My neighbors are trying to sell a house that needs work. A LOT of work. They moved to a new house a few months ago and their old house has been sitting vacant since.
Why haven’t they sold or rented out their old house? It’s a total disaster!
Well, they let a lot of stuff age over the years (like the paint and kitchen counters). They also started a lot of projects they never finished (like the flooring).
Then there are other problems, like the walls cracking because their foundation has shifted. In short, their house needs a lot of work.
They moved about 30 minutes away but they come up every weekend to do work on their house. They’re hard workers and they’re doing a decent job. They hired professionals to do the foundation but they’re doing most of the rest of the work themselves to save money.
Is this smart? Well, let’s do a little math (these are real life numbers):
Market value of house in current condition : $330,000
Repairs : $37,000
- Floors : $15k
- Granite counters: $5k
- Fixtures $1k
- Landscaping: $1k
- Exterior paint $5k
- Foundation $10k
Opportunity costs (time/labor): ??
Holding costs: $15,000
After Repair Value : $370,000
So my neighbors could have sold their house “as is” for $330,000…but instead spent $37,000 in repairs, $15,000 in holding costs and who knows how much time…so that their house would be worth $370,000…?
It’s clear that my neighbors would have saved months of time and a LOT of money if they had just sold the house “as is.”
So, are you making the same mistake my neighbors are making?
What kind of houses typically need work?
When we look at the marketplace, people trying to sell a house that needs work often fall into a few different buckets:
- Foreclosures. Houses that are in foreclosure often need a lot of work because the owner is under financial stress. If the owner can’t pay the bank, he probably can’t afford the enormous bill to fix the foundation either.
- Inherited Houses. People often have trouble selling inherited houses because many times, their now-deceased owner lived there for a very long time and the house has a lot of deferred maintenance. Inherited houses usually don’t have holes in the walls and cracked foundations, but the inside might be right out of the 1980s.
- Natural disasters. Hurricanes, floods, tornadoes and fires all cause millions of dollars in home damage every year.
Who’s going to buy a house that needs work?
Before you explore your options, you should make a realistic assessment of who would want to buy your rundown house. You might also want to think about who you’d sell your house to, but I recommend you try to avoid getting emotional.
Some people don’t want to see their childhood house turned into a rental, or torn down, so they’ll accept a lot less money to sell to a buyer they “like.”
I believe this is a mistake.
After all, what will impact your life more: What happens to your former house, or $10,000 more in your bank account?
You can’t even guarantee the buyer you “like” will do what you want.
There are two types of buyers for a house that needs work: investors or homeowners. Let’s look a little closer at these two groups.
Buyer #1. Homeowners
What homeowners are looking for
Homeowners will plan to stay in the house for years to come, and buying decisions are largely influenced by the wife.
- External factors. She’s thinking about the school district, access to stores and services they like, and safety.
- Internal factors. Within the home, she is looking specifically at the kitchen and bathroom. She will consider the floor plan, though not as highly as the kitchen and bathroom. She’s looking at every room, trying to ignore your furniture and envisioning her own furniture in its place.
How homeowners value homes
Homeowners are much less price sensitive than investors, largely because they’re highly weighting external factors like the school district and because they see this as a long-term decision.
For a house that needs work, they’re doing mental math on how much it will cost them to fix the house up to their standard. This mental math is often WILDLY inaccurate.
What homeowners plan to do with your rundown house
A homeowner buying your home will start working immediately to mold the house into their image of an ideal home. They will often rip out the carpet you just put in to put in hard wood flooring! Or they’ll repaint rooms you just had painted.
How homeowners will pay for the house
Someone buying your house to live in will usually seek financing through traditional means, a 15 or 30-year loan mortgage.
Most buyers will opt for an FHA 203(k) loan, which will provide them with funds to complete repairs. This means the process will take 60-90 days while the bank approves the loan.
It also means the deal could fall through, since there is a risk the bank’s appraisal will come in much lower than the agreed upon purchase price. This is especially true for houses that need a lot of work. The most important limitation here is that many buyers won’t be able to get any financing if the house is in an unsafe condition.
Buyer #2 : Investors
What investors are looking for
Investors are looking for houses that need work because they want to make it into a rent house, or because they want to “fix and flip” it. There are a lot of different factors that will go into whether they’ll make your house a rental or a “flip” but needless to say, they’re usually not looking at your house as a place to settle down.
- External factors. Things like school districts and crime rates are important for both rentals and “flips” but they will not dissuade an investor from buying a house that needs work.
- Internal factors. Different investors have different amounts of risk tolerance regarding a house’s state of disrepair, but for many investors, the more work a house needs, the better. This is because there is a lot less competition, and obviously the price will be lower.
How investors value homes
Professional investors will be much more sophisticated in how they value a house that needs work. They’ll get professional bids from contractors, independent appraisals, and then conduct an analysis to see how much the house is worth to them. The formula is basically a version of this:
After-repair value – repair costs – transaction & holding costs – profit margin = value of house
What investors plan to do with your rundown house
Investors will often have their contractors begin repair work on the house immediately upon closing. They’ll make repairs to make the house sparkle. Many often do things you wouldn’t think of, like install new toilets, although they’ll rarely “over rehab” the house (i.e. make it too fancy).
How investors will pay for the house
Investors will offer you cash, and a fast closing, often in less than a week. They do this to give them an edge over other investors and homeowners and make themselves attractive buyers to homeowners who need to sell their homes without hassle.
Which buyer should you sell your rundown house to?
If most of the work your house needs is cosmetic, it’s in a good location, and you want to get top dollar, you should pick homeowners as your target buyer.
If your house needs a large amount of work, is dangerous, or if you need to sell your house with the least amount of hassle, you should try to sell your house to an investor.
How to sell a house that needs work to a homeowner
You’ve decided you want another homeowner to buy your house. So now what? Now you need to do an analysis to figure out what you need to do to get it ready. In many cases, you won’t need to do much, as most fixes and upgrades won’t add enough value to the price of the home.
1. Get expert opinions
The first step will be to get expert advice on each aspect of getting your house ready. The first person I’d call is a local realtor.
Real Estate Agent
Call several real estate agents and ask them for the following analysis:
- Comparative Market Analysis (CMA). A CMA will tell you exactly what your house can sell for in the market without any upgrades and fixes. The agent will take into account recent sales in the area and compare your house to these recent transactions. Unlike Zillow, which will simply look at your house square footage and a few other metrics, the real estate agent will take into account other intangibles like the type of kitchen counters you have, what kind of flooring you have in each room, and other factors that will affect how a buyer sees your house.
- List of comparable upgrades. If it’s not included in the CMA, ask the agent for a list of comparable amenities in the neighborhood. If every house that’s sold in the last year has wood flooring, while you’re still sporting shag carpet throughout, that will bring down the value of your house. The opposite is true as well. You might think you need granite counter tops to really make your kitchen stand out, but if most of the houses in the area have laminate counters, you’d be wasting your money to get granite.
- Find out how much value these upgrades would add to your house. Before you spend $15,000 putting in a new diamond toilet, you might want to know if your house value will go up by that much.
- Other advice on selling your house. A good agent should be able to point out things you would have missed that buyers will be looking for and will have good advice for making the house show well.
Your buyer is going to have a professional home inspector go through your home with a fine- tooth comb. If it clearly needs a lot of work, the inspector is going to be even more vigilant. It’s not going to be a good feeling to get your house all fixed up, on the market, and gather offers, just to find out the foundation is off or there are electrical issues in the attic. The smart thing to do would be to preempt this by getting your own inspector before going on the market. Then if there are any safety issues or game-changers, you’ll know about it. You’ll also know how hard it will be for a buyer to get an FHA 203(k) loan if that’s how they’re financing the purchase.
Once you’ve gotten that information from the realtor and home inspector, you’ll have a better idea what kinds of repairs and upgrades will be needed. Call a General Contractor (GC) or specialized subcontractors and get bids on all the upgrades and fixes your house needs.
Do the math
Finally, you should look at the cost of repairs and compare that to the extra value your realtor says it will bring. For example, if it’s going to take $10,000 to replace the roof but will only increase the value of your house by $5,000, its obviously not a smart choice to get the roof repaired. Market studies have shown that most remodeling doesn’t pay back the original investment. But all markets are slightly different so you should consult your local experts to see if that is true in your case.
Make necessary repairs
If you’re like most people in most situations, you’ve found that it isn’t going to be worth doing many (or any) repairs or upgrades. Have the discipline to stick to your analysis and what the experts have told you. Many sellers are embarrassed by the way their house looks or lie to themselves that if they can just make a few fixes, their house will be much more valuable.
Some of the repairs needed you can do yourself. Some you’ll have to hire a professional. Even if you’re short on cash, remember, time is money. You don’t want your house to sit for another month while you replace all the carpet to save a few bucks.
Focus on the homeowner as buyer
Finally, you will have the information you need to get your house ready to bring to market. Remember to always keep in mind the buyer you’re trying to target. Make the house as blank a slate as possible, so that the buyers can easily imagine themselves living there. You want them to see their kids riding their bikes on the driveway and swinging out back. You want them to envision themselves hosting parties or snuggling up in front of their entertainment system. Here are some tips to help them do that:
- Clean the house. Just because the carpet is worn doesn’t mean you should have cobwebs on the ceiling
- Get rid of as much “stuff” as you can, even unused furniture. Most people stack this stuff in their garages while their house is on the market.
- Mow the yard. Focus on the front yard. Yes, your house may need a lot of work but people will just keep on driving if your front yard is a disaster.
- Highlight the positives. Leave flyers showing how the schools are rated highly or information on neighborhood amenities on your kitchen counters for buyers to take with them.
- Be honest about the work that’s needed. I also advise clients to leave an overview of the major repairs that need to be done and the lowest estimate you’ve received. Only include big things. No need to include a $5,000 bid to repaint the house as many buyers will envision themselves doing that.
How to sell a house that needs work to an investor
You’ve decided that you want to try to sell your house that needs work to an investor. Either it is way too damaged to appeal to most homeowners, or you need a simple and fast cash offer. Now you need to get it ready to appeal to investors. The good news is no matter how jacked up your house is, there are investors out there that will line up to make offers.
What I’m talking about is selling your house “as is.”
Technically, when you list your house “as is” it means you are selling it in its current condition and you won’t make any repairs. It’s code for “take it or leave it” and also indicates that the house might need lots of repairs. A house in good condition is never listed “as is.”
1. Provide contractor estimates
Most investors will have their own contractors give estimates on how much it will take to fix things. Still, having your own estimates will make it easier on the investor, plus give you some firepower during negotiation. If an investor has a bid to fix the foundation for $10,000, but you have a bid for $5,000 from a reputable foundation repairman, you can push back on an offer by sharing this information with the investor. It’s not guaranteed, especially if the investor has his/her own “guys” but numbers talk and most investors will want to go with the cheaper option (for similar quality work).
2. Appearances matter
I learned a phrase early in my Army career: “perception is reality.” An investor won’t be impressed that your living room smells like lilacs, but if it smells like cat urine, he’s automatically deducting from the offer price, cause he’s going to have to pay big money to remove that smell. The same goes for overgrown yards, and clutter. You can fix that stuff with a few hours of labor, but the investor isn’t going to do that. He’s going to hire someone to do that for him.
3. Be realistic about price
Your home may be worth $200,000 according to Zillow, but does Zillow know your bathroom is full of mold? Be realistic in what you’re going to have an investor pay for your house. Most investors are not going to lift a finger doing any work. They’re going to outsource everything, from mowing to painting to sweeping. They are including all of this stuff in their calculations for what they’re going to offer. On top of that, there is a huge risk factor with buying a house that needs work. It’s not uncommon that a home inspector will miss important, costly things, like mold in the walls, or faulty wiring in the attic. The investor has to account for this, because he’s stuck holding the bag once title has transferred. Finally, every investor needs to make money, after all that’s how they feed their kids.
4. Focus on the investor as your buyer
Selling a house that needs work to an investor is much different than selling to a homeowner. Here are some tips to help your house sell for more cash and faster:
- Make them compete. Don’t immediately take the first offer you get, and make sure you get multiple offers. Investors will have different risk tolerances and intentions for the house. Someone that is planning to turn your house into a rental might be able to pay more than an investor who wants to fix and flip.
- Negotiate beyond the price. Offers from homebuyers will not differ much, because they’re usually all boxed in by government standards for the mortgages they’re getting. Investors usually aren’t going through banks, so they have more flexibility with terms. An investor’s offer will include other things beyond price that might be important to you. For example, you might want a quick close, or you might even want to continue living in your house for another 6 months before the investor takes over. These things can be negotiated with an investor.
It can be extremely stressful to try to sell a house that needs work. Experience shows that putting a lot of time and money into fixing up the house is usually a bad idea. The key is to figure out who would be most interested in buying your house: someone who is going to make it their home, or an investor. Each of these buyers will be looking for different things when buying your house, and each should be considered when getting your rundown house ready to sell.
Want to sell a house that needs work?
If you need to sell a house that needs work, contact us. We’ll give you a free market analysis and talk to you about your options. We can either buy your house outright, or refer you to our network of realtors who specialize in selling rundown houses to homebuyers.