If you have made the decision to sell your home, you may have also realized how much work the property needs before you put it on the market. Don’t feel bad. Most homes that are listed for sale in the Bay Area need some work before hitting the open market. We live in a beautiful area where the homes are high-end and in high demand.
Hypothetically speaking, let’s assume that you and your realtor have come together and decided that a fresh coat of paint on the outside of the home is necessary. After getting some bids, you come to the conclusion that a new paint job on your home is going to cost around $10,000. If you planned on selling your home for $500,000, this determination may leave you wondering if you should now sell the home for $490,000. After all, can’t the new owner spend the $10,000 that they save on the new paint job. That’s not necessarily the case.
It’s important to understand how to price the cost of repairs into the asking price that you put on your home. Appraisers use the term “entrepreneurial profit” to explain the concept. This basically speaks to the amount of money that the person who puts in the work on the property can expect to make as a result of the work. It’s important to understand that in most cases, a paint job is not just a paint job. It usually includes an upgrade to the landscaping (which increases curb appeal), trimming back any branches that are too close to the home and more.
Ultimately, the market doesn’t view improvement costs on a 1:1 ratio. Instead, based on my personal experience working with buyers and sellers in the Bay Area, it’s usually more of a 3-5x ratio. That further increases the need for sellers to put in the work on their property before they put it on the market.
What do Buyers Expect?
Again, there is no scientific data to support this, and you can’t go to a website, and pull up a chart that shows this. However, I have worked with hundreds of buyers and sellers and have found that most buyers want around 2.5 times the cost of a needed repair knocked off the price of a property. That means that if you were going to sell that $500,000 home that needed a $10,000 paint job, most buyers are probably looking to paying a price closer to $475,000.
Everyone wants to know…
What can you do?
One of the most important steps that you can take when trying to determine the relationship between the cost of repairs and the list price of your home is to work with a real estate agent. It’s also not a bad idea to bring in an appraiser. Sure, this may add a little bit to your personal expenses, but it can give you a better idea of what your home will appraise for. When you combine that information with the comps that your realtor will provide, you can get an even better idea of what repairs you need to pay for and what you can expect your home to sell for.
Ultimately, the best option for you as a seller is to perform the repairs before selling your home. No, this doesn’t mean that you need to remodel the bathroom unless it’s horribly outdated. However, the numbers indicate that paying the price of that $10,000 paint job up front will pay major dividends on the back end of your deal.
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Why Don’t More People Do It?
There are two primary reasons that sellers don’t pay the cost of repairs before selling their home. First, and most obviously, they don’t want to invest money in a property that they plan on selling. Instead of looking at the long-term benefits of investing in the home, they focus on the immediate cost of repairing the home.
This issue is why I have joined a program called Compass Concierge. This is a program that allows home sellers to borrow up to $75,000 to spend on the repairs that their home needs before selling it. Sometimes, sellers don’t have access to the money that they need to fix up the home. In other cases, they simply don’t want to spend it. Compass allows sellers to gain access to the funds that they need to get even more out of their home on the open market.
The second reason that sellers shy away from performing repairs on their property is that they simply don’t want to deal with the hassle. If that’s your line of thinking, consider this: the buyers don’t want to deal with the hassle either. If they are spending hundreds of thousands of dollars or more on a property, they want it to be move in ready.
Before you put off the cost of repairing your home before you sell it, take careful time to consider the numbers that we discussed today. If sellers expect 2.5 times the cost of repair as a discount, it’s safe to assume that spending the money can result in you making 2.5 times what you thought you were going to get out of your home. That means a $50,000 in your home could result in $125,000 more in your pocket at the end of the transaction.
Time to talk to a REALTOR?
