Author Topic: Math of selling house as-is or doing repairs  (Read 2508 times)

Spondulix

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Math of selling house as-is or doing repairs
« on: August 17, 2021, 12:21:06 PM »
I'm looking at the potential return of investment for home repairs when selling over the lifetime of a loan. This is theoretical numbers/scenario - I'm just having a debate with DH about it. Numbers are high cause we're talking homes in Los Angeles:

If I sell a home (and do no repairs) that requires a new home loan of $750k (2.8%), the loan will cost $1.1 million over its lifetime
If I sell and do $50k of repairs with a 70% return rate (the average for this area), the new loan would be $665k, or $975,333 over lifetime

So, the true investment on that $50k would be the profit ($35k) + what was saved on the loan ($124,667), or $159,667. That sounds like a lot, but I'm calculating ROI of 3.95% yearly over 30 years (if I did the math correctly).

Even before working out the math, my husband was arguing that it's not worth the effort to do upgrades in a sellers market, and to put the money in an investment instead. If the return really is 3.95%, he's probably right. Any thoughts?

« Last Edit: August 17, 2021, 12:22:40 PM by act01 »

lutorm

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Re: Math of selling house as-is or doing repairs
« Reply #1 on: August 17, 2021, 12:55:49 PM »
$50k of repairs with a 70% return rate (the average for this area)
Are you saying repairing will yield a 70% return on investment, not that you'll get 70% back of the 50k?

I'm not at all very knowledgeable about real estate economics, but I thought the conventional wisdom was that you almost never get your money back on repairs, let alone make a 70% ROI. At the very least, only very specific kinds of repairs would give that return.

bacchi

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Re: Math of selling house as-is or doing repairs
« Reply #2 on: August 17, 2021, 01:05:15 PM »
$50k of repairs with a 70% return rate (the average for this area)
Are you saying repairing will yield a 70% return on investment, not that you'll get 70% back of the 50k?

I'm not at all very knowledgeable about real estate economics, but I thought the conventional wisdom was that you almost never get your money back on repairs, let alone make a 70% ROI. At the very least, only very specific kinds of repairs would give that return.

Especially in this market, where contractors are charging a premium.

If you can do repairs yourself, and it doesn't look DIY, then you might get a positive return. Otherwise, let the buyer do it.

six-car-habit

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Re: Math of selling house as-is or doing repairs
« Reply #3 on: August 17, 2021, 01:11:56 PM »
It's not obvious to me what you are asking here -
 
 Are you possibly putting 50K into a home , just before you sell it ??  [and think the upgrades will be only worth $35k at sales time ]
 Or are you buying a home that needs $50K of repairs ?

  If you are selling the home , either with or without repairs, what does it matter to you, what the buyer pays over the life of their loan.

  Are you buying a home that either -
 a]  Needs a loan of $750k to purchase , because it is in pristine shape...
    or
 b]  Needs a loan of $665K to purchase , because it also needs repairs to the tune of $50k , [ so $715K upfront investment ]

yachi

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Re: Math of selling house as-is or doing repairs
« Reply #4 on: August 17, 2021, 01:14:30 PM »
It's hard to make sense of these numbers, but what @lutorm says is true.  Very few home improvement situations have a positive return, so if you spend 50k renovating a kitchen, you might increase your house's value by 35k (you get back 70% of what you spent).  The big benefit is you'll sell your house sooner, but in a sellers market you might spend more time waiting to finish the repairs than the house would take to sell.


Current condition appraisal: $700,000.  Depending on the buyer, this home might need a loan of $750k (700K to buy the house, and 50K to repair the house)
Appraisal after 50k of repairs: $735,000.  This house would need a loan of $735k.

former player

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Re: Math of selling house as-is or doing repairs
« Reply #5 on: August 17, 2021, 01:27:53 PM »
There is a difference between repairs and improvements/upgrades.

Buying property and not keeping it in good repair (no leaks from roof or plumbing, safe electrics, paint as necessary for preservation, no infestations, keep any garden under control, etc.) is an excellent way to lose money.

Fancy upgrades to current fads (granite worktops, grey bathrooms, etc.) is a complete waste of money.

AccidentalMiser

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Re: Math of selling house as-is or doing repairs
« Reply #6 on: August 17, 2021, 01:35:17 PM »
There is a difference between repairs and improvements/upgrades.

Buying property and not keeping it in good repair (no leaks from roof or plumbing, safe electrics, paint as necessary for preservation, no infestations, keep any garden under control, etc.) is an excellent way to lose money.

Fancy upgrades to current fads (granite worktops, grey bathrooms, etc.) is a complete waste of money.

This.

Every house, every market, every repair or upgrade is different.  I sold a house last year and did 3k worth of carpet and 1k worth of paint work to it just before sale.  We had been remodeling and upgrading the house for years.  The downstairs was nicely done, clean and tidy.  The upstairs looked really bad compared to the downstairs.  It was a no brainer to do this work before selling.  We sold the house for full asking price in 12 hours in a not-really-hot real estate market. 

I know your question was hypothetical but it's so hypothetical that it can't be answered without making possibly erroneous assumptions.

dhc

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Re: Math of selling house as-is or doing repairs
« Reply #7 on: August 17, 2021, 05:37:16 PM »
It sounds like you're forgetting about opportunity cost. If you don't put the $50k towards repairs, you could:
  • Invest it: almost certain to come out ahead
  • Put it towards equity in the new house: certain to come out ahead (because it would be $50k of equity instead of $35k)
« Last Edit: August 17, 2021, 05:41:23 PM by dhc »

ChpBstrd

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Re: Math of selling house as-is or doing repairs
« Reply #8 on: August 18, 2021, 08:01:31 AM »
It sounds like you're forgetting about opportunity cost. If you don't put the $50k towards repairs, you could:
  • Invest it: almost certain to come out ahead
  • Put it towards equity in the new house: certain to come out ahead (because it would be $50k of equity instead of $35k)

I agree. Not accounting for the opportunity cost is why their math doesn't seem to agree. Over the term of a 30y loan, those $50k could grow into a ton of money if invested elsewhere. This ton of money is offset by the amount of interest paid on the mortgage. That means if the $50k can earn more than the mortgage interest rate, it would be more profitable to invest it rather than applying it to housing.

But I think the mystery is why do home buyers not apply a sufficient discount to structures that need remodeling? In a perfectly rational world, wouldn't a home needing $50k in remod costs be worth exactly $50k less than an identical house that already had that work done? Why is it, in fact, that the house that needs $50k in work is only $30k less expensive? Why are buyers seemingly more interested in paying these costs out of pocket rather than rolling the cost of these upgrades into their super-low-rate mortgage?

I can think of 3 answers, in order of importance:
 
1) Lots of people are looking for "bargain" housing in areas of higher socioeconomic status, better schools, and lower crime than they could otherwise afford. In exchange for these things, they are willing to live with a dated kitchen or bathroom forever. Competition among such buyers is intense, which shrinks the discount for houses that need a remod.

2) Contractors and craftsmen buy houses too, and they can DIY these remods for much less than the $50k you'd spend hiring them. Thus, they might only be willing to pay an extra $25k to not have to do the job themselves over a few weekends.

3) If you do the work before selling, you deprive the new owner of the opportunity to make their own design decisions. They have to live with elements of your decisions they don't like. E.g. color of countertops, arrangement of tile. Thus they apply a discount to the value of the work because it's not exactly what they'd have done.

YttriumNitrate

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Re: Math of selling house as-is or doing repairs
« Reply #9 on: August 18, 2021, 08:28:14 AM »
But I think the mystery is why do home buyers not apply a sufficient discount to structures that need remodeling? In a perfectly rational world, wouldn't a home needing $50k in remod costs be worth exactly $50k less than an identical house that already had that work done? Why is it, in fact, that the house that needs $50k in work is only $30k less expensive? Why are buyers seemingly more interested in paying these costs out of pocket rather than rolling the cost of these upgrades into their super-low-rate mortgage?

I can think of 3 answers, in order of importance:

I'd also add that in terms of remodeling, people's tastes/desires are different so there is no single set of remodeling wants.

For example, in the following post JeromeDawg states "the entire second floor and stairs have older carpet that needs to be replaced. The current owners have dogs I believe and the carpet didn't seem to be in the greatest shape." While JeromeDawg may want the carpet replaced, as someone with a big fluffy dog that sheds everywhere, the carpet looks fine to me in its current condition.

https://forum.mrmoneymustache.com/do-it-yourself-forum!/hardwood-vinyl-laminate-flooring-floating-over-tile-etc/msg2885041/#msg2885041

lutorm

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Re: Math of selling house as-is or doing repairs
« Reply #10 on: August 21, 2021, 05:36:32 PM »
Yeah, I think this is a big reason why renovations don't pay off: the buyer likely has a different idea of what they want than you do, thus valuing it less. Repairs, on the other hand, you'd think would be accurately discounted.

Spondulix

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Re: Math of selling house as-is or doing repairs
« Reply #11 on: August 21, 2021, 08:10:42 PM »
It sounds like you're forgetting about opportunity cost. If you don't put the $50k towards repairs, you could:
  • Invest it: almost certain to come out ahead
  • Put it towards equity in the new house: certain to come out ahead (because it would be $50k of equity instead of $35k)
Yes this - my husband was saying if we invested that $50k for 30 years it would be worth more than what we saved over the lifetime of a 30 year loan… and given compounding, you both are probably right. Earlier this year I paid off my student loans using interest on investments I made 10 years ago. The home loan interest rate would likely never catch up.

Dicey

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Re: Math of selling house as-is or doing repairs
« Reply #12 on: August 22, 2021, 02:47:10 AM »
Ha! We flipped a house in 2018-2019, doing a studs-out remodel. We did major foundation repairs, removed a fireplace and cracked chimney, rewired the whole house, installed a new kitchen, baths, laundry, etc. Inside the house, the only thing that wasn't completely new was the staircase. We have mad DIY skills and we do this as much for fun as profit. We made very good money on the project and got a lot of satisfaction out of taking something old, ugly and dangerous and creating a safe haven for a new young family. However, the house has appreciated so much since we sold it in late 2019, the new owners have had more appreciation, for basically doing nothing, than we got for doing all that work. Go figure. Of course, they only have paper profits, we got cold, hard cash, so there's that.

The answer to your questions, such as they are, is unknowable.

Metalcat

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Re: Math of selling house as-is or doing repairs
« Reply #13 on: August 22, 2021, 07:16:46 AM »
When people ask these questions, they're usually looking to justify renovations as "investments" as opposed to the expenses that they really are, and doing some mental gymnastics to justify the cost.

You will need to share more info for us to give you valid input l, but here's the basic run down on renos as an "investment".

Repairs: not an investment, this is basic maintenance of your asset. If you upgrade a system while doing maintenance, then that value will depreciate over time, but some will possibly be maintained in the sale value. So not an investment, just maintenance.

Additions: adding a bedroom, bathroom, square footage: like an addition or even finishing a basement. These can all add significant value to your home, but that value may or may not exceed the cost.These can be an investment, but aren't always, especially if done poorly, like adding a bathroom in the middle of a living room (yes, I have seen this).

Layout: This is major, costly work and can possibly add value beyond the cost, but often won't because you haven't added anything compared to what you spent, and layout trends can change.

Other renos: cosmetic, kitchen, bathroom, etc. Almost NONE of these will ever, ever pay off as any form of investment.

If you are flippers who can DIY at a professional level, know how to spot bargain houses, and know what sells, then you can make excellent money, but that's not what we're talking about.

If you are living in your home and planning renos for your own use and pleasure, then it's not an investment, it's run of the mill consumption. First, unless you can DIY to a professional level, it will look DIY. If you pay for professional results, you will pay too much to recoup the cost.

Regardless of whether you DIY or pay professionals, if you live in the space for 5+ years, the renos will rapidly become dated and damaged. It's hard enough to recoup the money on a brand new reno, it's a fantasy to recoup it on cabinets and tile work that has seen 5+ years of use and changes in style go by.

Now, if you buy an absolutely hideous, dated place with wood paneling everywhere, and a tiny galley kitchen, then if you renovate and bring it into the 21st century and open up the kitchen, then yeah, you will probably retain some of the value of the renos, but not likely the full value, so it's still not an investment.

So the smart way to perceive renovations of a house you aren't planning to sell right away is as maintenance or as standard lifestyle inflation spending. Then if you do retain any residual value of the renovation, it's a bonus. But you never know, by the time you sell, your house may only be valuable as a tear down for developers and no one will give a fuck that your backsplash is subway tiles oriented in a herringbone pattern.

Lastly, I don't understand ANY of your math of how your reno has anything to do with your loan. Can you or someone explain that to me? I'm really confused. How does the lifetime of the loan have anything to do with the cost and return of renos???
The math on whether or not you will get a return on your renos is the same whether or not you have a mortgage.
« Last Edit: August 22, 2021, 12:30:56 PM by Malcat »

YttriumNitrate

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Re: Math of selling house as-is or doing repairs
« Reply #14 on: August 22, 2021, 12:23:45 PM »
From what I recall, the only (or one of the only) common renos that consistently pays off is new paint.

Dicey

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Re: Math of selling house as-is or doing repairs
« Reply #15 on: August 22, 2021, 12:58:16 PM »
From what I recall, the only (or one of the only) common renos that consistently pays off is new paint.
That plus deep cleaning and decluttering.

RainyDay

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Re: Math of selling house as-is or doing repairs
« Reply #16 on: August 23, 2021, 06:17:30 AM »

I can think of 3 answers, in order of importance:
 
1) Lots of people are looking for "bargain" housing in areas of higher socioeconomic status, better schools, and lower crime than they could otherwise afford. In exchange for these things, they are willing to live with a dated kitchen or bathroom forever. Competition among such buyers is intense, which shrinks the discount for houses that need a remod.

2) Contractors and craftsmen buy houses too, and they can DIY these remods for much less than the $50k you'd spend hiring them. Thus, they might only be willing to pay an extra $25k to not have to do the job themselves over a few weekends.

3) If you do the work before selling, you deprive the new owner of the opportunity to make their own design decisions. They have to live with elements of your decisions they don't like. E.g. color of countertops, arrangement of tile. Thus they apply a discount to the value of the work because it's not exactly what they'd have done.

I can think of a possible 4th:
Buyers often underestimate the total cost of a renovation.  They may walk into a house with an out-dated kitchen and think, "I can have this completely remodeled for $15-20k!"  In my area, unless they are professionals or very experienced DIYers, they cannot.  Kitchen remodels go for a premium and everyone I know who has done one has paid upward of $35k (and sometimes $70-100k). 

Dicey

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Re: Math of selling house as-is or doing repairs
« Reply #17 on: August 23, 2021, 06:49:27 AM »

I can think of 3 answers, in order of importance:
 
1) Lots of people are looking for "bargain" housing in areas of higher socioeconomic status, better schools, and lower crime than they could otherwise afford. In exchange for these things, they are willing to live with a dated kitchen or bathroom forever. Competition among such buyers is intense, which shrinks the discount for houses that need a remod.

2) Contractors and craftsmen buy houses too, and they can DIY these remods for much less than the $50k you'd spend hiring them. Thus, they might only be willing to pay an extra $25k to not have to do the job themselves over a few weekends.

3) If you do the work before selling, you deprive the new owner of the opportunity to make their own design decisions. They have to live with elements of your decisions they don't like. E.g. color of countertops, arrangement of tile. Thus they apply a discount to the value of the work because it's not exactly what they'd have done.

I can think of a possible 4th:
Buyers often underestimate the total cost of a renovation.  They may walk into a house with an out-dated kitchen and think, "I can have this completely remodeled for $15-20k!"  In my area, unless they are professionals or very experienced DIYers, they cannot.  Kitchen remodels go for a premium and everyone I know who has done one has paid upward of $35k (and sometimes $70-100k).
Add supply chain interruptions and skyrocketing costs to your #4. From big things like lumber and appliances to a myriad of small things. DH noticed yesterday that an 8 oz. roll of solder has jumped from $17 to $42. Every time I see a house with a new fence (and they seem to be everywhere), I know the owner paid at least twice what it would have cost pre-pandemic.

Metalcat

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Re: Math of selling house as-is or doing repairs
« Reply #18 on: August 23, 2021, 06:53:43 AM »

I can think of 3 answers, in order of importance:
 
1) Lots of people are looking for "bargain" housing in areas of higher socioeconomic status, better schools, and lower crime than they could otherwise afford. In exchange for these things, they are willing to live with a dated kitchen or bathroom forever. Competition among such buyers is intense, which shrinks the discount for houses that need a remod.

2) Contractors and craftsmen buy houses too, and they can DIY these remods for much less than the $50k you'd spend hiring them. Thus, they might only be willing to pay an extra $25k to not have to do the job themselves over a few weekends.

3) If you do the work before selling, you deprive the new owner of the opportunity to make their own design decisions. They have to live with elements of your decisions they don't like. E.g. color of countertops, arrangement of tile. Thus they apply a discount to the value of the work because it's not exactly what they'd have done.

I can think of a possible 4th:
Buyers often underestimate the total cost of a renovation.  They may walk into a house with an out-dated kitchen and think, "I can have this completely remodeled for $15-20k!"  In my area, unless they are professionals or very experienced DIYers, they cannot.  Kitchen remodels go for a premium and everyone I know who has done one has paid upward of $35k (and sometimes $70-100k).
Add supply chain interruptions and skyrocketing costs to your #4. From big things like lumber and appliances to a myriad of small things. DH noticed yesterday that an 8 oz. roll of solder has jumped from $17 to $42. Every time I see a house with a new fence (and they seem to be everywhere), I know the owner paid at least twice what it would have cost pre-pandemic.

This is SO true.

I've been doing a ton of small renos around the house over covid, and small supplies have been crazy expensive, or simply unavailable. I can't imagine what that would do to a project timeline if working with professional contractors and they're not able to source small supplies that are necessary to move a job forward.

That could add months to a project timeline.

I'm taking months myself to finish my projects anyway, so I don't really care if I need to take a few weeks off waiting for an item to come back into stock, but I would be shitting myself if I were depending on any trades people at the same time.

RainyDay

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Re: Math of selling house as-is or doing repairs
« Reply #19 on: August 23, 2021, 08:40:16 AM »

Add supply chain interruptions and skyrocketing costs to your #4. From big things like lumber and appliances to a myriad of small things. DH noticed yesterday that an 8 oz. roll of solder has jumped from $17 to $42. Every time I see a house with a new fence (and they seem to be everywhere), I know the owner paid at least twice what it would have cost pre-pandemic.

Good point.  I keep forgetting how expensive things are getting.  I rarely go into stores (unless it's a garden center, my personal weakness), so I was astonished a few weeks ago in Kohls.  Looking for a plain old sports bra, and they were $25 and up!  The "fancy" ones were $42. (I have no idea what makes a sports bra fancy, aside from price.)

Last year we built a new chicken coop and I was blown away that the sheets of plywood were $22 each when a few years ago they were $17 each.  I'm sure they're even more than that now.

Car Jack

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Re: Math of selling house as-is or doing repairs
« Reply #20 on: August 25, 2021, 12:14:28 PM »
Something I will never forget is looking for and buying our first house.  Stretching it, we could spend $125k.  So we looked at houses priced from about $115k to $129k.  For someone who took a house in a good location on a good lot and completely went through it, updating everything, then putting it on the market for $131k, we didn't even look at it.  Well, I did look at MLS listings and went to some open houses.  But even if the house had $50k worth of upgrades compared to a $125k house, it didn't matter.  Too expensive.  We weren't even going to look.

We've sold a couple houses and did the free upgrades.  Mega declutter.  Mega clean.  Ask multiple agents "what's the one thing that the house needs?".  As an owner, it's easy to lose perspective.  Oh...and for Pete's sake, vacate the house whenever anyone is coming to look at it.  Having attended many, many showings, some of the few that really stood in my mind (in a bad way) were when the owners insisted on staying and "helping" the agent.  I can remember one house in particular that was small, but great location and great lot.  The owners insisted on showing us their home built cabinets (that were garbage) and the ultra narrow, added staircase (probably illegal) up into the useless attic.  I remember specifically leaving and the agent saying "I'm sorry" and me responding "that house is prime for a bulldozer renovation".

I guess it's my perspective.  If you spend a ton of money, you're reducing your market.

GodlessCommie

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Re: Math of selling house as-is or doing repairs
« Reply #21 on: September 01, 2021, 03:37:17 PM »
From what I recall, the only (or one of the only) common renos that consistently pays off is new paint.

New entry doors and *some* landscaping, apparently, also have positive ROI. Door handles. Basically, cheap stuff that improves curb appeal.

kite

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Re: Math of selling house as-is or doing repairs
« Reply #22 on: September 02, 2021, 07:42:24 AM »
How do you know what size loan the hypothetical buyer 'needs' for any home?   


Metalcat

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Re: Math of selling house as-is or doing repairs
« Reply #23 on: September 02, 2021, 07:58:25 AM »
From what I recall, the only (or one of the only) common renos that consistently pays off is new paint.

New entry doors and *some* landscaping, apparently, also have positive ROI. Door handles. Basically, cheap stuff that improves curb appeal.

Cabinet pulls too. We changed out the cabinet pulls in our last kitchen to the latest obviously trendy style and a number of people assumed the cabinets were new.

 

Wow, a phone plan for fifteen bucks!