When buying a house, choosing a fixer-upper can be a cost-effective way to personalize your dream home or squeeze into an up-and-coming neighborhood.
But it can also be a huge undertaking, one that depletes both your time and your finances.
A first-person essay published by Toronto Life on Monday titled "We Bought a Crack House " makes that point clear. The story chronicles the $1.1 million renovation writer Catherine Jheon and her husband, Julian Humphreys, undertook to gut and refurbish their family's new home. The effort nearly bankrupted them.
Jheon explains that she and her husband, who were parents to one child and expecting another, put in a $560,000 offer on a dilapidated three-story Victorian, which was at the time being used as a rooming house. The house seemed like a good deal, and in their eagerness to pounce, they neglected to take certain factors into account.
Only after making the agreement did Jheon realize, "We had just spent more than a half a million dollars on a house I had never seen."
They thought of themselves as capable of making the needed upgrades, though they didn't have any direct experience. Until they found the Parkdale home, "we scoured the listings every day, searching for a fixer-upper that we could renovate ourselves to save money," Jheon writes. "We weren't particularly handy, but we'd seen all the home reno shows, and it seemed like everyone in the city was doing it. How hard could it be?"
As anyone who has gone through a renovation could have told them, the answer turned out to be, "Very."
The couple ran into a slew of obstacles, including stubborn tenants and even more stubborn squatters, delayed building permits and new damage caused by a contractor they impulsively hired after meeting him on the street. Each new hindrance added to the expense until the couple found themselves underwater, financially. They were forced to take on a personal loan from Julian's godfather to finish the project.
All told, the couple spent $1.12 million on the home, double their original $560,000 budget.
"If we had just listened to the advice of realtors, architects, designers, tradespeople and many friends, we would have avoided considerable stress and, well, $100,000 in debt," Jheon writes.
Jheon's story also underscores two critical mistakes homebuyers make.
Home prices can't be taken at face value; something always comes up. To truly afford a house, you need more than just a down payment saved. You'll want to be able to comfortably cover six factors: the down payment, closing costs, moving expenses, repairs and maintenance, the first few months' mortgage payments and your emergency fund.
The same goes for renovating a fixer-upper. It's smart to always have more than you expect to need stashed away.
As Jheon and her husband learned the hard way, "There's no way to shortcut a reno; they cost a lot, period."
Homebuying isn't the place for impulse purchases. It's important to be honest about your budget and also to do your homework on neighborhoods and building histories.
Jumping into a new mortgage on a whim, as Jheon and her husband did, is a recipe for financial disaster.
"The number one sign that you don't have enough money to buy a home is if you find yourself saying, 'I think we might be able to make it work,' " Eric Roberge, CFP and founder of Beyond Your Hammock, told CNBC. "I'm all about taking calculated risks when appropriate, but taking a risk on the largest purchase you've ever made is not smart."