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September 07, 2009

Shoud you buy or sell a home “as is”?

Should you update and stage your home, or sell As Is?Most homes are neither fully original nor fully remodeled. Most homes are “somewhat updated” or “somewhat remodeled”. To get them into shape to pass inspections (there’s not really a pas-fail grade, it’s more “items of concern”, health and safety issues, or serious structural issues, and big cost items), most homes will require some work. And this is often a surprise to homeowners. Sellers don’t usually know that they have termites, for instance. They often don’t realize that the electrical system they’ve been living with isn’t entirely safe. They won’t know until and unless they get the home professionally inspected.

Silicon Valley real estate buyers strongly prefer a remodeled home that is not in need of any repairs. If a kitchen is 15 – 20 years of age or older, most home buyers will think it needs to be remodeled. Water heaters last about 10 years – so if yours is 9.5 years, they’ll want (expect) it to be replaced, too.

Treating pests, correcting issues with electrical, roof, updating countertops, appliances etc. can often run 1 – 3% of the purchase price. This is really in the range of normal.

Then the only question is this: who will pay that 1 – 3% to get the home into ideal condition?

As Is home sales shift the risk (and potential return) to the buyers.When the sellers do the repairs, updating (and staging), often they recoup far more than that amount because buyers feel confident knowing that there are no major issues or concerns. When the buyers pay for the improvements to the home after closing, often they get a better deal on the house. It’s a risk – return ratio. Buyers will pay more when they feel sure that the home is in good shape (and it looks better too). They pay mcuh less when there’s the unknown of “how much will it cost to fix it?” and when they have to live through doing the work.

Let’s look at a couple of hypothetical examples using a million dollar property for the sake of easy numbers.

(1) A Los Gatos house has been updated and remodeled for the most part, but it needs about $20,000 worth of repairs (that were previously unknown to the seller), between a roof tuneup, pest work (Section 1 work on the termite & pest report), a couple of electrical issues, replacing some appliances that currently function but are really not at all close to new, etc. It could also use some fresh paint, carpet, and a little work on the landscaping to show at its best. Altogether, it’s about $30,000 worth of repairs, updating, and “freshening up” to sell.

In this hypothetical case, one seller will do the repairs and updating and one won’t.

The seller who doesn’t do the work expects that the home can sell for $970,000 since it should be worth about 1 million if the work’s done. The seller’s thinking goes like this, “I’ve been living here and it’s just fine. I might pick out a paint or carpet color that the buyer wouldn’t like.” Or “I’m not going to stage the home, or inspect it. What if it doesn’t sell? I’m going to sell As Is, but only if I get my price.” That home might eventually sell in the low 9’s, if it sells. Maybe at $920,000 to $940,000.

The seller who does the work and prices it aggressively (a little on the low side, under a million and maybe as low as $975k) gets multiple offers, driving the price up over one million dollars. Depending on the number of offers, it might sell at $1,020,000. That would be a pretty good return for $30,000.

(2) Now let’s consider the 100% original home vs the fully remodeled one.

If a fully fixed up home sells for $1,000,000 and the same floorplan in the same neighborhood is clean but original and it would take about $100,000 to bring it up to the level of the remodeled home (it needs a new kitchen, new baths, new furnace, water heater, pipes, etc.), a buyer will NOT pay $900,000 for it. No, the buyer will want an additional discount for the unknown, for having to arrange the work, for having to live with the construction etc. That home will probably sell for more like $850,000, perhaps $830,000. You may not think it’s a “fixer upper”, but the buyers will. It’s what most of us would call a “cosmetic fixer”. The home’s not falling down, but it needs a lot of work.

If you’re the seller, you may not have the time, energy and money to do the remodeling – but realize that you can’t sell for what it is worth per se. You will have to discount it more because of the risk and hassle.

Buyers, sellers often don’t think they should have to take as big of a discount as you want. Sellers won’t part with that “could be a million dollars” home in the 700s. But the good news is this: if you do the work, you should, in most cases, have great instant equity. You won’t have as much competition. (In both examples, of course, assuming that prices are flat or better, not declining.)

Also factor in the real estate market conditions:

When the market is flat such that prices are either not changing or appreciating, it is usually better for sellers, if they want to net more money, to do the repairs and staging. Homeowners, even if you have periodically updated your home and you think it’s in perfect shape, please understand that there will probably be repairs and improvements to make in order to maximize your return on the home sale. Mentally budget up to 3% of your home’s value, though most likely if you haven’t deferred work, it should be closer to 1 – 1.5%.

Often sellers don’t want to do the work, and in many cases they don’t have either the energy or finances to do it. However, when they do have the work done, it is usually greatly to their benefit. I once had a Santa Clara listing and the seller agreed to do $7000 worth of minor staging and repairs and that brought a sales price of $20,000 more – about three times the “investment” returned just a couple of months later.

If the market is depreciating and prices are falling, it is often better to get the home on the market quickly since the time spent on improvements will often cause a loss that is greater than the value of making the imrovements would bring.

Home selling in Silicon Valley book by Mary Pope-HandyIf you are interested in improving your net from a home sale or in paying less for a property, please contact me and we can discuss your plans and strategy. If you are thinking of becoming a Los Gatos, Saratoga or San Jose area home seller, please also see
Get the Best Deal When Selling Your Home in Silicon Valley, my book. If we meet, I’ll be happy to give you a copy of it with my compliments.