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In the real world, the true cost of a home in need of repairs may not be worth the value of the treasures. “Fixer Upper” / HGTV
If you'd never heard of the term “fixer upper” until a few years ago, you can thank Chip and Joanna Gaines for bringing it into the mainstream.
Since 2013, the Gaineses have starred on “Fixer Upper,” one of HGTV's most-watched home renovation shows.
Earlier this week, the couple announced that they would be leaving the show after the fifth season airs this fall, much to the disappointment of the show's die-hard fans. By the end of the season, Chip and Joanna will have completed the renovation of nearly 80 “dream homes” on-screen in Waco, Texas.
For many people featured on the show, working with Chip and Joanna not only leads to getting their dream home, but also a good investment.
When it's time for the big reveal at the end of each episode, Chip estimates the home's new value, minus the purchase price and renovation costs. “This property will appreciate in value by nearly $30,000,” Chip tells a happy client who, in one episode, spent about $272,000 on a property. “Not only did you pick a beautiful home, you also made a great investment.”
That's cause for celebration in a small town like Waco, where the average asking price is just under $180,000. But in the off-camera world of real estate, the outlook is less rosy.
In fact, a new working paper from the National Bureau of Economic Research (NBER) finds that overzealous real estate investors likely played a big role when the housing market collapsed nearly a decade ago — contrary to the typical narrative that blames Americans with bad credit for buying homes they couldn't afford. Analyzing anonymized mortgage data, the NBER found that wealthy and middle-class investors who had been buying cheap properties in smaller markets, fixing them up, and selling them at a profit until the financial crisis hit, all defaulted on their loans at the same time.
Just a few years after the economic recovery, HGTV introduced the Gaineses, who inspired countless Americans to jump back into real estate and invest in homes in need of repair.
Chip and Joanna show off their signature home. Fixer Upper/HGTV, Scripps Networks Interactive
If you watch a show like “Fixer Upper,” it seems easy. Every episode follows the same formula: The Gaineses visit three homes with a client. The client brings a “total budget” to cover the cost of purchasing the home and various renovations, but the tip is estimated on the spot. The renovations almost always include replacing countertops, flooring, cabinets and room expansions.
After the home is purchased, construction begins, and while there are hiccups here and there that can force the client to pay a few thousand dollars extra, the project never derails (as viewers see).
The client in the aforementioned episode purchased their home for $169,000 and only had a renovation budget of $103,000. Most of the clients featured on “Fixer Upper” have mid-five figure renovation budgets due to their shockingly low purchase prices, but this is far from reality.
A 2016 analysis by Zillow Digs found that the average property in need of repairs was selling for 8% below market value, and buyers could save just $11,000 to complete the renovations to break even.
Still, a home in need of repair can be a cheaper way to own a home: buying an older but still livable house on the cheap and then slowly but surely making improvements to it without draining your savings.
“Renovations that need repairs can be a bargain, allowing buyers to inject their own style into the home as they renovate. But it's a good idea to do the math before making a decision,” said Svenja Gudel, chief economist at Zillow.
“While an 8% discount on a property in need of repairs, or $11,000 in upfront savings, is certainly a lot of money, it probably won't cover a kitchen remodel, much less the structural improvements like roofing or plumbing replacement that many of these properties will need,” Goodell says. If you barely have enough cash left to cover renovation costs, the chances of a return on your investment are slim.
“Do you have the courage to take on a home in need of repairs?” Joanna asks in the opening credits of each episode. Courage is one thing, funds are another.
While some “Fixer Upper” cast members have been able to cash in on the show's popularity — one couple, for example, put their home on the market for about 10 times the median price per square foot in their area — the average home flipper doesn't have that luxury.
In the real world, the actual cost of a property in need of repairs may not be worth the value of the potential treasure.
Tanza Loudenback is a personal finance expert and Certified Financial Planner (CFP). She is the founding reporter for Personal Finance Insider and covers topics such as taxes, retirement planning, banking, real estate and mortgages, and budgeting. Her work has been featured in WSJ Buy Side, Fortune Recommends, Korn Ferry, TheStreet, Morgan Stanley Wealth Management, and Fidelity. Biography Tanza was the first reporter on the Personal Finance Insider team. In addition to helping build this vertical from the ground up, she led a biweekly advice column answering readers' personal finance questions, launched a personal finance newsletter, and published two e-books under the Personal Finance Insider brand. She was the executive editor of the Master Your Money series, a two-year-long Business Insider series providing financial advice to millennials. She managed the Master Your Money bootcamp events during the series. During her time at BI, she expanded her tax coverage to include guides to the best tax software and commissioned a panel of experts to review all articles. Tanza earned her CFP license in 2020. She aims to simplify personal finance concepts to help readers make smart decisions with their money. Areas of ExpertiseTanza's areas of personal finance expertise include:Real Estate/Mortgage TaxesRetirement PlanningSmall Business FinanceBankingBudgetingEducationTanza graduated from Elon University with a degree in Print Journalism and Online Journalism and a minor in Italian Studies. Read More Read Less
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