Tips for Buying a House That Needs Work

An old clapboard house with peeled exterior paint and missing shutters.
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Perceptions vary widely when buying a house that needs work; just ask any home buyer. Better yet, ask a real estate agent, because many agents believe a house needs work if the house is not updated.

Beauty Is in the Eye of the Beholder

As an example, take a home built in the 1940s. During this era, rooms were smaller and separate from one another, and kitchen counters were often covered in four-inch tile, not trendy stone or concrete. Maybe the cabinets are painted wood, and the floors are linoleum. A millennial buyer will say a home in that condition would need work. However, a purist who loves the character of 1940 homes might prefer the home in its original condition and disagree.

Whether a house needs work is based on personal opinion. Sometimes sellers will ask if they should fix up a home or sell it as is. While certain repairs will bring more money, some types of improvements are better left as an option for the buyer.

For example, if the wall-to-wall carpeting is worn and stained, it is generally a good idea to replace the floor covering before selling. However, you would be foolish to haul a Wedgewood stove to the dump or remove original hardwood interior trim simply because it is of a certain vintage.

Types of Houses That Need Work

Since work-needed is often in the eye of the beholder, let's talk about the types of houses that could use work. One thing you should not fall prey to is the tendency to wrongly presume that the listing price has already been adjusted due to the home needing work. Further, how you would pursue a purchase offer for a home will likely depend on the type of home you are buying.

Most sellers already realize the home they are selling needs work and have accounted for it when pricing the home. Most realtors will help sellers understand when their home could use some updating. Since they already realize the need for repairs and have priced accordingly, they aren't interested in who is financing a buyer's home improvement dreams. However, that doesn't stop buyers from trying to discount an already discounted home price.

Buying a Fixer-Upper

Fixer-upper homes are generally priced for a sale in an "AS IS" condition. These homes often show deferred maintenance because the sellers were unable or unwilling to care for the home properly. Maybe there has been a death in the house, or it passed through probate to heirs who don't want it. In some cases, the exact condition might be unknown.

To compute a price on the fixer-upper house, sellers will generally choose a sales price based on the comparable sales. Comparable sales (Comps) are homes in the same general type of neighborhood and of the same age, square footage, the number of bedrooms, and other characteristics as the fixer-upper home. Then the asking price is further reduced by the estimate for repairs. The seller may 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 is hoping to turn a fast buck or a home for a first-time home buyer depends on profit margins and the amount of work that is needed.

If the home has been on the market for a while, with longer days on the market than the average sale time of other homes there could be other problems. Perhaps the work that is 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 the home is overpriced because that's not always a true assumption.

Purchasing a Mint Condition Vintage

The mint condition vintage home could sell at a premium, even though it is not necessarily modernized nor trendy. Think about Folk Victorians or Italianates or Queen Annes or Craftsman bungalows. Also, becoming increasingly popular are mid-century homes—those built between the 1950s and the 1960s. These homes include architecture such as that done by Eichlers or Strengs. This category may also include homes that have historical prominence due to past owners or residents.

To price this type of homes, a seller would probably add a premium price pad on top of the comparable sales. Here, the owners might receive multiple offers, simply due to the attractiveness of the design and well-maintained mint or original interior and exterior. If the fixtures are original, the sales price could go even higher.

If a perfect condition vintage home is on the market for longer than others around it, it is possible the home could be overpriced. Not every seller is eager to part with a home of such caliber. Some will price it high enough to make it worthwhile for the seller to relocate. Also, home in historic districts will have high asking prices with little wiggle room. Since, the sellers may or may not budge on price, if a buyer wants the home badly enough, they will typically pay the asking price.

Newer but Outdated

You spot a lot of these types of homes in areas that were once thriving before becoming depressed. Maybe the area was overbuilt, and supply exceeded demand. Perhaps 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. After all, they figure the home was fine when they bought it, and it's fine to sell it now.

What they don't realize is buyers don't want homes without updates. Buyers want turnkey homes that don't require additional work. If they have to put work into a home by tackling a home improvement project, they expect a discount.

Remember the 1990s color trend of hunter green? Most horrible color ever. OK, maybe not, maybe the avocado green of the 1960s was the most horrible color.
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. Otherwise, buyers will generally not agree to pay top-of-market for an outdated home, even if it is newer and clean.

Foreclosure

Buyers often say they want to buy a foreclosure. A foreclosure is a bank-owned home. However, most buyers do not have a firm handle on what buying a foreclosure entails.

Almost invariably these homes are sold in AS IS condition. Many times these properties will have sat vacant for extended periods. The bank will have done little if any maintenance or landscape upkeep. Further, a bank is not held responsible for disclosing facts they do not know. If a buyer finds a defect later, which turns out to be a major repair cost, banks are reluctant to offer discounts for the work needed.

Buyers might spot what are called pre-foreclosure houses on certain popular websites, but those are often not for sale at all and may never be for sale. This is often a process that a bank will go through as a seller goes into default but before they take full possession of the home.

Short Sale

The short sale (when a lender accepts less than the total amount due) is perhaps the most misunderstood type of sale, especially when the house needs work. When a seller can't afford to make their mortgage payments, the also probably can't afford to make repairs or fix up the home.

Not only that, but 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 do not discount the price they will accept for short sale homes, even if the home needs work.

The reasons for what might appear to you as a stubborn or clueless attitude among the banks vary. A bank could possibly make out better financially or be paid more to foreclose vs. short sale the home. In that event, the broker price opinion (BPO) value won't matter because the investor will be adamant on a net to match the foreclosure net. No amount of "explaining" to the bank the amount of work that is needed will make the investor budge.

The Packrat

Not every messy house is a packrat house, but the packrat houses may be the worst. These are the homes where you might need 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 that you can't get the door open. Packrats collect and save stuff, and sometimes are attracted to odd things such as balls of lint or shredded newspapers.

Combine a packrat house with years of neglect, and you could find piles of dead rodents, for example, or discover moisture problems that have led to a pest invasion. If you're lucky, renting a couple of 30-yard dumpsters will serve to get rid of the debris. But underlying problems that develop could be more extensive. Often, the sale prices of these homes are knocked down dramatically.

Consideration

As with any purchase offer, a home buyer's best bet is to rely on the comparable sales and then deduct for the work that is needed. Base the deduction on written estimates from licensed contractors. Providing this information to the owner may encourage them to reduce the price. However, if that adjusted price lines up with the listed price, you might need to pay list price to buy a home that needs work.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.