Monday, April 13, 2020

Remodel to Sell? Maybe Not!

Fixing up your house to sell it might sound like a good idea, but chances are, the person buying it may tear out everything you did.

There was a mini housing boom here on the island in the last few months.  Not mini-houses, but a mini-boom.  A lot of houses sold from October through January, and of course, it all sort of stopped after that.

People were paying asking price - in the neighborhood of $400,000 or more, and then throwing a hundred grand at these 50-year-old houses to "update" them.  The oddest thing of all is that houses that were "remodeled" to sell or to flip were also remodeled by their new owners.  The previous owners had a dumpster in the yard, as they ripped out kitchens and baths and moved walls.  The new owners..... have a dumpster in the yard, as they rip out kitchens and baths and move walls.

One older lady put brand-new granite countertops in the kitchen, as the real estate agent said it would help sell the house and "pay back" the investment.   A month later, the new countertops were smashed with a sledgehammer and thrown into the dumpster - the new owner didn't like the color, apparently, and wanted to re-do the entire kitchen with new cabinets and floors and an island and so on and so forth.   Did the seller "get value" for those countertops, or did the real estate agent get a kickback from the granite countertop guy? (act shocked).

If you are going to go that route, why not install these things while you live there, so at least you can enjoy them?   Waiting until you sell to fix up your house means only that you never get to enjoy what you are paying for.

Do upgrades like that add value to a house?  Generally, no.  They may make it easier to sell a house, if it looks more modern and trendy.  Fresh paint, modern colors, new counter-tops and other fairly superficial things can make the house sell faster.  A lot of buyers don't have "vision" and cannot see beyond your chintz curtains and photo collection of your grandchildren.

Even a well-done remodel (not just a superficial "dressing the pig") returns only pennies on the dollar.  A bathroom or kitchen, maybe 50-75 cents.   A bedroom or closet - pennies, if that.  You always lose money in remodeling - it is called maintenance and doesn't add value more than what you paid for it.

But what about "house flippers" you say?   The property twins!  They buy and flip houses and make money!  You saw it on Cable TV and Cable television never lies to you, ever!   Sadly, it does, all the time.   Most of these "property flipping" shows are in hot markets where you can buy a house that is distressed and flip it in a few months for a huge profit.  Before the market collapsed in Vancouver (please excuse my Canadian friends who told me "our market is different!" and folks who said, "there are no such thing as bubbles!") you could buy a house for nearly a million bucks and some Chinese dude would pay you nearly double that, and tear the whole damn thing down and start over.   No point in putting in granite counter-tops there!

A neighbor of ours was a "flipper" and he bought and remodeled two houses on the island.  Again, the dumpster in his driveway for months and the spectacular "reveal" at the end of the project.  Then, he sold both houses and moved away, and in both cases, the new owners had a dumpster there within a week of closing, tearing out a lot of what he did.

Doing the math on this, I am wondering whether if he just sold the houses as-is, rather than remodeling them, he would have come out ahead - or at the very least, made the same amount of money.  One house was his personal residence, so the remodeling was at least something they enjoyed for a year or two.  The other was a distressed "estate sale" that he bought for a quarter-million and probably put maybe 50 grand into it, mostly in kitchen and bath improvements (with a lot of sweat equity).   The house sold for a little under 400 grand.   Given how housing prices have gone up in the last year (and how little he paid for it), I wonder if he would have saved a lot of time and effort and made just as much money, if not more, by just painting the place and making it presentable.  Someone would have paid $350K for it, just as it was.

Of course, this is speculation, as there is no way to go back in time and re-run the events and see the outcomes.   But the rapid appearance of dumpsters after the sale at houses that had dumpsters in their driveways before the sale is almost comical.

Our neighbor behind us passed away at age 98.   The house was presentable, but needed a new roof and a few other repairs - and desperately needed to be updated.  The heirs cleaned the place up and sold it, as-is, for about 400 grand.  The new owners have put a new roof on, remodeled one bathroom, and are redoing the kitchen.   It is not clear to me that the heirs would have made more money by doing these sort of upgrades - which would have cost $100,000 easily - and whether the new owners would have torn them out, anyway.   People like to select their own roof color, counter-top color, appliances, and so on and so forth.

This is not to say you should let your house look like a shanty.  Maintaining a home is important, and it should always be in condition to sell (because you never know when you will need to).   Why fix up a home to sell it - and miss out on all those amenities that you are installing for someone else?

Legally, in most States, unless you are selling a house "as-is" the only requirement is that everything has to be in working order.   So even if appliances are old, if they work, the buyer can't spike the sale on a home inspection.  A hole in the roof, on the other hand, is something that needs to be repaired.

Now granted, the nicer your house is, the faster it will sell and the better the price you will get.   But throwing money at a house in the months before selling it - to do extensive remodeling on the premise that the new owners will enjoy what you picked out - may not be a cost-effective move.

The spread in prices between the most expensive house on the block and the cheapest, is often not very much - far less than the cost of remodeling.   Once again, people are paying for location, location, and location - which may be three different things.   Often the land is worth more than the house, or in most cases, about as much.   We paid over $400,000 for our house (on a leased lot, no less!) and the flood insurance only goes to $250,000.  It shows you how much it costs to build the actual house - and what the house is worth, versus the land underneath (our tax assessment pretty much makes the same 50/50 evaluation).   You'd be surprised how inexpensive it is to replace a house - in many cases, less expensive than remodeling it!

I thought about all of this on our bike ride today.  There are at least six dumpsters-in-driveways within a two block radius of our house.  A lot of people are buying houses here (or were!) and fixing them up.   In a lot of cases, they are fixing what was previously fixed prior to selling.

Seems kind of like a waste of money, to me!