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How to Sell a House that Needs Work

Josh Stech Josh Stech

In this guide, you’ll learn the pros and cons of listing with an agent vs. selling to a cash buyer, and how to choose the best approach for your situation.

Looking to sell a house that needs some love but don’t have money to fix it up first? This guide is for you! You’ll need to start by choosing one of two primary options:

1) List it on the market with the help of a real estate agent to attract a buyer, OR

2) Find a cash buyer who’ll purchase your house as-is off-market

There are pros and cons to each one, which we’ll break down in this guide.  

 

In this guide

 

Option 1: Hire an agent and list your house on the market

The traditional way of selling a house is to sign a contract with a licensed agent who will handle the marketing and promotion of your house and advise you throughout the process. They’ll tell you how to get your house spruced up and ready for buyers, make the house’s information and photos available to the public (in places like Zillow, Trulia, Redfin, etc.), and organize viewings for potential buyers. When you find a buyer, your agent manages all the communication with the buyer and their agent and makes sure everything pertaining to money and documentation is in order. In exchange for their work, real estate agents take about 6% of the sale price.

 

Pros of hiring a real estate agent:

  • Reach more potential buyers
  • Potentially end up with higher net proceeds vs. selling to an off-market cash buyer

 

Cons of hiring a real estate agent:

  • They may not reach the right buyers for your property if it’s distressed
  • Spend time cleaning up and dealing with the hassle of repairs
  • Prepare for showings and vacate the property for open houses
  • Sign a listing agreement that gives the agent the exclusive right to sell your house for six months
  • Pay 6% of the sale price in commissions, even if the agent is not the one who finds the buyer
  • Pay closing costs, which are typically 1-2% of the sale price
  • Pay holding costs (see below) while waiting to sell, typically for two months or more
  • Deal with price haggling and an unpredictable outcome

 

Option 2: Find a cash buyer and sell off-market

Most cash buyers purchase houses with the intention of renovating and reselling them. They purchase the house as-is, without cleanings, showings, or renovations. The entire transaction can close quickly with no hassles. As the owner, you’re responsible for getting multiple comparison offers, negotiating your own terms, and working directly with the buyer on all aspects of the transaction such as escrow, title, and closing.

 

Pros of working with a cash buyer:

  • Pay zero fees to sell your home
  • Avoid cleanup, repairs, and showings
  • Complete the closing in just 10 days if you need to move quickly
  • Ask for a cash advance before closing (Sundae offers up to $10,000)

 

Cons of working with a cash buyer:

  • You do the work to shop around for multiple offers, vet buyers, and compare offers
  • Potentially lower net proceeds vs. listing and selling on the market

 

Which option is better?

So how do you choose between these options? The first question to ask yourself is how much time and money are you willing to invest in the sales process. If you don’t have much of either, and you need a reliable outcome, then selling to a property investor is probably the best way to go.

If time is on your side and you have some flexibility to sell at a later time so that you can focus on maximizing the cash in your pocket when you sell, you should explore both options. Here are two key questions to ask:

 

1. How much love does your house need?

If your house needs significant repairs or major updating, it’s possible it won’t sell on the market to another family who’ll move in. Instead you’ll likely attract cash buyers who want to buy your house for the purpose of investing in renovations and reselling it for a profit.

If you suspect your house is not likely to sell on the market due to its condition, your agent may have to find one of these cash buyers. If this is the reality of your current situation, you’re probably better off going straight to a cash buyer yourself to avoid paying agent commissions and other fees (see below). Most off-market buyers will also pay for closing costs. However, if you think you could attract some buyers who’d like to move in and handle renovations themselves, then keep reading. 

 

2. What are your estimated net proceeds in each scenario?

The key to seeing how much you might make selling on the market with an agent is to look at both the potential sale price and the cost of the sale. Real estate agents will argue they can get you a much higher sale price if you list your house, which is often true. However, there are many more costs associated with selling the traditional way, whereas there are usually zero costs subtracted from a cash buyer. 

When you list your house, the sale price is the starting point from which all your costs are deducted, and what’s left over afterward is the net profit or net proceeds. Doing a net proceeds calculation gives you a better apples to apples comparison of the two offers. 

 

How to calculate your net proceeds

To calculate net proceeds when listing your home on the market with an agent, do these five simple calculations (we’ve provided an example to help illustrate each one).

 

1. Estimate a realistic sale price

First, look at other comparable houses in your area for sale in terms of square footage, bedrooms and bathrooms. How does the condition of your house compare? Unless your house requires no repairs and has up-to-date fixtures, appliances, and design, the price you get for your house will not be in the same ballpark as the ones that do.

According to publicly available data from 2019 home sales, homes that haven’t had updates to kitchens, bathrooms, appliances, and flooring within ten years of listing on the MLS will sell for 17% less than comparable houses that have been recently updated. [1] For example:

Example: Comparable houses in good condition are selling for $300,000. Reduce that price by 17% based on your house's as-is condition ($51,000), and you get a realistic asking price of $249,000

 

2. Calculate seller concessions

Next, look at the inspection. Are there items that a buyer would need to have fixed before moving in? Buyers will often require that the seller reduce their price to accommodate the costs associated with these repairs. For example, if the roof needs to be replaced, or there’s a foundation issue, you’ll likely need to be prepared to come down another 1-2% from that realistic price.

Example: Sellers may negotiate down about 1-2%, which is $3,735 for a sale price of $249,000

 

3. Calculate transaction costs.

When you sell on the market through the traditional sales process with an agent, you are likely giving up between 7% – 9% of the sale price to pay commissions to your agent and the closing costs, which are paid to the companies handling all the finances (escrow) and paperwork (titles). 

From your actual sale price, subtract 6% for agent commission ($14,716) and 1-2% for closing costs ($3,679) - a total of $18,395.

 

4. Calculate your holding costs.

Consider the out of pocket costs of owning the house while waiting to find a buyer and close. These holding costs include mortgage, taxes, utilities, and any other monthly fees you owe such as solar panel bill, HOA fees, and any other out of pocket costs to maintain the house. The average time to sell a house in California is about 60 days.

Subtract 2 months of mortgage, utility, taxes, HOA, and any other recurring costs of owning the house. For two months, we're using the example of $5,200.

 

5. Calculate your net proceeds.

Subtract the amounts you’ve calculated for seller concessions, transaction costs, and holding costs from your realistic sale price – this is your estimated net proceeds, the amount of money that you might have after you’ve sold your house as-is using a real estate agent. Keep in mind that if it takes longer than the average 60 days to sell, you’ll be profiting less and less as you continue to pay holding costs.

Realistic asking price of $249,000. Subtract 1 to 2% for seller concessions (approx $3,735), then another 7 to 9% for transaction costs (approx $18,395), and then 2 mos worth of holding costs ($5,200). Your net profit would be $221,670.

 

Consider soft costs

While these price and cost calculations will help you estimate your profits you also need to factor in the many soft costs associated with the traditional sales process. These costs include time, uncertainty, stress, and work that goes into selling a house including the hassle of cleanings and showings.

At this point you may want to ask yourself, what is it worth to NOT deal with these hassles? Comparing your estimated net profit to a cash offer from a property investor will help you answer that question.

If you’re willing to accept a lower net profit in exchange for being able to walk away quickly and without doing any work, then it might be worth exploring an off-market sale to a property investor. An off-market buyer may not give you quite as much as your net proceeds calculation, but they may come closer than you think. And they can make the offer appealing in other ways, such as a fast closing and a short escrow period. 

Many off-market buyers will buy your house for cash, which means you don’t need to wait for a mortgage to be approved and risk having the sale fall through. Some may even offer a cash advance to help alleviate any needs during your transition.

 

Next steps

If you’re considering an off-market sale, make sure you explore your options before you sign on with a real estate agent. Many realtor contracts will lock you in for six months or more, stipulating that you owe them a commission even if they aren’t the one who finds you a buyer. That means if you end up selling off-market to a property investor, you’ll still have to pony up the agent commission! 

Be sure to field offers from multiple off-market buyers, and always ask to see the math behind their offers. Also be sure to ask about options to help smooth the transition, such as a cash advance before closing.

If you decide to go the traditional route and sell with an agent, be sure to understand your contract before signing. Check out our helpful tips for reviewing a listing agent agreement.

 

[1] Median sales prices and DOM according to MLS records of all properties sold Jan-Aug 2019 in San Diego, Riverside and San Bernadino counties (excluding mobile, modular and manufactured homes), as compared to properties sold Jan-Aug 2019 in San Diego, Riverside and San Bernadino counties (excluding mobile, modular and manufactured homes) with remarks specifying ‘As-Is, Damaged, Potential, Renovation, Probate, Investor’.

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What to Know Before Signing a Real Estate Listing Agreement

Understanding different types of real estate listing contracts can save you a lot of trouble, and money, when it's time to sell your house. If you're trying to sell a house that needs work, there are two options worth considering: selling with an agent on the market, or selling to a cash buyer