Should you buy a dump? The most important things you need to know before bidding on a dilapidated house

A wave of dilapidated houses has hit the market, and house-hunters may be wondering whether buying a fixer-upper could be a way to pick up a bargain property in a sought-after location.

Transforming an uninhabitable property into a beautiful home can be incredibly expensive, as structural problems hidden deep beneath the peeling paint, crumbling ceilings and rotten floorboards can’t be left alone once discovered. For properties protected by heritage constraints, a knock-down-rebuild is out of the question.

But rundown houses continue to appeal to savvy renovators and could offer the chance to create a dream home for those prepared to pay the price.

Why do dilapidated houses generate so much interest?

Paul Cree from Refresh Renovations said fixer-uppers often attracted buyers seeking entry into a suburb they otherwise couldn’t afford, while other buyers were drawn to a home’s period features.

“Older properties have more character and individuality than you get with newer properties,” he said.

Philip Drew from PMD Build said the history of period homes appealed to creative renovators.

“You’re keeping the heritage of the building and you’re actually putting that back into the building at the end,” he said.

• Related: Cut the cost of a new home by 30 per cent
• Related: Should you renovate or move house?
• Related: How to become a property developer

Director of Cobden & Hayson Danny Cobden said a dilapidated house was “a blank canvas for someone to come in and put their personal mark on it.”

“They’re always in strong demand,” he said. “I’m always astounded how much interest dilapidated houses get.”

After

Before

The value of this Waterloo property increased by almost $1 million after an extensive renovation.

What do you need to know before buying a dump?

Mr Cree said it’s important to determine the scope of the work at the beginning.

“Sometimes a property can look very rundown but a lot of it is actually relatively cosmetic,” he said. “Other times the stumps or footings of the property need replacing and there are a lot of structural problems.”

Mr Cree said these hidden problems end up costing more than buyers realise, citing issues with plumbing and electrical systems and damp as the major culprits.

“There are often a lot of unknowns and it’s wise to have a bit of a contingency to tackle those unknown costs.”

Before buying a property, familiarise yourself with the development control plan of the local council and make an appointment to discuss your ideas with a duty planner.

Older homes are more likely to have heritage constraints, but Mr Cree said this usually involved a home’s facade.

“A lot of the time it’s more focused on the road-facing aspects of the property. There’s more flexibility with what they can do at the rear of the house.”

A building inspection is essential, but it’s also worth hiring a builder to estimate the cost of renovations, as comparable renovated properties may prove better value.

After

Before

After two years and a renovation, the price of this Annandale property rose by 85 per cent.

How do you fund a major renovation?

Mortgage Choice spokesperson Graciela Gomez said it can be harder to secure a loan on a dilapidated property as the risk to lenders is higher.

“If the borrower defaults on their loan, the lender will need to repossess and resell the property,” she said. “This could be more difficult to do if the property is rundown.”

If the property is uninhabitable, most lenders require buyers to take out a construction loan to fund the project, with payments made in stages.

“Lenders will ask to see the borrower’s building contract along with payment schedule from a licensed builder. They will also request evidence of council approval.”

Properties with a development application already in place can streamline the renovation process, but these are likely to command higher prices.

Mr Cobden said homes that could be tenanted during the planning stage may be less risky for renovators. “That’s going to at least provide that holding income that will hopefully cover the cost of any loans, rates or taxes,” he said.

What are the risks of buying a rundown house?

The attention dilapidated homes receive means buyers are unlikely to secure a bargain at auction. “The market place is so intelligent so it’s very difficult to buy well,” said Mr Cobden.

According to Ms Gomez, this can be especially problematic whe it comes to funding the purchase.

“Buyers whose homes are valued less than the purchase price may struggle to get finance approved or may need to pay lender’s mortgage insurance which can add thousands of dollars to the loan amount,” Ms Gomez said.

Mr Drew, who has worked on dozens of residential projects including a rundown terrace that became his own home, said renovating an uninhabitable home would be too challenging and expensive for first-home buyers without hands-on building experience, and not lucrative enough for developers.

“If you’re a developer it wouldn’t be a good way to make money – you’d be better off doing knock-down-rebuilds,” he said.

Ms Gomez said DIY renovations are even riskier. “Borrowers who decide to take the owner-builder route will find fewer lenders who are willing to write them a loan,” she said. “Generally speaking, owner-builders will need a lower loan-to-value ratio.”

According to Mr Codben, trying to cut costs is a mistake. “Anything shorter than a major renovation with a top notch job simply won’t get you as a good a return.”

For buyers with a renovation or two under their belt, an affordable dilapidated house could allow entry into a desirable suburb, with the potential to create significant equity if costs are carefully managed.

Flipping a property is trickier in a flat market, but when prices are going up, the risks of taking on a major reno are minimised, as even unimproved properties can benefit from rising land values.