What to Know Before You Buy That Fixer-Upper

By the Mercury Team

Buying a fixer-upper house can be a fantastic way to enter the housing market, especially when inventory is low and prices are high. It offers the chance to build equity quickly and create a space that’s uniquely yours. But before you pick up a sledgehammer, you need to understand exactly what you’re signing up for.

Whether you are a first-time buyer or a seasoned investor, this guide will explain what to look for, how to budget, and what kind of insurance you may need while you’re renovating.

Why Buying a Fixer-Upper Can Be a Smart Move

For many, the primary appeal of a fixer-upper is the price tag. A fixer-upper is a house usually available at a lower cost than a move-in-ready home because it needs major repairs and renovations to be livable. When purchasing a home below market value, you have the opportunity to build “sweat equity.” This means that every dollar and hour you invest in improvements can increase the home’s value, potentially offering a big return on investment if you decide to sell later.

Beyond the financial benefits, buying a fixer-upper offers unparalleled freedom. When you buy a turnkey home, you’re paying for someone else’s design choices. With a renovation project, you’re curating your future home to fit your specific lifestyle needs, meaning you control the layout, materials, and finishes.

From an insurance perspective, updating older systems (e.g., plumbing, electrical, and roofing) can also be beneficial. Modernizing these elements reduces the risk of accidental damage, which can make your home safer and potentially easier to insure.

What To Look For When Shopping for a Fixer-Upper

Learning how to find fixer-upper homes that are hidden gems rather than money pits is an art form. It starts with looking past the ugly wallpaper and shag carpet to assess the “bones” of the house.

Key Signs of a Solid Structure vs. a Money Pit

Cosmetic issues are easy to fix. Structural issues are not. When touring potential homes, look for red flags that indicate expensive problems:

• Foundation cracks: Small hairline cracks can be normal, but large, zig-zagging cracks often signal structural failure.
• Water damage: Water stains on ceilings or musty smells in the basement can indicate long-term leaking or drainage issues.
• Outdated electrical: Two-prong outlets or old fuse boxes often mean the entire house needs rewiring.

Location, Lot Size, and Neighborhood Value

You can change almost anything about a house, but you cannot change where it is. A fixer-upper in a highly desirable neighborhood is almost always a safer investment than a perfect house in a declining area. Look for neighborhoods with good schools, low crime rates, and rising property values.

Professional Inspections and Hidden Costs

Never skip the inspection. In fact, for a fixer-upper, you might need more than just a general inspection. Consider bringing in specialists for pests, roofing, or structural engineering. Understanding what to expect during your home inspection is important for negotiating the final price and planning your renovation budget.

Budgeting and Financing Your Renovation

Once you find the right property, the next hurdle is financing. Figuring out how to buy a fixer-upper house involves more math than a traditional purchase because you need to account for construction costs upfront.

How Much Does It Really Cost to Fix Up a Home?

A common mistake is underestimating renovation costs. A good rule of thumb is to calculate your estimated budget for materials and labor, and then add 20% for surprise expenses. Renovations rarely go exactly to plan, and opening up walls can reveal unexpected issues.

To stay on track, determine how much house you can afford, including these repair costs. If the purchase price plus renovations exceeds the cost of a move-in-ready home in the same area, you might want to reconsider.

Types of Renovation Loans

Financing a fixer-upper is different from a standard mortgage. You might consider:

• FHA 203(k) Loan: This government-backed loan allows you to bundle the purchase price and renovation costs into a single mortgage with a low down payment.
• Fannie Mae HomeStyle Renovation: This is similar to the FHA option, but for borrowers with higher credit scores. This loan can be used for both structural and cosmetic repairs.
• Cash-out refinance: If you already own a home, you might leverage equity to fund the purchase or repairs of a new investment.

Insurance Considerations for Fixer-Uppers

Insurance is a critical piece of the puzzle that many buyers overlook until the last minute. When you’re buying a fixer-upper home, your insurance needs can be different from those of a standard homeowner.

Do You Need Special Coverage During Renovations?

Standard homeowners insurance policies assume you live in the home full-time. If you plan to live somewhere else while major work is being done, you may need additional protection, such as:

• A vacant home policy if no one will be living there for an extended period.
• Builder’s risk insurance to help protect the structure and materials during construction.

Coverage needs can vary based on the scope of your project, so it’s important to review your plans with your local insurance agent.

“The biggest mistake we see with fixer-upper buyers is focusing only on the purchase price and the renovation budget, and forgetting how the project changes their risk. If your home is vacant, under construction, or full of contractors coming and going, your insurance needs can look very different than a standard policy,” says Bonnie Lee, VP, Homeowner Claims for Mercury Insurance.

Liability and Contractor Insurance Basics

If you’re hiring contractors, make sure they are licensed, bonded, and insured. Ask for proof of:

• General liability insurance to help cover accidental property damage or injuries they may cause while working on your home.
• Workers’ compensation coverage if they have employees working on-site.

If you’re taking a DIY approach, talk with your agent about how your own liability coverage works if someone is injured on your property during a project.

Also, be sure to review homeowners insurance tips for first-time buyers to understand exactly what protections are available for your specific project.

Common Mistakes To Avoid When Buying a Fixer-Upper

Even with the best intentions, buyers can fall into traps. Here are a few to watch out for:

• Underestimating time: Renovations almost always take longer than expected. If you are renting while renovating, ensure you have a buffer in your lease.
• Skipping inspections: In a competitive market, it might be tempting to waive contingencies. However, knowing how to stay grounded during a bidding war means never sacrificing your due diligence for a quick sale.
• Forgetting permits: Unpermitted work can cause nightmares when you try to sell the home later or file an insurance claim. Always ensure your contractors have the necessary permits.

How To Know If a Move-In Ready Home Might Be Better

Many buyers wonder whether they should buy a fixer-upper or move-in-ready home. There’s no right or wrong answer. It depends on your budget, timeline, and comfort with projects.

A Fixer-Upper May Be a Better Fit If…	A Move-In-Ready Home Might Be Smarter If…
You have savings set aside for repairs and a cushion for unexpected costs.	You need to move quickly or don’t want to live in a construction zone.
You enjoy DIY projects or feel comfortable managing contractors.	You prefer predictable monthly costs instead of large renovation expenses.
You plan to stay in the home long enough to benefit from increased value after upgrades.	Your schedule or lifestyle doesn’t leave much time for managing renovation projects.

If you’re still unsure which is right for you, a real estate professional can help compare buying a fixer-upper home versus a turnkey property in your local market. You can also explore Mercury’s guides on when to buy a house.

Final Thoughts: Turn That Fixer-Upper Into a Safe, Beautiful Investment

Buying a house that needs renovation can be a rewarding way to build equity and create a home that reflects your style, as long as you go in with clear eyes and a solid plan. Focus on finding a structurally sound property in a strong neighborhood, build a realistic budget with room for surprises, work with qualified professionals, and make sure your insurance keeps up with every stage of the project.

Whether you choose a fixer-upper or a move-in-ready home, protecting your investment with the right homeowners insurance is an important step. Mercury Insurance offers reliable coverage at an affordable price.

Contact us today for a fast, free quote!