4 Questions to Ask Yourself Before Buying a Fixer-Upper

Buying a fixer-upper could be a fun project and could potentially allow you to keep your mortgage costs down since, in most cases, you'll pay less for the home up front. But it's also a big undertaking that could do serious damage to your mental health -- and your bank account.

To be sure you're ready to take on the task, ask yourself these four key questions before moving forward.

1. Are you paying a fair price for the home given the work involved?

When you buy a home that needs to be repaired, you have the up-front costs of the purchase. You also have to pay for the repairs and remodeling. Once you add those costs together, you'll want to be sure they come in at less than or equal to the home's market value.

Say, for example, you pay $200,000 for the fixer-upper and have to put $50,000 of work into it. If you could sell it for at least $250,000 (based on comparable properties), then it may be worth moving forward with the deal.

2. How much of the renovations will you hire out?

If you plan to do the work on the home yourself, you can often save a lot of money on repair costs. But, you also need special knowledge to do it right and ensure you comply with building codes.

It's important to think about what you can do yourself versus how much you'll have to hire out. Not only will hiring professionals cost you more, but you'll also have to deal with finding them, managing them, and making sure they do the project correctly.

If you're planning on funding the renovations using a special mortgage aimed at fixer-uppers, such as an FHA 203(k) loan, you may also not be allowed to do the renovations yourself, as a licensed contractor may be required to perform the work.

3. Do you have a fund for surprise costs?

Cost overruns are a part of life when you are doing any kind of construction work. In fact, you should have enough money to exceed your planned expenses by around 5% to 10% so you don't face hardships when inevitable surprises occur.

Without the money to cover unexpected issues, work could stall while you come up with extra cash. Or you might be forced to try to borrow, which could be a challenge if you already have a big mortgage and lenders are worried about loaning you more money.

4. What's your timeline for the project's completion?

If you need to move into a home right away, you'll have to consider how long it will take for the project to be completed. You probably don't want to live in a construction zone if you are doing major repairs, so you'll also need to be sure you have another place to live if you can't move in right away.

If you have a definite date you must move in by, you may also want to write that into a contract with whomever you hire to perform the work for you, as it's common for construction projects to go longer than expected.

By considering these key issues, you can decide if moving forward with purchasing a fixer-upper is really right for you.