By: Penelope Graham, Zoocasa
Thinking of buying a home in need of a little TLC? Purchasing a property with plans to renovate may seem like a savvy way to get onto the property ladder for less, and is a common tactic among buyers of older homes for sale in Toronto and other coveted markets. After all, the popular saying is to “buy the worst home on the best block”!
But renovating a home requires a lot more than sweat equity; it’s a major undertaking that can severely strain your finances, not to mention your relationships and sanity. It’s important to do your due diligence and select the right project for your budget, lifestyle, and expectations.
Here’s what buyers should consider before making an offer on a fixer upper, much less strapping on a hardhat.
One of the most common tropes in home renovation reality TV is an unexpected discovery – usually of the structural or mould variety – that threatens to derail the project’s timeline, budget, or both. While a great dramatic device, unforeseen repairs are a serious risk in real life too, and should be avoided at all costs.
For this reason, professionally inspecting the property before you buy it is crucial, as is making your offer conditional on the inspector’s findings. While an inspector can’t see behind drywall or peer into the foundation, they should use equipment to detect signs of moisture, mould and other hazardous substances. They should also provide a full report on the condition of the electrical, plumbing, and heating systems, and note any visible structural vulnerabilities.
Your seller should also be able to disclose the age and repair history of the roof, appliances such as the furnace and stove, and whether any part of the home is still under warranty.
It’s also wise to bring in a contractor at this stage to discuss required work, and to draw up an estimate of the total cost. Take extra care with homes listed “as is” – this can indicate the necessary work is extensive, or that the seller may not have an intimate knowledge of the home’s condition.
Once you have established your scope of work, you’ll need to draw up a detailed budget and schedule to complete it. This should include the cost of materials and labour – including your own, if you’re doing some yourself. It’s also important to factor in the carrying costs of your new home such as mortgage payments, property taxes, and utility bills. If you can’t move in until the work is complete, you’ll need to take the shelter costs of your temporary living situation into account.
To pay for the work itself, many homeowners take out a line of credit which allows them to tap into up to 80% of the homes total value, and the flexibility to use the money however they wish. However, LoCs can also be risky as they’re a form of revolving debt; like a credit card, they don’t have a deadline for payment, and can rapidly incur interest if left unchecked.
Another option is for home buyers to use the Purchase Plus Improvements Program, a type of mortgage offered by lenders designed to cover both the home purchase price as well as any needed improvements.
In order to qualify, the renovations must increase the property value (i.e. they can’t be purely cosmetic), and the purchase of the home must be conditional on getting approval for the renovation mortgage program. Most lenders will also require a quote from a contractor on the estimated scope of work and what the home’s value will be post-renovation. The biggest caveat is that the work must be completed – and signed off on by an inspector – before the buyer receives the funds, meaning they’ll need to pay the initial costs out of pocket.
If you’re building your home from scratch, or undertaking extensive renovations, you may also qualify for the GTS / HST New Housing Rebate, if the value of the completed home is below $450,000.
Depending on the municipality and neighbourhood where you’re building, there may be bylaws and rules governing what you can do, such as building an addition, demolishing part of your home, or even changing the landscaping.
For example, in Toronto, homeowners must apply for a building permit when undertaking any “construction and / or demolition of a new building, an addition, or material alteration of any building structure.” This includes interior changes as well – homeowners must submit extensive documentation including floorplans, space usage and property lines in order for work to move forward.
Things get even more complicated if the property, or the neighbourhood, has heritage designation, which may require homeowners stick with a specific aesthetic, and even source original materials. Heritage homes, because of their advanced age, also tend to need the most repairs, as their systems and structures may no longer be up to code.
Penelope Graham is the Managing Editor of Zoocasa.com, a real estate website that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully across the nation, including the Toronto, Calgary, and Vancouver MLS. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.