I sometimes have sellers who don’t want to make repairs or updates and prefer to sell their home “as-is”. As a home seller, that is certainly an option, but be prepared to take a major price beating when you sell as-is. Why?
To understand why sellers usually end up selling an as-is home at a drastic price reduction, it is important to first understand most home buyers. There are basically two types of buyers who purchase “as-is” homes:
- The Fixer-Upper – This is a buyer who wants a good deal on a home they plan to renovate and then live in for a period of time, hopefully turning their hard work into instant equity.
- The Investor – This is normally an experienced buyer who searches for bargain homes that often need major repairs and updates before either renting the home or “flipping” the home.
The Fixer-Upper Buyer
The fixer-upper buyer is looking for a deal. They want to purchase a property that needs work, and they plan on doing most of the repairs themselves to earn equity in the home. However, potential fixer-upper buyers are unable to finance a home that needs major repairs. They sometimes can qualify for rehabilitation loans that allow them to renovate the property and then transition to a conventional loan once the repairs are completed. These buyers are looking for a deal, but their primary motivation is not a quick profit. They are more interested in earning equity in the home and living in the home for several years before possibly selling the home for a profit. Hence, they may be willing to pay a slight bit more for an as-is home since they take a longer view of the transaction.
In my experience fixer-upper buyers are few and far between. A lot of first time home buyers would LIKE to buy a home that needs work, but few can qualify or have the time and expertise to renovate an as-is home. Older buyers with experience and equity are more likely to be qualified to finance a fixer-upper and these buyers are realistic about what they expect to pay for a home. In short, not much. They want a deal.
The Investor
The investor is usually a buyer who is very experienced at buying homes, doing repairs, and then selling the homes quickly for a profit. Many times they can purchase with cash, and seldom plan to live in a home. These are often called “flippers” since they plan to flip the home for a profit soon after repairs are completed – often in only 1-2 months. They typically hire contractors to do the work – contractors that want to make a profit on their work. Some “flippers” will do a portion of the work. Either way, their goal is to turn a profit on the home as quickly as possible. Hence, these buyers tend to pay even less than “fixer-uppers” since they are interested in a quick flip and a tidy profit for their work.
Example
Let’s use a typical 2003 built, $200,000 home with about 2000 sf, on a city lot for an example. Our typical home would sell at a normal retail price for $200,000 once it has been updated and all repairs complete. It should be “move-in ready” with new or nearly new carpet, new paint, and updated kitchen, a good roof and good curb appeal – i.e., landscaping.
Every home is different, but in our example we are going to talk about an “as-is” home that needs carpet, paint, a refreshed kitchen, and a bit of landscaping. We are going to assume the roof is in good shape. Below is a typical budget to update such a home:
- Paint inside – $5,000
- Paint outside – $3,000
- Kitchen countertops and appliances – $7,000
- Carpet – $2,500
- Landscaping – $1,000
- Cost of selling home (closing costs, taxes, etc.) $13,500
- TOTAL = $32,000
So a fixer-upper owner MIGHT be willing to pay close to $168,000 for the home – but most likely they will want to pay less so they have equity for the work they have invested. They are more likely willing to pay in the neighborhood of $150,000 to $155,000 for this “fixer-upper” home.
An investor will want an even better deal. They are going to want to turn a profit after investing $32,000 in the home to make it worth the risk they take. It is more likely they are going to want to purchase the home for $120,00 or maybe $130,000.
Summary
So if you are wanting to just walk away and sell your home “as-is” you need to be aware that you will most likely end up taking a huge write-down on your investment, and may not even be able to sell your home for what you owe on it. In most cases I find it is better if buyers can spend a little money and elbow grease to update the home and sell it closer to retail price rather than sell it “as-is”. If you just are not able to update the home, be ready to get MUCH less for it than you might think by just looking at what other homes sell for in your neighborhood.
