Doing up a fixer-upper: when the sums work
A fixer-upper is a construction project with a property attached. The property is usually the easier half.
The arithmetic of a refurbishment is simple: the after-repair value minus the purchase price, the work, the acquisition costs and the holding costs is your margin. If that figure is positive and large enough to compensate you for the risk, the project works.
What makes it difficult is the uncertainty in each of those terms, and particularly in the cost of the work, which is discovered progressively and paid for up front.
Establishing the after-repair value
The after-repair value is what the property will be worth once the work is complete, and it should be established from sold comparables of finished properties of the type yours will become. This is the single most important figure, because everything else is compared against it.
Be conservative. Assume you will finish the work to a good standard rather than an exceptional one, assume the market will not have risen, and assume you will sell at a slight discount to asking because you will want a reasonably quick exit.
Costing the work realistically
Get at least two itemised quotes from contractors, and be suspicious of a single round figure with no breakdown. Add a contingency of at least 15%, and more for an older property or a first project.
- Structural work: roof, walls, floors, and anything a structural engineer needs to sign off
- Services: rewiring, replumbing, and a new boiler or heating system
- Kitchen and bathrooms, which are the largest single cost in most refurbishments
- Windows, doors and insulation, particularly where the EPC rating needs improving
- Decoration, flooring and landscaping, which are consistently underestimated
- Professional fees: architect, building control, party wall awards, structural engineer
- Void holding costs: council tax, insurance, utilities and finance over the whole project
The margin you need
A refurbishment carries the risk of cost overrun, delay, and a market that moves while you work. The margin has to compensate for all three, and a margin of 10% on the after-repair value is thin; 20% is a more honest target for a first project.
If the numbers only work with a 5% margin, the project does not work, because a single unexpected discovery will erase it. The fixer-uppers that make money are the ones where the purchase price was low enough to leave room for the things nobody could see.
Common questions
- How do I calculate profit on a renovation project?
- Take the after-repair value and subtract the purchase price, all acquisition costs (stamp duty, legal, survey), the cost of the works including a contingency, the professional fees, and the holding costs over the project period. What remains is the profit. If it is less than about 15–20% of the after-repair value, the project leaves too little margin for the risks it carries.
- How much contingency should I allow for a refurbishment?
- At least 15% on a straightforward modernisation, and 20–25% on an older property or one being taken back to brick. The contingency must be money you actually hold, because a project that runs out of budget halfway through leaves a property that is neither lettable nor sellable.