The Pitfalls of Home Renovations

For many homebuyers and investors, buying a fixer upper is a challenge they were not prepared for. A recent study from Porch.com takes a look at the tradeoffs between buying a fixer-upper versus buying a move-in-ready "turnkey" home.

When renovating, those who purchased a fixer-upper home and went over budget on repairs spent 38% more than planned on average. Much of these extra costs went toward things such as new HVAC and plumbing.

For those who chose turnkey homes over fixer uppers, a majority of buyers (63%) stated that they chose their home simply because they liked the house or neighborhood. On the other end, most fixer-upper buyers stated that they made their purchase decision based on finances, stating they believed they could get a better price on a fixer-upper than a turnkey house.

Despite the expectation of spending less, fixer-uppers ended up costing homeowners about the same or more on average as move-in ready homes. According to Porch.com, 44% of buyers ended up spending more than expected on repairs, going over budget by 38% on average. The rooms most likely to go over budget were basements and bathrooms.

For rental investors, the move toward existing and fixer-upper homes is being reflected in the rental market. According to the National Association of Homebuilders (NAHB) and the Census Bureau, the number of single-family homes built-for-rent declined at the start of 2019.

Though built-for-rent single-family rentals have been on the decline, the overall single-family rental market has been on the rise. The market for single-family rental (SFR) securitizations continued to grow month over month. It increased to 4.7% in March from 4.2%, according to the latest Morningstar Credit Ratings report on the SFR market.

The report indicated that the average vacancy rate had declined overall to 4% in March—the lowest since May 2018.

The average retention rate for expiring leases also dropped to 78.9% in February, the latest month available, from 80.4% in January.