So you want to buy a fixer-upper?

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It’s the homebuyer’s dream: Dig up a rough diamond in the perfect neighborhood, buy it for bottom dollar, and flip it into a gem worth double what you paid.

It can happen. But sometimes that diamond in the rough is actually a money pit in disguise. The key to getting a steal is knowing how to tell them apart.

“Buying a fixer-upper can be fraught with peril,” says This Old House. “Before you take the plunge, make sure you have a realistic idea of what you're getting into.”

If you’re looking to pay bottom dollar, take a hard look at your local market. Deep discounts are possible in some areas—especially those with expensive homes—but most fixer-uppers list for an average of 8 percent less than market value, according to Zillow. For the median buyer, that leaves about $11,000 for repairs.

Many homeowners do the work themselves to save money. If you have the skills, you can maximize your investment. But ask yourself some hard questions about the amount of work and the time commitment involved. Renovations can take months or even years to finish. Some work might require permits, which are time-consuming. Mistakes can be costly.

That said, there are some great fixer-uppers out there that offer maximum return for minimal effort. You just need to know what to look for.

Easy fixes

Ideally, you want a fixer-upper that needs mostly cosmetic improvements. These types of renovations typically cost far less than what they return in market value. Major additions like a family room or extra bedroom tend to be less lucrative, costing as much or more than they return—although adding a bathroom can be worth up to twice its cost.

Some easier fixes include:

  • New paint
  • Refinishing floors and laying tile or carpet
  • Updated kitchen or bathroom
  • Patching walls and stripping wallpaper
  • Installing ceiling fans and light fixtures
  • Replacing baseboards or adding trim
  • Fixing broken windows
  • Door replacement
  • New bathroom subfloor

Repairs to avoid

If the house needs major structural work, many real estate experts suggest walking the other way. Plumbing and electrical updates, extensive roof or wall work, and foundation upgrades are expensive and rarely add enough value to offset their cost.

Some repairs you may want to avoid include:

  • Complete kitchen or bath remodel
  • Replacing HVAC system or adding central air
  • Reroofing if tear-off is required
  • Shoring up foundation
  • Pouring concrete for driveways, sidewalks and steps
  • Fully replacing windows
  • New plumbing, sewer lines or wiring
  • Building a garage or addition

Calculating your offer

How much should you offer on your fixer-upper? To get the deal you want, arm yourself with hard figures. Start thoroughly assessing the house’s condition. Once you know what work is needed, you’ll need to do some research and make a few calculations to arrive at your maximum offer.

STEP 1: Estimate repair costs. “Be tough with this estimate,” says This Old House. If you’re doing the work yourself, research the cost of materials. If you’re using a contractor, take them on a walk-through of the house and get a written estimate. If structural work is involved, hire a structural engineer to investigate the full extent of the problem. Add up the costs of all:

  • Materials
  • Labor—yours and others’
  • Permits

STEP 2: Leave room for surprises. Renovations take a while. During that time, material prices can spike, inflation can drive up labor costs and mishaps can occur. Tack on 10 percent to 20 percent to cover any unforeseen problems that will inevitably arise.

STEP 3: Estimate future value. Compare your fixer-upper to comparable homes in the neighborhood to estimate its probable market value after repairs. Be careful not to over-improve—your remodel shouldn’t raise the value of your home more than 15 percent above the median sale price of other houses in the neighborhood. Subtract the above amount from the estimated value.

This gives you an idea of how much you might want to offer on the home. Check OCCU’s mortgage calculator to figure out how much house your budget can accommodate.

Choosing the right loan

Whatever you decide, make sure you get preapproved for both your mortgage and secure the funds for the renovation before making an offer on a fixer-upper. Applying with a credit union can help you save money on interest and fees. Apply for an OCCU home loan today to take the first step toward owning that diamond in the rough.