Does Working With A Contractor When Buying a Fixer-Upper Increase Equity?

When everyday people dive into renovating a fixer-upper, they often regret not enlisting the support of a contractor in advance. The lucrative return on investment of reality shows sometimes oversimplifies the process. As construction professionals sometimes warn, what you don't know can cost money.

That's why it's essential to work with a contractor when considering a house-flip or buying a blighted single-family home. While it seems reasonable to work with an experienced contractor to get good results, can that relationship also result in increased equity? It may come as something of a surprise but working with the right contractor can make you money.

Why Vetting A Contractor Is Job One

Potential homebuyers sometimes find themselves pressed for time and they cut corners. Rather than hunker down and thoroughly vet construction outfits, they field quotes and run with the lowest bid. Instead, these are vetting strategies worth considering:

• Recommendations: Ask for local references that focus on people who worked with the company. Don't hesitate to contact your community members.
• Reviews: Online reviews may run a little extreme. Some people get a little overwrought when typing about their feelings. Take them with a grain of salt. You may want to weigh ratings from organizations such as the Better Business Bureau and others.
• In-Person Interactions: Take your time and ask pertinent questions about the proposed project. Having a lengthy and wide-reaching conversation about everyday things also allows you to get to know the person. Listen to your instincts before hiring a contractor.

Selecting a reputable contractor ranks among the best ways to ensure a positive outcome. That comfortable relationship may prove invaluable if the project hits a snag.

Craft A Detailed Budget With Your Contractor

It's not uncommon for people investing in a fixer-upper to apply for a mortgage. Lenders typically require potential buyers to provide a renovation estimate from a licensed and insured contractor. A wide range of fixer-upper loan products are available for qualified borrowers that include the following:

• Government-backed conventional loans such as Fannie Mae and Freddie Mac
• HUD-supported 203(k) fixer-upper loans
• Unsecured personal loans

Having an experienced contractor craft a renovation budget with you can improve your odds of securing a loan on the lower side of the interest scale. Many of these loan products allow qualified applicants to borrow based on the listing price, renovation cost and the anticipated fair market value once complete.

How Does This Increase Equity?

At first, potential homeowners may not be able to see the increased equity through all the calculations and sawdust. However, the first place you can find equity is in the loan application part of the project. The assistance of a contractor can be instrumental in securing the right amount for a loan. Beyond the borrowing aspect of the project, going with an inexperienced contractor may cost you. These additional costs may include underestimating rising material and labor costs. Buyers also sometimes find themselves buying expensive power tools and failing inspections rather than handing off construction tasks to a pro. All those unnecessary expenses reduce the equity you would otherwise enjoy if you worked with a contractor from the very beginning.