Tips for Buying a House That Needs Work
Existing home sales—as opposed to new construction—accounted for more than 5.5 million real estate transactions in February 2020. About 2% of them were considered "distressed sales," and it can be presumed that they might have needed a little work. This doesn't necessarily have to be a deal-breaker if you know how to handle it.
Perceptions vary widely when someone is buying a house that "needs work." Many agents believe this is the case if it isn't updated, but some buyers and sellers might not share this viewpoint. Whether a house needs work is based on personal opinion, and "work" can depend on the type of property you're thinking of buying.
Beauty Is in the Eye of the Beholder
Rooms in properties built in the 1940s were smaller and separate from one another, and kitchen counters were often covered in four-inch tile, not trendy stone. The cabinets are probably painted wood, and the floors are linoleum.
A millennial buyer will say a house in this condition would need work, but a purist who loves the character of 1940s homes might prefer the house in its original condition.
It's generally a good idea to replace the floor covering before selling if the wall-to-wall carpeting is worn and stained, but it would be foolish to haul a Wedgewood stove to the dump or remove original hardwood interior trim simply because it's of a certain vintage.
Buying a Fixer-Upper
Fixer-upper homes are generally priced for sale in "as-is" condition. These properties often show deferred maintenance because the sellers were unable or unwilling to care for the home properly. Maybe there was a death in the house, or it passed through probate to heirs who didn't want it.
Sellers will generally choose a sales price based on comparable sales to compute a price on a fixer-upper property. Comparable sales or "comps" are houses in the same general type of neighborhood and of the same age, square footage, and number of bedrooms, and they can share other characteristics. An asking price is arrived at then reduced by an estimate for repairs.
The seller might deduct a little bit more from the price for a fast sale or an all-cash sale. Whether it becomes a flipper house for an investor who's hoping to turn a fast profit, or a house for a first-time homebuyer who's willing to put in a little work, depends on profit margins and the amount of work that's necessary.
The FHA's Section 203(k) Program allows borrowers to take additional funds on an existing FHA mortgage, or take out a separate loan to pay for repairs and rehabilitation. You can even apply online.
There could be other problems, however, if the home has longer days on the market than the average sale time of other properties. Perhaps the work that's actually needed exceeds the seller's expectations, or it could be that the home appeals to a smaller pool of buyers.
Don't make the mistake of automatically assuming longer days on market means that the home is overpriced.
Purchasing a Mint-Condition Vintage
A mint-condition vintage home could sell at a premium price even if it's not necessarily modernized or trendy. Think about folk Victorians, Italianates, Queen Annes, or Craftsman bungalows. Mid-century homes—those built between the 1950s and the 1960s—are also becoming increasingly popular. This category might also include houses that have historical prominence due to past owners or residents.
A seller would probably add a premium price pad on top of the comparable sales figure to price this type of home, and might receive multiple offers simply due to the attractiveness of the design. The sales price could go even higher if the fixtures are original.
It's possible that a vintage home in perfect condition could be overpriced if it's been on the market for longer than others. Not every seller is eager to part with a property of such caliber, and some will price it high enough to make it worthwhile for them to relocate.
Homes in historic districts will have high asking prices with little wiggle room. A buyer will typically pay the asking price if they want the place badly enough because the seller might or might not budge on price.
Newer but Outdated Homes
You'll spot a lot of these types of properties in areas that were once thriving but have become depressed. Maybe the area was overbuilt and supply exceeded demand, jobs left town, or other tract homes opened up a few miles away for less money.
Whatever the reason, owners often have little interest in remodeling a home just because trends change. They figure the house was fine when they bought it, and it's fine to sell now. What they don't realize is that buyers don't want homes without updates. They want turnkey properties that don't require additional work. They expect a discount if they'll have to tackle a home improvement project.
A few changes, such as replacing the fixtures, choosing modern paint colors, and installing newer appliances are often enough to generate interest at a better sales price, but buyers generally won't agree to pay top-of-market for an outdated home, even if it's newer and clean.
A foreclosure is a bank-owned home, taken by the lender because the owners defaulted on mortgage payments. These properties are almost invariably sold in as-is condition.
They've often sat vacant for extended periods of time. The bank will have done little—if any—maintenance or landscape upkeep. A bank can't be held responsible for disclosing facts that they don't know.
Banks are reluctant to offer discounts for the work needed if a buyer finds a defect that turns out to be a major repair cost.
Buyers might spot pre-foreclosure houses on certain popular websites, but these aren't always for sale and they might never be for sale. This is usually just a process that a bank will go through as a seller goes into default but before they take full possession of the home.
A short sale happens when a lender accepts less than the total amount of the mortgage balance due from the buyer. This is perhaps the most misunderstood type of sale, especially when the house needs work.
Sellers probably can't afford to make repairs or fix up the home if they can't even make their mortgage payments, and the seller's lender has little incentive to cooperate with a short sale unless the price is in line with the current real estate market.
Banks typically won't discount the price they'll accept for short sale homes, even if the property needs work, because they're already selling it for less than the loan balance against it.
A bank could possibly make out better financially or and get more money if it forecloses rather than short sales the home. The broker price opinion (BPO) value won't matter in that event because the investor will be adamant on a net to match the foreclosure net.
Pack Rat Homes
Pack rat houses might be the worst. These are the properties where you'll have to navigate through on tight paths woven around stacks of personal belongings throughout the house. Sometimes the bedrooms are so full of furniture and boxes and junk that you can't get the door open. Pack rats and hoarders collect and save stuff...a lot of stuff.
Combine a pack rat house with years of neglect and you could find piles of dead rodents or moisture problems that have gone undetected for years. Renting a couple of 30-yard dumpsters will get rid of the debris if you're lucky, but any underlying problems could be much more extensive.
The sale prices of these houses are often knocked down dramatically.
Effect on Negotiations
How you would pursue a purchase offer on a home that needs repairs will likely depend on the type of property you're buying.
Buyers shouldn't automatically presume that the listing price has already been adjusted due to the place needing work, but most sellers already realize that the home they're selling needs repairs or updating and they've accounted for that when pricing it.
As with any purchase offer, a homebuyer's best bet is to rely on the comparable sales, then deduct for the work that's needed. Base the deduction on written estimates from licensed contractors. Providing this information to the owner might be enough to encourage them to reduce the price.