Tuesday, November 19, 2013

Should You Fix Up a Home before Selling It?

by: Carrie Sokoloski, Real Estate Assistant
Clearwater Montana Properties, Inc.

RIS Media posted an article last week entitled, "The Mortgage Professor: Should You Fix Up a Home before Selling It?" In his article, Mortgage Professor Jack Guttentag brings up some important considerations when deciding whether or not to make repairs prior to selling. Guttentag was inspired to write the article based on his own recent home-selling experience.  Based on my own recent home-buying experience I know that the process of negotiating repairs can be stressful and confusing.

Almost all homes have defects, even if they're only slight.  Homebuyers have become more educated and savvy when it comes to inspecting potential properties prior to purchase.  A serious buyer will likely invest in an inspection. And in most situations when a buyer doesn't hire a professional inspector, they tend to assume the worst about the overall condition of the home, even when they find only minor defects.

Guttentag recommends being realistic about your property's condition when deciding whether or not to make repairs yourself, or lowering your asking price and leaving repairs up to a buyer.  Either way, it's important to remember that just because the cost of a repair is $10,000, doesn't mean that choosing to leave the repair for the new homeowner is going to lower your property's asking price by $10,000.  Likewise, making $10,000 worth of repairs on your home doesn't mean that your home is going to increase in value by $10,000.  The impact of repairs on a home's price varies from repair to repair and can depend on whether the repair is essential infrastructure, wear and tear or simple updating.

In his article, Guttentag sites two circumstances that favor fixing up your property prior to selling:
  1. If there is a large variance between the cost of a fix-up and a potential buyer is likely to over-estimate the repair cost.
  2. If potential buyers only have the ability to make a small down payment and wouldn't be able to pay for expensive repairs after purchase.
Besides being expensive, repairs take time, which can be an issue if a seller, buyer or both are anxious to for a sale to be complete. Keep in mind that time is money and can be used as a negotiating tool for either side of the transaction. When I purchased my home, the sellers were anxious to purchase a new home and happy to leave a few simple repairs.  Since my husband is good with tools and enjoys fixing things up, it was a win-win for both parties and helped us by reducing the overall cost of the home.

In his article, Guttentag explains he sold his house 'as is' because he was in a hurry to close and already in the process of purchasing a new home.  The individual who wanted to purchase his old home was also financially able to make repairs and would rather have a lower mortgage payment and pay for repairs out-of-pocket.  He was lucky that things worked in his favor because this isn't always the case.  Sellers need to be prepared for what may arise during the selling process.

Whether or not the seller decides to make repairs before they put their property on the market, it's important for them to know what repairs need to be made, as well as a cost estimate of the repairs.  This puts them in a better position to negotiate with prospective buyers.  The Mortgage Professor explains that seller-ordered inspections help equalize negotiating power between parties.  In his situation, his property buyer used the inspection to drive down his selling price; something he hadn't anticipated.

Likewise, buyers would be well-advised to hire an inspector to identify any potential repairs that need to be made.  Inspections often reveal repairs that the seller wasn't even aware of, and can help the buyer negotiate from an educated position.  You never know what an inspection might uncover.

Regardless of how repairs and prices are negotiated between a buyer and seller, inspections and a little research can help both parties avoid costly mistakes.

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