairs, or will you be taking a risk and hoping nothing major happens, like the hot water heater springing a leak?
Enjoyed this post? Get blog updates delivered to your reader. Click here.
Comment
Permalink
Email
What counts as a home improvement project?
We had the floors refinished and painted the entire place top to bottom before we even moved one piece of furniture in. I'm not sure if that counts or if you're talking more like "remodeling the kitchen" or "tearing down a bathroom". Everything is a money suck. Just trying to get the yard into shape has taken quite a bit of money (not to mention lots of sweat - but I enjoy that part!)
In summary, we've occupied the house three months and spent a little less than that figure($4,350) I'd estimate. There are some projects on the horizon - new windows, but it's not an urgent matter.
A home worth $150K. You're a funny guy. You writing this column form Oklahoma? :-)
But this column does open up an interesting question - should you put every dime into a down payment, or should you keep some money (let's say $5-10K) in the bank account for renovations/emergency expenses? It's hard not to try and get that lower mortgage payment, but if something breaks in those first few months (or you need to start fixing-up), it'll be a while before the savings gets back up there...
One of the reasons I bought the house I did was because it had a new roof, new 200 amp electric, and relatively new gas heat / hot water system. I knew that some of the major concerns were already handled by the previous owners who seemed to be tackling their home improvements with an eye toward staying there for the long term (indeed, the seller transferred to a new location and had to move out of state unexpectedly). This eased my concerns over having enough money in reserve in case major repairs were needed after moving in.
There were other projects in the home that were not handled in favor of those other improvements, though. The kitchen is vintage 70s, though in very good shape with newer appliances. We didn't like the bright yellow laminate counters and backsplash, but we knew we could live with it for a little while saving money for remodeling.
A lot of first-time buyers would reject the house because of the lack of an updated kitchen-- something a lot of buyers insist upon. In fact, I almost did when seeing just the pictures of the property online. In the end, it wasn't as important as making sure the house's structure and utilities were secure. There's a difference between budgeting for optional improvements and ones that need to be done to keep the elements at bay.
There's a difference between improvements that are needed and those that are wanted. Fixer-uppers to me mean needed improvements.
Needed improvements ARE, as a previous commentor pointed out, a major money suck; but if the hot water heater blows, or the heating system fails (in December), or the roof leaks, you pretty much have to fix it no matter what funds you have. For that reason I have never bought a fixer-upper.
I have, though, bought homes that needed updating: these are the homes whose green tile and pink bath fixtures may not appeal to you, but they're functional and you can live with them until you have the money to do something else.
I don't consider a home a fixer-upper if it has an occupancy permit & you can live safely in it.
I don't think 1% is enough to cover repairs and build an emergency fund for big ticket repairs.
I'd say you actually SPEND 1% annually in regular maintenance and upkeep which means you need to save at least 2% for the big ticket items (roof, foundation work, siding, painting, major renovation, etc) that come staggered every 4-5 years.
We sock away 3% specifically for home repairs and even that is probably on the low side.
This post is timely as I am considering several "fixer-uppers" and am trying to get an understanding of how much various projects cost on average. Does anyone have a good place(s) to learn more?
Thanks
Do not put all your life savings into that down payment and make sure you have a good sum in the bank just to be safe. Any resale will need some work. Bigger projects like kitchen, bathrooms, windows, siding, roof, heating systems, etc are going smash that 1%.
I think the % needed for repairs varies based on the amount of the house. I own several houses ranging in value from 300k - 900k. I would say that on those houses I budget a few thousand for repairs / improvements per property. I definately don't spend 9k per year on the most expensive house and probably average around 2 - 3k per property for maintenance and upgrades. The amount will probably also vary based on what you do yourself VS hire people for, if you hire someone to do landscaping and snow removal that may be $1,000 by itself. When buying a house that needs repairs I always have a careful budget in mind and do a detailed inspection. I generally add as much as 50% to the budget for the unexpected. If you're unsure bring a contract to see the house before buying it.
Buy a warranty. Or better yet have the Seller buy a one year home warranty.
home warranties are pretty much useless in my experience. Great marketing tool, because the buyers never read the fine print and see what they are getting. Or not getting.
Houses require maintenance, no matter how good shape they are in. Money should be set aside for that. Money to replace bathrooms and kitchens etc. is extra.
How much do renovations cost? That's like asking how high is tall. You can't say anything without specific variables, its a much more complex answer than say, how much does a car cost.
And as an aside, (and a personal pet peeve of mine, clearly) you don't get a discount for fixer-uppers in massachusetts - in fact, properly valued fixer uppers still tend to be more than houses in good repair. The bubble is not over until that is over.
The best place for buyers to save money remains to be out of the market. Things will keep going down dramatically for at least the next year.
it is not a comment but a question. how doyou relate the state of repair of property to value
This blogger might want to review your comment before posting it.
Recent Posts
browse this blog
by categoryINside Boston.com