Real Estate Question

[wdfifteen]

A house down the street is up for sale. The place is 25 years old and has never been touched. It needs a roof, paint inside and out, furnace, water heater, AC - everything. The family in it now has not spent a cent or lifted a finger for landscaping in 10 years so it even needs that.
The owner is asking $250k for a house that would easily sell for $300k if it was nice. It would probably cost $50k to bring it up to snuff. So is he better off selling it as-is, or would you fix it up and sell at a higher price?

[look 171]

Caught in a rock and a hard place on this one IMO. YOu spend 50k to get 300k. If not, it will sit at 250k and no one wants to buy it. It takes a very special buyer, a home owner to take it off their hands knowing the HVAC isn't working and a new roof. An investeer will not touch it because its a break even investment. As an investment, I would walk.

[speeder]

The free market should dictate that this place sells for "normal price" minus all repairs and taxes/transaction fees on a flip and reasonable profit on investment. At least that's the waY it's supposed to work. Otherwise, it sits unsold.

There are exceptions to this formula, (notably white-hot markets where there are no cheap fixers around), but markets tend to take care of these things. The scenario you describe where it's priced $50k under normal market and needs $50k in rehab doesn't add up. Literally.

[TheMentat]

Originally Posted by wdfifteen

A house down the street is up for sale. The place is 25 years old and has never been touched. It needs a roof, paint inside and out, furnace, water heater, AC - everything. The family in it now has not spent a cent or lifted a finger for landscaping in 10 years so it even needs that.
The owner is asking $250k for a house that would easily sell for $300k if it was nice. It would probably cost $50k to bring it up to snuff. So is he better off selling it as-is, or would you fix it up and sell at a higher price?

Quite honestly, if it is worth $300k after $50,000 worth of work, its worth less than $250k now... Probably closer to $210k. nobody is going to take on that work for free in a normal market.

So if he actually gets an offer for $250k, he should take it.

[ossiblue]

It only makes sense to fix up a house if the cost of the rehab will be less than the new selling price, minus the costs. Investing 50k to sell it for 50K more doesn't make sense and carries the risk that the new asking price may not be met. Further, there is the time factor to rehab the house and keep it off the market. Prices may rise or they may fall during that time--is a gamble.

It would only make sense to the seller if rehabbing the house adds significantly to the equity he would get at the newer selling price, once the costs have been deducted.

Same goes with the buyer. If he's looking at rehabbing costs of 50K and will realize only a 50K increase in his equity, he'll pass or offer much lower than the 250K being asked. This will be the telling feature. If the house sits, unsold, then it is over priced as is. Having to lower the price to, say 200K, may bring offers. Now, the owner may think, "If I put in 50K I can get 300K for this house--50K more than my fixing costs." This may then inspire the owner to fix the house.

[Aragorn]

I don't see the value of paying $250k for a house worth $300k that needs $50k worth of work. Seems like the seller should either fix it and ask market price or sell at a discount (more than just $50k off.)

[rusnak]

The way I see it working out, the seller lists it for $250K. Buyer will have a home inspector make an estimate for all repairs. Say it's $50K. Buyer will submit that estimate and couter offer at $200K. At least that's what I would do.

[stomachmonkey]

Originally Posted by rusnak

The way I see it working out, the seller lists it for $250K. Buyer will have a home inspector make an estimate for all repairs. Say it's $50K. Buyer will submit that estimate and couter offer at $200K. At least that's what I would do.

Ditto.

[Hugh R]

$50K in upgrades/repairs often turns into $75K.

[Deschodt]

Yeah that's not realistic math, from experience... Either it won't sell at all, or if it does it will be for 75-100K under market. Or if he invested the 50K, he should do it if doable in a way that generates 75-100K in extra value (like an extra bedroom instead of a new cupboards)... Buyers seem to go for something "finished" and "perfect", or for a steal that they think they can fix for less and beat the market... Time is money. If it's truly 50K underpriced because it needs precisely 50K of work, it is worth 75K under market at best. (Home renovation) time is money (as well).

PS: I fall into category#2, and we doubled the estimated renovation costs (but no complaints)... so it's hard to gauge. "while you 're in there" doesn't only apply to Porsches ;-)

[Rick Lee]

Originally Posted by Hugh R

$50K in upgrades/repairs often turns into $75K.

And then add in realtor commissions. Unless the owners have a ton of equity, they might be better of walking away.

[look 171]

How are other houses selling in the neighborhood? Are they moving and what's the estimated time on the market before they sell? The longer it takes to sell, the more it eats into your profit, unless you paid for it in cash. Still, your cash is tied up for some time. its time to walk unless you buy it at 160-170k. Is a loan needed for the urchase? If so, will the bank loan on it?

[rusnak]

It has to appraise for the asking price.

[KFC911]

Originally Posted by rusnak

It has to appraise for the asking price.

But only if a loan is involved. There aren't too many houses on the market around here (based upon my casual observations), and they don't last long....and "cash is king" for houses in that price range...YMMV. Nothing wrong with a "low ball offer" imo....my buddy just "unloaded" one of his houses to investors for a price that I would have considered insulting. He was just ready to move on, simplify his life, and has no regrets either....he easily left 50K on the table in doing so.

[CalPersFatCat]

If $300k is a solid After Repair Value and $50k is a rehab number from an experienced investor who has walked the property, then figure:

$300k minus

$50k rehab
$18k (6% RE commissions at final sale)
$1,500 (estimated local closing costs for title/escrow)

minus
short term hard money for acquisition at 4% of purchase price
interest on hard money loan for the duration of rehab time and time on the market, at 8 or 9%

minus
utilities costs for the duration of rehab time and time on the market
insurance costs for the duration of rehab time and time on the market

minus an expected/acceptable profit

minus whatever amount you believe the property must be discounted vs. other similar properties in order to get the house sold quickly.

= MAXIMUM offer price for the house "as is". This is the MAXIMUM that you can pay for the house.

[rusnak]

Originally Posted by KC911

But only if a loan is involved. There aren't too many houses on the market around here (based upon my casual observations), and they don't last long....and "cash is king" for houses in that price range...YMMV. Nothing wrong with a "low ball offer" imo....my buddy just "unloaded" one of his houses to investors for a price that I would have considered insulting. He was just ready to move on, simplify his life, and has no regrets either....he easily left 50K on the table in doing so.

Well, I can't see a cash buyer paying more than appraised value, so I guess my statement still holds up. The house has to appraise at least at the asking price. Otherwise, a buyer will have to come up with additional equity over the minimum to make LTV numbers work.

And a cash buyer will just cram down the price, otherwise there is no point in using cash.

What is an "acceptable profit" to an investor? That's like asking whether you prefer Advil or Tylenol to treat a headache. The answer is highly individualized, and varies from person to person.

[chrismorse]

With a house that has been neglected for so long, you are likely to find plumbing/electrical/"termite/ rot issues". There are so many "surfaces" that are likely to need freshening that you at least ought to double or triple the $50K cost after adding the above mentioned carrying costs, commissions, utilities and an allowance for ugly surprises.
I have been a contractor for 25 years and seen a lot of nasty surprises, so you really, really need to do the due diligence on this with a good pest inspector and if you are not an experienced fix it guy, hire a good one to do some "real numbers".
Be carefull, let some other investor drink the cool aid.

I have done several million dollars in bug repairs, over the years and very seldom has this increased the value of the property. It is money down the toilet from a prior owners neglect.

Having said that, I own three rentals, manage 8 for my inlaws and do repairs for about 12 units for friends.

Good luck,
chris

[LWJ]

A loser. (says the guy who is trying to buy a 1971 house that needs a ton of work!)

[KFC911]

Originally Posted by rusnak

Well, I can't see a cash buyer paying more than appraised value, so I guess my statement still holds up. The house has to appraise at least at the asking price. Otherwise, a buyer will have to come up with additional equity over the minimum to make LTV numbers work.

And a cash buyer will just cram down the price, otherwise there is no point in using cash.
....

I don't understand where this "appraised value" comes from if there isn't a loan involved for MOST purchases (at least around here) ? In fact, in the past couple of years, I suspect that most sales (cash) in that price range are done that way. I'm a novice compared to many, but I've only had one "appraisal" (loan involved) many years ago...for the rest: "cash is king"....maybe it's different in other parts of the country? I dunno....

[porsche4life]

Where are you hearing about all these cash buyers KC? We closed 3 houses and put 5 more under contract last weekend between 100k-300k and not a single one of them was cash. The closest thing was a hard money loan on a rehab property we have listed.