Most sellers instinctively believe the fixing up a home before is always the way to go, but experts say it all depends on the home, the seller and the preferred time of sale. Motivated sellers may want to shell out big bucks even if the expense isn’t returned in an effort to save on taxes and mortgage payments. On the other hand, if there’s no rush a seller may want to take time to make DIY touchups at low cost. In any event, pros note that large contract jobs rarely make back what they cost at the time of sale. For more on this continue reading the following article from TheStreet.
When lenders are stingy and buyers picky, a seller wants to make sure the home is appealing. So obviously you want to fix all flaws before going to market, right?
Maybe, but not necessarily. The calculation is tricky. Not only does it involve the repairs’ actual cost, but the buyers’ sometimes incorrect perceptions about what those improvements are worth.
Many studies show that home improvements by contractors typically don’t add as much resale value as they cost, supporting the case for tidying and painting before a sale, but not remodeling the kitchen — unless you have the skill to do it cheaply yourself. But these findings don’t necessarily apply in an individual case. If you can get a particularly good deal on an improvement, it may well pay to hire a pro to do it.
A seller who must have a quick sale might be wise to lay out serious money to put the home in tip-top condition. Even if the improvements won’t pay for themselves completely in a higher sales price, that gap could be closed by saving months of payments on the mortgage, taxes, insurance and maintenance.
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When time is not that critical, the seller should do a careful cost/benefit analysis. Hire an appraiser to find out how much value the improvements would add and get a second opinion from a real estate agent who works full time, has been in the business a long time and knows the neighborhood well.
Keep in mind that agents, because they earn a percentage of the sales price, may push for improvements that raise the price even if the improvements’ cost reduces the seller’s profit. Also, agents generally prefer quick sales, which allow them to move on to the next property.
A fix-up also makes sense when there are large variations in the cost of the job to be done and the buyer is likely to over-estimate the cost, says Jack M. Guttentag, emeritus professor of finance at the Wharton School.
"In the case of a septic system, for example, the cost depends on the condition of the soil, and if the seller knows that the condition is favorable and the cost low, it makes sense to fix it before sale," he says on his website, The Mortgage Professor.
The fix-up is also advisable when buyers are unlikely to have the cash to pay for the work after buying the home, he says. Many buyers are in this situation today, because lenders are demanding large down payments and buyers are not getting top dollar when they sell their previous homes. If the seller does the improvement and raises the price accordingly, the buyer, in effect, will finance the improvement at today’s low mortgage rate rather than lay out a lot of cash after the purchase, Guttentag says.
"If a buyer with limited cash had to make the improvements after purchase, the financing costs would be substantially higher," he adds.
Sometimes, he says, it’s advisable to leave the improvement undone so the buyer can choose how to do it, as in a deck replacement. That could even be true of a kitchen or bath remodeling.
When flaws are an issue, hiring an appraiser can be money well spent, Guttentag says. At a minimum, the appraiser’s report will give you ammunition to counter points made by the buyer’s appraiser.
This article was republished with permission from TheStreet.