Many homeowners call me when they are selling a home that needs repairs. Many homes that have been inherited, have been used as rental properties, or have just been left vacant for long periods of time have deteriorated in condition. Whether it be an investment property or an inherited home, if it needs more than just carpeting and paint things can get expensive very quickly.
Let’s say you are selling a home that needs repairs such as: carpeting, paint, appliances, outdated kitchen, and bathroom. To use an example with some specific numbers we’ll assume the home is worth $150,000 after all repairs, and updates, are made.
Let’s also assume that it will take $15,000 to bring this home up to salable condition. This “salable condition” is also know as an “After Repair Value” or “ARV” for short. Many home sellers make the mistake of subtracting the repair estimate from the after repaired value and coming up with an asking price of $135,000.
$150,000 – $15,000 = $135,000 (asking price)
Is there value here? When you go to work do you expect to be paid or compensated for your time? In the above example the new homeowner has to hire and supervise contractors, deal with payments, design choices, overages, risk, pay the mortgage while the home is uninhabitable, headaches and so on. Why not just buy the same $150,000 house that’s in perfect condition?
Any investor will expect to receive $2 in net profit for every $1 invested. For those of you who have read my article on the Holding costs also have to come into play as taxes, insurance, attorney fees, title search, permits, and inspection fees come into play. Can an investor purchase the above property at $135,000 and still make a profit? No, the mid 2000’s with 30% per year appreciation are over. That bubble popped long ago.
In the above example, purchasing this property with a cash for homes method would result in a loss for the investor. So does that mean that an agreement cannot be reached? Not necessarily, if the home seller can let me make their house payments I can be more generous with purchase price after the rehab and sale is complete.
How do you know what I can do for you? Contact me and ask! I can’t help you if I don’t know who you are or what your situation is.