Homeowners commonly wonder if they need to fix or repair their house before selling it.
Conventional real estate wisdom says that you need to fix your home before selling it. Unfortunately, in some situations this is bad advice.
Really, really bad advice.
You may need to fix your home. You may not. It depends.
The situation is much more complex than a simple yes or no answer. It is 100 percent dependent on your personal situation.
For example, did you recently inherit a home that you would like to sell? Are you a traditional home owner who is looking to sell before they can buy a new home?
Context matters. A lot.
For that reason, I am going to share a few tips and provide you with a framework to help you evaluate if you need to fix your home before selling.
Net Profit Matters More
When a client asks me if they need to make any repairs to their home before listing it, I hear several questions. When I’m asked that question I hear:
- What do we need to do to our home to get it to sell for the highest price?
- Is there anything in our home that will turn off a buyer and cause our home to sit on the market longer?
- Is there anything that would prevent our home from selling or causes us to receive a lower price?
- How do we make the most amount of money when it comes to selling our home?
The last question is about net profit — arguably the most important factor.
I found that most people have an underlying assumption about the relationship between price and profit. The assumption is:
Higher Price = More Profit
Said in a different way, the higher a home sells for, the larger the amount of money that will go into your pocket at the end of the transaction.
This is a strong adage. But, in some situations it can fail you. If getting a higher sales price incurs expenses than you may inadvertently lower your profits.
This plays out, for example, when the cost of the repair is larger than the increase in sales price. For example, if you upgrade a bathroom for $3,000 and it raises the sales price by $2,000, then you are at a net loss of $1,000.
It would have been much better — in terms of money in your pocket — to make no changes, fixes, or updates.
Price Versus Profit In Real Estate
Price and net profit are linked, but are not causative. In other words, a higher sales price does not lead to a higher net profit.
It might. Most of the time it does. But not always.
A more representative of reality formula would be:
Current Sales Price + Lift – Expenses > Current Sales Price
This formula can be reworked to come up with a formula like this:
New Sales Price – Current Sales Price – Expenses > 0; where New Sales Price – Current Sales Price = Lift
To put this another way, the repairs we do need to add more value to the home than they cost. It’s that simple. If we put a dollar to fix something, we better get more than a dollar back.
Otherwise, we are losing money. You would be financially better off not doing the repair and listing your Lansing or Detroit home how it is.
This concept is often referred to as your return on investment. While you will hear this word thrown around in your retirement account and stocks or maybe even house flipping, it applies to our scenario.
What’s The Return On Investment?
I laid out a formula for you. You can use it as a framework to determine if making a repair or update is necessary to sell your home.
Your job is to plug your numbers into the formula. If the formula is greater than 0, then a repair is worth it. If you get a number that is less than 0 (negative), then skip the repair.
So, how do you determine the numbers to the formula?
Finding The Price Of Your Home
The most common method for valuing a single-family home is a sales-comparison approach. You find at least three comparable properties to yours, make some adjustments for the differences, and reconcile the information to determine a final estimate of value.
Exception: this isn’t true for new builds or multi-family homes. They may use one of the other common methods, such as a cost approach or income approach.
The sales-comparison approach (any approach, really) requires significant judgement, experience, and access to data to complete. Out of the realm for the average homeowner.
It’s out of the realm of possibility for home owners who are selling a home they inherited or is in probate. In these situations, the home is likely outdated, so making the correct value adjustments is impossible.
Who knows how much a C4 to C3 condition makes in your market? Few people.
The benefit is that this method can be used to determine the current value of a home and the future value of a home if repairs are made.
Finding A PSA Real Estate Agent
A real estate agent can find the value of your home in its current condition and in a future condition.
However, you need to look for a specific real estate agent that has the skills, judgement and experience in determining a home’s value.
You can ask each agent if they have this experience. Or, you can look for a real estate agent that has been certified through the National Association of Realtors as a Pricing Strategy Advisor (PSA).
A PSA certification verifies that an agent has the knowledge to use the sales-comparison approach method. They know how to pick the right comparables, make appropriate adjustments, and reconcile the estimate of their value.
To find a PSA certified agent in your area, you can visit Realtor.com and look for the green little icon in someone’s profile.
Here is a Dolinski Group agent, Alex Craig, who is certified as a Pricing Strategy Advisor real estate agent.
You can also visit the directory at PSAAdvisor.org. You will need to provide the state and the zip code. Then, where it says “certifications, select “Pricing Strategy Advisor”.
I find Realtor.com easier to use, so I recommend that one.
Add Up The Cost Of Repairs
Lastly, you need to know the cost to repair or update your home. Plug it into the formula with your home valuations and you can determine if it is greater than zero.
You can determine the cost of repairs or updates using various online tools and doing some research. It will take some grunt work, but it’s possible.
You can use sites like Angie’sList, Thumbtack, or HomeAdvisor to find the average cost of a repair.
A simple Google search told me how much it might cost to retile a bathroom.
The page offers further information to help me determine my actual costs. For example, it lists the price on a square footage basis — between $2 and $17 a square foot to retile a bathroom.
So, I do some simple math. For example, I might have 100 square feet to retile. I will assume I am going to use a medium quality tile and an average contractor for a rate of $8 per square foot. My total is $800 to retile my hypothetical bathroom.
Add all of those repairs or updates up for a total. Plug it into the formula.
Now, find the value. If it’s positive, the repairs are worth it. If it’s negative, the repairs aren’t worth it.
It’s important to note: not all repairs are equal. This can get complicated when you start to break out each repair. The best way to do it, if you want to maximize profits, is to determine the value and cost of an individual repair.
Add up all of the positive repairs and don’t do the negative repairs. This will get you to the maximum profit number.
Your Access to Capital
Once you determine if the repairs are worth it, you need to consider a few other factors. One such factor is your access to capital.
Repairs cost money. You need to have access to the capital and cash to pay for those repairs. Cheap and few repairs are typically covered with cash or maybe a credit card.
Large repairs are a different story, though. A 10k project repair or update cost is harder to manage.
This price tag might sound shocking to some, but it’s the kind we see with our clients. At the Dolinski Group, we often work with Lansing, Detroit, Riverview, and Grand Ledge homes that are outdated. In some cases, 10k is a drop in the bucket for what a home needs.
On top of that, in some situations, you may not be able to use any capital even if you have a sizable bank balance. For example, a home in probate may need approval before you can even fix up a home. Sometimes the cost of the repairs must come out of the estate itself.
Complicating matters and limiting your access to capital.
With a positive net value, you have to look at your access to capital and cash to complete the projects. This may, at times, involve cutting down the repair or updates list.
Consider The Real Estate Market
There are three types of markets: a seller’s market, a buyer’s market, or a balanced market. The type of market you are in affects what repairs you will need.
In a seller’s market, homes are selling fast, for top dollar. This is often due to a lack of inventory. Sellers experience low competition amongst each other.
As a result, a seller can get away with less updates and repairs than if they were in one of the other two markets.
A buyer’s market and a seller’s market are diametrically opposed. Everything that is true of a seller’s market is the exact opposite in a buyer’s market.
In a buyer’s market, you are required to do far more repairs than if you were in one of the other two market types.
Understand the type of market that you are in. Some repairs in some markets may be absolutely critical, regardless of whether or not they will return a positive net profit.
You can learn about the type of market you are in by reading reports or finding a real estate agent in your area that publishes market updates. You can check out some of our Lansing real estate market updates on our site.
Selling Your Michigan Home As-Is
Maybe, despite what the formula says, you don’t want to complete any repairs. You want to sell your house as it is.
You always have the option to sell your home as-is, regardless of the condition. You might not get the price you want or net the amount of money you want, but it is an option.
There are three methods for selling your home as-is.
- Traditional listing with no repairs
- Cash investor
- Non-traditional sale
Let’s explore each of these to let you know your options.
Traditional Sale
The traditional route is what we are all familiar with. Find an agent, pick a list price, put on the market, do some showings, and hopefully, get some offers.
Pro: It’s simple and takes much of the stress off you. You let your real estate agent handle everything and find a buyer.
Con: The costs can add up and eat away at the profits. If your home is in need of some serious repairs, you’re going to take a big hit going this route.
Cash Investor
This method is similar to the traditional sale route. The difference is that you often avoid real estate agent fees and can close pretty quickly.
It typically works like this: an investor finds the future value of your home after repairs. Depending on the location and the market conditions, they will apply a 10 to 40 percent discount, then subtract the cost of repairs to arrive at an offer price.
Pro: Quick close and you can avoid having to do much with the home
Con: you won’t be maximizing the value of the home fully. Often selling it for 40 to 60 percent of the home’s future value after repairs.
For this reason, we recommend this method for homeowners who have a home where the price of repairs is high and the house can’t be considered move-in ready or the amount of repairs/updates is large. It may be the most convenient route for out-of-state sellers, too, if large repairs are needed.
Non-Traditional Sale
This last category is reserved for the very few as it takes a lot of knowledge and some experience. It involves selling the home on a land contract or a similar vehicle.
Find a buyer who wants to purchase the home and will make the repairs themselves. Essentially, you finance the home for the buyer rather than the buyer using the bank.
Pro: this method leads to the highest sales price.
Con: the complexity creates a higher risk of something going wrong.
Takeaway
Do you need to fix your Lansing, Detroit, or Michigan home before you sell it? Maybe. Either way, to answer that question you need to contact and work with a PSA certified real estate agent. They will help you find the current and future value of your home. Without this key element, you’re guessing.
If you’re in the Lansing or Detroit area, we would be happy to assist you in determining if you need to fix your home and getting your home sold.
