Should you buy a fixer-upper? (© Juice Images/Corbis)

© Juice Images/Corbis

With housing inventory tight and many bank-owned homes on the market, some buyers are starting to consider homes that they previously would have dismissed as problems. (Bing: How tight is housing inventory right now?)

How much of a project should you take on? We asked real-estate agents and a home inspector what buyers should consider when evaluating a home that needs work.

In this month's Buying Advice, we'll also check in with the latest housing statistics and help define a real-estate phrase that's commonly used but not universally understood.

Repair, renovate, rehab
Buying a fixer-upper is hardly ever anyone's first choice. But with the number of available listings at or near record lows in many markets, paying for repairs is something more buyers have to plan on, says Chasin Prather, with ERA Buy America Real Estate in La Palma, Calif.

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"Relying on the seller to make the repairs you want in this market is not a good strategy," he says. "Assume you'll have to take it in the existing condition."

A recent home inspection at a 1952 tract home on which his first-time-buyer clients had made an offer turned up inferior galvanized plumbing, and other repairs were needed. Despite the large tab to make repairs, the seller offered to pay only one-quarter of the cost.

"The tight competition allowed the seller to say, 'Take it or leave it. I have seven other offers,'" Prather says. His clients ultimately decided to buy it.

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But Prather says there are times when it's best to walk away. Here's his list of problems you should walk away from:

  • Mold: If you see or suspect (sniff sniff) mold in the house, you should definitely get it inspected carefully. (Did we mention that you should never skip a home inspection, or any additional specialized inspections recommended by the inspector?) Mold on the inside could mean repairs to plumbing and extensive drywall replacement. Exterior mold could mean that the house has improper drainage, which requires expensive lot grading to remedy and, if uncorrected, could mean a flooded basement every time it rains.
  • Foundation issues; If an inspection turns up a problem with the foundation, you can bet that you'll be draining your bank account to fix it. And if your lender becomes aware of the problem, it could jeopardize your financing, Prather says. Many lenders request a copy of the home inspection if it is cited on the purchase agreement.
  • A bad floor plan: Many buyers with large families talk themselves into a home with a less-than-ideal floor plan by rationalizing that it would be made better with an addition. While an addition can add space, it can't always resolve issues such as a cramped kitchen or bad access to the laundry room, bedrooms or backyard. "Be sure the rest of the home works for you," Prather says. 

Bill Jacques, president of the American Society of Home Inspectors, says first-timers should probably steer clear of a house that needs extensive repairs. He says most people overestimate how handy they are and underestimate the costs of repairs. "They end up taking on these large projects and not being able to finish them," he says.

Problems that made his walk-away list include:

  • A bad roof: You are looking at thousands of dollars to replace it, on top of any other work.
  • A dead or dying heating and air-conditioning system: "If you have to replace the unit, you're looking at a minimum of $5,000," Jacques says. And if it's a much older home, you might also have to commit to replacing some ductwork.
  • An ancient, problematic electrical system: Many old homes, he says, have faulty wiring and electrical panels that could pose a risk of electrical fire. For example, he says, in many cases, old circuit-breaker panels made by Federal Pacific Electric Co. failed to trip and protect homeowners. Updating wiring is expensive, he says. Know that going in.

If many repairs are needed, he says, you have to consider whether you'd be better off waiting and buying something a little more expensive. "You will be spending all of your money [and time] trying to fix everything up," Jacques says.

Slide show:  DIY or don't?

If you are going to give a fixer serious consideration, make sure you do your homework, says Tony Geraci, broker/owner of Century 21 HomeStar in Cleveland.

Price out repairs with a licensed contractor before you buy and have the contractor help you map out a realistic timeline for repairs.

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If repairs are major, ask yourself if you are able to find another place to live. If you must move in, can you live with the house the way it is?

Know that a home inspection might not turn up everything that needs work. Make sure you have an emergency fund to deal with these problems.

See if your city's planning department offers any grants, tax abatements or other incentives for renovations in your neighborhood.

Lastly, prioritize your projects and don't tackle them all at once, especially if you're doing it yourself. You don't want to start working on both bathroom and kitchen and wind up getting stuck or out of money halfway through, when your counters are all ripped out.

Read:  Got a fixer-upper? Get this loan

"Doing it on your own saves you money, but there's no one to complain to if you do it wrong," Geraci says.