When Should Sellers Perform Renovations/Repairs?

 

Informed sellers know that it's most often best to put a home in cost-effective marketable shape prior to listing it. You might think that they're crazy, but some buyers almost fall in love with a house, but are held back by a single negative feature about it that they assume will not be resolved by the seller, sometimes never even taking a 2nd look even if the seller states that the problem has since been resolved & they have not made an offer on another home yet. By that time it can be out of sight and out of mind. By doing cost effective work up front, even if they hire out all the work, sellers should make higher net profits than if they left it alone. Of course, not every home has work that needs to be done, but most often there are some items that I recommend that the seller does. There are many agents who will not make recommendations for work that obviously needs to be done simply because they want to get the listing & know that the better that they say the house is and the more they say that it's worth (regardless of reality), the more likely that many sellers will list with them. The most common reason why sellers do not list with me after a listing appointment at their home that I have found is my honesty in telling them what they don't want to hear. Conversely, there are other clients I've had where they found my honesty to be one of my strongest qualities because so many people in life will simply tell you what you want to hear & I refuse to do so.

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Done ineffectively, attempting work on a home prior to a sale can result in more harm than good, such as a bad looking DIY job (as I have seen on multiple occasions, even though on others DIY looks great) or renovations/repairs that are not cost effective (such as putting a pool in the backyard) can also be a way to shoot yourself in the foot. Done effectively, some flippers make a living, as you may have seen with various shows on HDTV like "Flip or Flop" where the best deals are often in the worst shape & the greatest need of cosmetic & other updates. I have helped buyers to purchase investment properties & continue to assist investors. Even the home I purchased was a foreclosure that needed a lot of work because it was such a great deal. I was able to gain essentially instant equity following the renovations/repairs even though I had most of the work contracted out. Most buyers are not willing to go to the lengths that I was, but when they do, they want a deal, and if a home is not priced well, they'll pass it by for another one that is or make a lowball offer. If a home that needs $20k worth of foundation work, for instance, where the after repair value is $200k, an investor who wanted to flip it would in most cases be a fool to buy it for only $180k. If he did that, he wouldn't make any money when he went to resell it & he would have spent lots of time involved in a transaction and potentially come out of it with nothing to show for it. In addition, a home purchase involves risk, so he could in the end even come out of the final transaction at a loss. In order to be a successful investor, in most cases, he would have to buy it for significantly less than $180k. Also, many standard buyers would not only be turned off by the $20k worth of work needed but wouldn't even be able to qualify for it on the mortgage that they are planning on using. One of the first properties that I ever sold was a case where we told the seller what needed to be done to maximize the profits, but they were unwilling to have the work done. The buyer that, months later, got under contract to buy the house requested that certain work is done, and the sellers agreed. When it was all said & done, someone assessing the value of the property contacted me about why it sold for so little. I had to tell him that the sellers had initially refused to do the work that was needed to be done and that if they had done the work that they eventually did after it was under contract prior to listing it. If they had done as we advised, it likely would have sold faster and for more money, yielding the sellers higher net profits. For those that want to play hardball with buyers regarding work that needs to be done, wanting to do as little as possible, it's important to know that sometimes a buyer will not respond with a counter to a seller's counter regarding items of repair, but will simply reject it and get out of the contract rather than deal with the hassle of what they believe is a stingy seller. When I represent sellers, I want to maximize the seller's profits while also not pushing away a prospective buyer from a deal if I feel that they are the best buyer for the house. It's important to know that in some cases, none of the options below are best, and an as-is sale is the seller's best recourse, such as those who need to get their property under contract and closed in less than 40 days from the day that they contact me in order to avoid foreclosure. 

 

While some sellers have the capital to get work done in cash through contractors that they pay, others do not have the cash to do that, and many are unaware of some of the alternative approaches to attaining those funds in order to maximize their net proceeds at closing.

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It's also important to note that, in the event that the seller would be taking a loss, I sometimes advise sellers to rent out a home prior to sale to put themselves in a better position to sell. While I don't personally manage properties, even for my own property, it's a viable option & I can refer you to others like Property Management by Garrett that does.

 

Options for getting loan proceeds paid prior to closing for sellers:

 

1. Garrett Realty Partners Investor Opportunity for Limited Renovations – In partnership with 22nd Century Contractors, an affiliated business of Greg Garrett Realty, here the work, if approved (equity in a home is very important for approval as well as agreement by the seller to the terms), would be done by 22nd Century Contractors, with the proceeds of the sale funding the work plus a financing fee. This option would include fairly simple language agreed to in advance within the normal paperwork (i.e. the 22nd Century Estimate as well as addendums made in advance for reducing the price based on activity – sometimes addendums that are signed in advance are not needed but multiple timed reductions are included for worst case scenarios), such as price reduction strategy based on showings and contracts. Tprotects the contractors from sellers with unrealistic expectations.

2. Home Equity Line of Credit – here you would work with a bank to get equity from your home in the form of a check. You could then pay it back following selling your home.

3. Garrett Realty Partners Investor Opportunity for Extensive (i.e. $50,000, etc.) Renovations – like the GRP IO for Limited Renovations, except here the seller would sign a Renovation Loan Promissory Note that includes 12% annual interest on the repairs starting to accrue 30 days after completion of the work. Here is the current template at the time of this writing. 

4. Alternative viable methods (especially if you have good credit in many cases) include the following:

   1. Credit card(s) with <12% interest rate on purchases or balance transfers (including any transfer fee) in situations where the utilization rate while carrying a balance would not too negatively impact credit (especially if there was a 0% APR or another low promotional period of 6 months or more as well as a sign up bonus, which can sometimes be worth thousands of dollars for high spending levels. I am currently working toward a sign-up bonus worth over $3k after $50,000 in spending on one card. With another card I have a balance transfer promotion where, if I wanted to, I could be getting a 2.99% intro APR period for 12 months with no transfer fee)

   2. Fixed rate personal loan with <12% interest rate with no activation fees

   3. Getting involved as you can to do some if not all of the work yourself based on your funds/skill set where the work does not appear DIY (I have seen some botched DIY jobs by sellers so it's important to know your limitations, especially if it would be costly to completely redo the job based on material cost); when I did renovations to my own home as part of a renovation mortgage, while most of the work was done by contractors, I did some of the low skill & minimal tools jobs, including stump removal, cutting down trees, other landscaping, gutter cleaning, & installing LED bulbs & window blinds. In some cases, I decided what I was going to do myself after seeing the price. My wife and her mother did a lot of work on the kitchen countertops and cabinets.

   4. Reverse auto loan or other secured debt at <12% interest rate

   5. Borrowing from close friends or family, such as parents

   6. Selling items of value that you don’t need, such as a car with a high payment and replacing it with a lower value yet reliable car purchased in cash ideally or financing if purchasing in cash is not an option (I’ve never purchased a car with financing, and never plan to, having purchased cars ranging from $600-$9000). If going this route, I recommend a > 5-year-old, low mileage, high MPG, well rated individual car that is from a reliably rated brand.

   7. In some cases, there are free or greatly discounted programs available to sellers to have help for their home's repair, often subsidized by the government &/or ran by a non-profit. The lower the income the seller, the more likely that they will qualify.

5. Alternative methods that I don’t recommend include the following:

   1. Credit card at >12% interest rate &/or where the money put on renovations would make your utilization high enough to substantially temporarily lower your credit score if you expect to need your credit during the time of sale (i.e. for another home purchase)

   2. Loan sharks – while some may laugh at this notion as obviously unwise, a friend of mine did contact me for money (I said no) that she needed to pay to loan sharks once.

   3. Switching from a car to a motorcycle or scooter to gain immediate capital or lower payments – the fatality and injury rates are too high in my opinion