Renovations And House Price – Reader Question

by Mike Holman

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Dave, who is in the process of buying a house asked the following question in the comments recently

I would appreciate some advice as far as asking price and renovations.
We are currently looking at purchasing an older home that will require 80K. The current owners did nothing (and I mean nothing) to the house and have lived there for 12 yrs. Needs roof, furnace (currently 40 yrs old), all windows, floors need reinforcement, Siding. And this is just the outside. Contractors have quoted roughly 45K to do these items. The rest we would do over time. How should we adjust the asking price?

Cheap and I both agree that he should over-estimate the renos/repairs and subtract them from the market value of the repaired house (not the asking price) to come up with a fair market value. The problem of course is that coming up with the proper market value involves a lot of work looking at houses, seeing what they sell for and trying to learn the market that way.

Two other issues you may run into, particularly if you are looking in a hot neighbourhood, is that other buyers may not estimate the repairs as conservatively which might mean that your pricing model may not be accurate (it will be too low). The other scenario is that sometimes people who are desperate to buy into a particular area but can’t afford a house in good shape will overpay for a fixer. For example if there is an area where a house in good shape costs $600k and a buyer can only afford $500k then they might be tempted to buy a house that needs $150k in renos. Logically, they should only pay $450k for this house (approx) but since there will be some competition for this “entry to the neighbourhood house”, they might pay up to $500k for it just because it enables them to buy the area they want. I’m not suggesting that you overpay to compete with irrational buyers but rather to be aware of them and try avoid a situation where you are competing with them.

He also left a comment regarding his agent:

I agree with the comments on the common lines that agents try to use.
Our agent used the “don’t bid too low or you will insult the selling agent and clients” line this weekend. He also used the “meet them halfway” concerning the opening bid. He also used the “there is interest in the property” line. That was all this weekend. I said to the wife that we have a limit financially. If our 1st offer isn’t accepted, that’s OK. The house will be there a month from now when we return with another offer.

These are pretty standard lines for agents and while you shouldn’t put too much stock in anything an agent has to say, I also wouldn’t completely disregard them. The “don’t bid too low and insult the buyer” has some validity although it should really be worded “Don’t bid too low because you will be wasting everyone’s time including your own”. My point is that just because these lines can be used to further the agent’s own interest – doesn’t mean that everything the agent says is a complete lie.

I like the attitude of coming back in a month to put in another offer. The important thing to note is that while that particular house may or may not be there in a month, there are many more just like it, or even better. There is no such thing as a perfect house.

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{ 10 comments… read them below or add one }

1 Nurseb911

The bottom line, IMO, is that you have to protect your investment by doing what’s best for you. Overpaying simply because the current seller thinks its worth that much or the agent is using sales tactics doesn’t mean that you have to budge a centimetre. Keep an open mind throughout of WHO stands to benefit from the advice you’re receiving and then evaluate what you think it the best option.
Agree with Mike & Cheap – judge what you would pay for FMV and substract your reno costs with an adequate margin of safety. If someone else is going to overpay, let them.

2 Billy

Don’t forget to also factor in extra costs for somewhere else to live during the renovations (or a PITA factor if you plan to live there).

While the list above (windows, furnace, roof(which I assume means shingles)) may be possible while living there, many other things are great inconveniences — electrical, plumbling, kitchens, full on additions, etc.

Depending on the extent of the renos, you may even decide to carry both the old and new house for some period of time. As someone who has done this, it can be stressfull seeing double mortgage payments come out, the bank may want to have a firm purchase on the old house to secure your bridge loan — which means a long closing to overlap the new house renos and a myriad of other stressors.

3 Four Pillars

Brad – good comment.

Billy – very true. The pita factor or the two mortgage factor is yet another thing that some buyers will just ignore.

Mike

4 Nobleea

An idea for showing the seller how far out their pricing is would be to make a reasonable offer, but then put conditions in that they have to install new furnace, roof, siding, windows, etc.
BTW, replacing the windows and furnace might get you a rebate cheque from the government.

I definitely agree that making an offer within your range now and then coming back in a month with another offer of the same (or lower) amount is a good idea.

The PITA factor has been mentioned and it is certainly a big factor. Especially if you’re doing so much work.

5 Mr. Cheap

Nobleea: That’d be a good idea to make a point, but typically its not considered the best idea to get sellers to make repairs. Why? Because they have no vested interested in making sure long term quality work is done. They’ll hire the cheapest and use the cheapest materials as long as it’ll pass inspection.

With respect to the idea of coming back at a later date with another offer: Violent Acres has a great post where she mentions using this strategy: http://www.violentacres.com/archives/121/fleecing-old-ladies

She actually DROPS her offer to punish the seller for not taking her earlier offer :-) I love it.

6 Matt

We just recently bought a house that needs a bunch of repairs and the end result for us will be that in the long term we’ll end up making a lot of money on the property. Buying a fixer even if you might need to put money into the house can be well worth the investment. But you have to know the neighbourhood and the market you’re buying into or you might be wasting your money.

In our case I believe we got the house at a steal because of the few pieces of work that need to be done to it.

7 Four Pillars

Nobleea – I agree with Cheap – I ran into this situation with my first house where the owners put in a new roof and they got the cheapest of cheap roof.

Matt – nothing wrong with buying a fixer but as you say, you have to know what you are getting into.

8 nobleea

I wasn’t suggesting that you actually get the seller to make the changes. More of a tactical move to open their eyes at the amount/cost of work involved. With all the work required, if you put it all as a condition, I doubt the seller would accept.

9 guinness416

You have to have the time too. We lowered/finished our basement a few months ago, and without my husband being between jobs and able to supervize and answer questions it wouldn’t have happened. I work with a guy who bought a fixer and THEN figured out that given their workloads neither he nor his wife would be able to give spec’ing, bidding or performing the project much time at all (and we work in construction….).

10 Mr. Cheap

Guinness: I found the same thing. Got a condo with “cosmetic” work needed (new flooring, patch up walls and repaint). I originally intended to do it all myself as a learning exercise, freaked out when I was going to start and ended up contracting out all the work. Even with hiring people, there was a pretty constant stream of things I had to check out and decisions I had to make (I wasn’t working at the time, between contracts and intentionally focusing on the renos).

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