Renovation Costs Case Study – By Steven

Deferred Maintenance when Selling an Older Home

The questions I get most often are: How do you guys make money? How is a cash sale good for me, as a seller? Let’s go through the numbers on a common scenario and how a cash sale could be good for everyone. Even if this isn’t exactly your situation, I believe the following case study may shed some light on how a contractor or investor approaches buying a home.  As always, I want to say that selling your house in a quick cash sale isn’t always the best option for you. There are situations when, after meeting with you, we discover that the better option for you is to list it on the market. So today, I’ll discuss how the numbers ended up working for a common situation.

Case study

Dave and Marie are in their 80s and have been living in their four-bedroom, two-bathroom colonial home since Dave built it over 50 years ago. Their health and mobility have been declining for the last decade, as has their ability to keep up with repairs and maintenance. Dave has fallen several times and faces long-term care.

A well-meaning friend tells them that homes in the neighborhood of their size sell for upwards of $450,000. Some even reach $600,00, and they are surprised that they can get so much—or can they? The homes that the friend looked up are all less than ten years old and are turnkey modern homes with luxury finishes like granite countertops, walk-in closets, whirlpool tubs, built-in swimming pools, etc.

The Story Begins

Dave and Marie were visited one day by the son of a family friend, John, who is a reputable local general contractor. John built several houses nearby and did countless renovations and several flips. They asked him what it would cost to fix up the home to the point where it could sell for those higher numbers. John was familiar with their house enough from the several times he helped the couple out with some repairs or advice.

“Renovate?” John chuckled incredulously. “It would take a fair amount of work just to get your home ready to list on the market. Let’s see, there are certain things that I already know about that need to be addressed before you list it. Do you still get water in the basement when it rains heavily? And I heard the furnace might need to be replaced soon.”

“But we just put that furnace in seven years ago.” Dave quipped.” Marie rolled her eyes a bit. “Fifteen, and the heating guy said it’s barely limping along.”

“The electrical needs a major upgrade.” John continues, “especially if you plan on renovating the kitchen. You have structural issues in the garage, deck, and screened-in porch, and your two chimneys need some serious attention. Even if you don’t renovate the kitchens and bathrooms, these things will pop up on the inspector’s report and will be attached to your property card.

“Inspector, what inspector?!” Dave reacts.

“Yes, every lender requires a complete inspection if they are going to write the mortgage for the buyers. And that report looks at EVERYTHING! Not only that, the bank will require some repairs to be made to approve the mortgage.”

“Who pays for those repairs?” Dave asks.

The look on John’s face answers his question.

John senses Marie and Dave’s hopes for a big sale price fading and wants to give them some hope. “The good news,” he says, “is the hardwood floors still look great, most of your windows were replaced a few years ago, and the roof still has half of its life left. You built a solid house on a nice piece of land, Dave.”

Dave nods his head with pride.

“It’s just for a retail buyer to get financing, you’ll need to fix the structural issues, some of the wiring issues, any septic tank issues they may find, and water ingress in the basement, as well as the runoff that is causing those issues. Oh, and several trees have gotten awfully huge and are leaning toward the house that I’d suggest dealing with.”

“How much would all that cost?” Marie shyly asks as she passes the list she has been making to John with a pencil.

“Hmm, let’s see,” said John writing numbers next to items and adding them up. “Depending on what the septic inspection comes up with, we’re already at $60,000-$80,000.”

“I bought this land and built this whole house for $14,000!” Dave loudly replied.

John calmly replied, “Inflation is our friend when we are selling. But those same forces that have raised property values have also dramatically increased material costs and labor costs of the tradesmen—if you can find them.”

“John, hypothetically, if you were to give us a price to make this house as nice as the others in the neighborhood, what would the ballpark figure be?” Marie asked.

John thinks for a moment. “If I had the time in my schedule and you had the money to spend,” John chuckles, “we’re looking at 6-9 months and around $180,000-$200,000 in labor and materials to get the top of the market.”

Dave and Marie were silent.

John then started a rant about the cost of plywood, 2X4’s, and what it takes to get and keep good help. He gave examples of what clients had to spend on items they never thought of. “I had a customer with a chimney like yours, who was quoted $13,000 to repair it—and that was the low bid! A rewiring job at $18,000. These roofing companies that send you the post cards in the mail every other week and have commercials on TV—I guarantee they’d quote you $18,000-$24,000 for a new roof and gutters on a house this size. But hey, ‘it’s guaranteed for life!’ When I am the general contractor, I know who is good and reliable. I can stay within budget because I throw my subs so much business. But yeah, nothing is cheap anymore and building codes have ten times more requirements than they did in 1967. And believe me, the local building inspector is not concerned with the cost of the homeowner complying with codes. I can go on and on, but yeah, it’s a big expensive job, that you may not see a return on.”

“I thought the market was hot right now, John,” Marie questioned.

“You’re right it has been, but will it still be hot next year? And what will happen with material and labor costs? Flippers were hit hard when materials cost skyrocketed and time frames stretched during Covid. Thankfully, those costs were mostly offset by increased selling prices. But you remember when my dad lost everything in the ’70s when he got stuck holding the bag on spec homes? It doesn’t always work out well for the small investor.” John posed. “Everything is so crazy now. the market could go up more or go down, or just stagnate.”

“So, if I were buying a house like this to flip, I’d have to account for every expense—the cost of money to pay for the house, renovations, permits, insurance, and taxes for at least a year. Let’s assume I can sell it fully renovated for $500,000. I can figure the cost of financing for purchase and renovation to be $40,000, holding cost of $8,000, and realtor fees of $28,000. I’d buy a house like this for no more than $200,000, with the hopes of making MAYBE $50,000, which I’ll have the joy of paying capital gains taxes on. It’s a risk for me to flip in this environment. And honestly, I have more than enough work for my guys to keep us going for the next six months, which will make me a lot more money, with very little risk compared to taking on a fix and flip.”

Dave chimed in. “I had no idea of all of the costs involved and how expensive things have gotten. I had a guy make a cash offer a couple of years ago, and I told him to get lost.”

“You weren’t very nice to that young man,” Marie interjected.

“Well,” Dave pleading his defense, “I thought that guy was low-balling me, and now that John wrote out these rough numbers, I realize how much risk and expense he would have been taking on with a project like this. Heck, I thought my house was fine and only needed a few things fixed, but these kids buying houses nowadays want all the fancy bells and whistles. Besides, I didn’t trust that guy. But his offer now makes more sense to me.”

“What did you do with his business card, Dave?” Marie asked. “Maybe, we should give him a call. I can’t begin to imagine all the work it would take to clean up a half-century of accumulated stuff inside and junk out in the yard. The pressure of hiring all the contractors to fix the issues and finding enough cash to pay them is a daunting task. I’d rather just focus on packing the necessities and keep the memories we have made in this house undisturbed. We have loved living in our home, but it is all getting to be too much. I think it may be worth the peace of mind to finally be relieved of the burden of trying to maintain this big house. It served us well, but perhaps it’s time for a new family to come and make new memories in the place we built our family memories.”

Dave quietly nodded his head, and everyone took a sip of coffee as Marie’s statement hung heavy in the air.

“Well…” John said, finally breaking the silence, indicting he needed to get back to work. “I know some well-funded guys that you can talk to who do this all the time. Or I can also research the guy you spoke to last year if you find his card. There are a lot of small players who don’t have cash in hand and can’t always follow through with their offer. I should be able to tell if he is honest and can really buy with cash.”

Dave promised to try to locate the young man’s business card or talk to John’s friends to get an offer and make a decision. The reality of a high selling price had faded, but there was a clearer path forward. One that would unburden them from many of the stresses that haunted them and their children.

Follow up

Six weeks after John’s visit, Dave entered a full-time facility. Marie moved into an in-law suite in their daughter’s house near Dave’s facility. The house was sold with the contents after the children helped sort through the items with sentimental value. On the day before the closing, they had one last get-together to say goodbye to the home where their childhood memories were written. And everyone and collectively, they turned the page.