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How to Sell a House that Needs Work

April 7, 2020 | Josh Stech Josh Stech

In this guide, you’ll learn how to sell a house that needs repair work or renovations by weighing the pros and cons of listing the house with an agent vs. selling your fixer upper to a cash buyer.

Looking to sell a house that needs repair work 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 selling options:

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

or

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

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

 

Contents of this guide

 

Option 1: Hire an agent and list a house that needs repairs 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. Agents will tell you how to get your house spruced up and ready for buyers. They’ll also 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. The agent’s responsibility is to ensure 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:

  • Agents may not reach the right buyers for your property if it’s distressed and requires a lot of repair work
  • You have to spend time cleaning up and dealing with the hassle of repairs
  • You need to prepare for showings and vacate the property for open houses
  • Signing a listing agreement gives the agent the exclusive right to sell your house for six months
  • You will need to pay 6% of the sale price in commissions, even if the agent is not the one who finds the buyer or helps you sell the house
  • As the seller, you must pay closing costs, which are typically 1-2% of the sale price
  • You’ll pay holding costs (see below) while waiting to sell, typically for two months or more
  • Dealing with a range of buyers and price haggling creates an unpredictable outcome

Option 2: Find a cash buyer and sell your house off market

Most cash buyers purchase houses with the intention of doing repairs, renovating, and reselling them. They purchase the house as is, without cleanings, showings, or renovations. The entire transaction can close quickly with no hassles. In a cash transaction, the owner can seek out multiple comparison offers and negotiate terms. In fact, as the owner, you work 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

Best sell option for houses in need of work

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 to sell a house. If you don’t have much of either, and you need a reliable outcome, then selling to a property investor that can quickly do the repairs 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 repair work does your house need?

If your house needs significant repair work or a complete renovation, it’s possible that it won’t sell on the market to another family. Instead, you’ll likely attract cash buyers or property investors. These companies want to buy your house for the purpose of investing in renovations and reselling it for a profit. Consider this option if you want to sell your house faster.

If you suspect your house is not likely to sell on the market due to its condition, your agent may have to find cash buyers or developers to help you sell your house. If this is the reality of your current situation, you’re probably better off going straight to a cash buyer 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 and repairs 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. 

Read more: How to Calculate Net Proceeds When Selling Your House

When you list your house to sell, in particular if the house needs a lot of repair work, the sale price is the starting point from which all costs are deducted. 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

When listing with an agent to sell your house, follow these steps to calculate net proceeds:

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].

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

 

2. Calculate seller concessions due to repairs

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 come down another 1-2% from that realistic price to sell your house.

Example: Sellers may negotiate down about 1-2% if your house needs work on the roof or foundation, which would be $3,775 out of 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). 

Example: 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 sell it. These holding costs include mortgage, taxes, utilities, and any other monthly fees you owe such as solar panel bill, HOA fees, and maintenance costs you pay before you sell the house. The average time to sell a house in California is about 60 days.

Example: Subtract two months of mortgage, utility, taxes, HOA, and any other recurring costs of owning the house while you’re trying to sell it. 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.

Example: From a realistic asking price of $249,000, subtract 1 to 2% for seller concessions ($3,775), another 7 to 9% for transaction costs ($18,395), and then two months of holding costs ($3,432). Your net profit from selling a house that needs work would be $223,438.

Consider soft costs

These price and cost calculations will help you estimate the profits you get when you sell the house. But you also need to factor in the many soft costs associated with the traditional sales process. These costs include:

  • Time – a traditional sale requires hours of managing the process
  • Uncertainty – there is no guarantee of a sale, much less at your desired price
  • Stress – the mental strain of dealing with a demanding challenge
  • Work – 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? What would it be worth to be able to walk away quickly from all the repairs and possible bottomless money pit? Comparing your estimated net proceeds to a cash offer from a property investor will help you answer that question.

If you’re willing to accept lower net proceeds in exchange for being able to sell your house without doing any work, then it might be worth exploring an off-market sale to a property investor. An off-market buyer probably won’t give you as much as a traditional sale. But based on your net proceeds calculation, they may come closer than you think. And they can sweeten the offer by offering a fast closing and short escrow period. 

Off-market buyers will take the repair work off your hands and buy your house for cash. This means you don’t need to wait for a mortgage to be approved to sell it nor risk having the sale fall through. Some homebuyers even offer a cash advance to help alleviate any needs during your transition.

Fixer upper 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 to sell your house. 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 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 before you sell 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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