Have you ever walked through a house you wanted to make an offer on but got stumped on repair costs or estimates? Here’s one way to look at home remodel costs as a potential home buyer during a home showing.
Think In Blocks And Systems
When you think of a house, what do you think of? You probably think about the front of the house, or the inside of the house. When you want to estimate costs quickly, think of things as blocks or systems. Here’s how to think of each.
A block would be a room. For example, the kitchen is a block. A bedroom is a block. A bathroom is a block. The basement is a block.
A system would be something that doesn’t fit into a block. A roof would be a system. Siding would be a system. Your heating and air conditioning is a system.
Assign A Cost For Blocks Or Systems
Now that you know you have a block or a system, what do you do? You make a consideration of the type of box or system you are working with or desire to have. Look at your costs in three different ways
Entry Level When you are thinking in terms of entry level, this is quality expectation of a non-professional. Finishes aren’t going to be perfect, and perhaps the materials used are going to be of a lesser quality as well.
Mid Level When you think about mid level, you are looking at professional finishes. Most of the work is contracted out to others. The brands used are considered good brands.
Luxury This is the level for people who aren’t necessarily looking at money as the main motivating factor in their remodeling. They are looking for a particular style, or groups of brands that are expensive. You also see luxury level pricing in homes in particular areas of town, where putting in an entry level product would actually hurt the value of the home.
You don’t want to put luxury finishes in a house that is never going to bring the money in upgrades as it will cost you on the high side. Similarly, you don’t want to put entry level finishes on a luxury home because no one is going to pay the asking price plus the upgrades to get it back to the appropriate luxury level. It is helpful to think about the finishes. As an example, if a kitchen in an entry level home is $15,000, a kitchen in a luxury home sure isn’t going to be $15,000, and is more likely 3 to 4 times the cost.
Putting it together
What you want to do now is assign a value to your boxes or systems. Do this before you go looking at houses, and try to be reasonable about your costs. Always figure that you are too low with your cost estimates.
Let’s say you are walking through a home for sale in Webster Groves. The house is gorgeous but there are a few things you’d like to change out. As you walk through the kitchen, it’s just not up to date. And, while there are three bathrooms in the home, two have been updated and the other one will need an update soon. Also, as you’re walking through the basement, you notice the electric service will need to be upgraded.
The kitchen and the bathroom are blocks, and the electric service is a system. Assign a value to them. Let’s say to do this kitchen it will cost approximately 20,000 on the low end. Let’s assign a value for the bathroom of $10,000, and the electric service will cost at least $2,000. Add the numbers up and you get $32,000. Ask yourself this question, “As I see this house now, if I add $32,000 to the house, will I get even close to the new asking price?” If not, you are over paying for the home.
What did you just do?
I mixed a few concepts here, but I do this all the time so this is how I think of things when working as a buyer’s agent. I will go over them one by one right now.
- Figure out the repairs needed or desired. I don’t see many houses where the new buyers aren’t going to want to change something. Rather than trying to hide it, get it out in the open and discuss what you want. It’s ok if you don’t like the kitchen but love the rest of the home. Ask yourself what it would take to buy the home and replace the kitchen over time.
- Create a quick estimate. Most buyers will go through many homes. Rather than just walk through them with no idea what you’re doing, perhaps it’s good to have a system in place like the one I am presenting to you. Here’s the thing: Good houses sell quickly. You aren’t going to have time to schedule contractors to come through the house and give precise estimates, and, quite frankly, the seller probably isn’t going to want to grant you that time without closing on the house first. You need to have a way to get a number quickly.
I left out part of the rules, but I’m adding it here. Blocks should be either $5,000 or $10,000 increments. Systems can be in $1,000 increments but it’s much faster to add everything up and keep track at fives and tens and it’s also just a little easier to remember those numbers as well. If you go to three or four houses in a day, it will definitely benefit you to keep to the rules.
- Determine a value. Your real estate agent should be able to help you here. Let’s go over a quick example. Assume the true value of a home in a particular neighborhood is 200,000. This is the number the house should sell for if everything is perfect. Now, let’s say you walk through it, it needs a new kitchen, it needs a new bathroom, and the air conditioning is from the 70’s. Figure $10,000 for the kitchen, figure $10,000 for the new bathroom, and figure $10,000 for the new HVAC. The asking price of the home is $170,000. You like the home and you like the neighborhood. Should you buy it? Yes!! This is a great deal. Let’s look at a different situation
Assume the true value of a home is $450,000. The home needs a new kitchen, 2 new bathrooms, there’s something wrong with the garage, and the basement is atrocious. Let the value of the home work on assigning prices to things. A new kitchen in this neighborhood will be $30,000, and the two bathrooms are going to come in at $20,000 each. The basement is going to need somewhere around $15,000. The asking price for the home is $470,000. Should you buy it? No! You need $85,000 in upgrades just to get to $450,000. At $555,00, which is the asking price plus the upgrades, the neighborhood won’t support that price, as $470,000 is the highest asking price in the neighborhood now and $450,.000 is the true value.
Looking At Home Remodel Costs Or Upgrades Is Very Important
As you can see, if you aren’t considering remodeling or upgrading costs in your walk throughs, you are at a serious disadvantage when trying to figure out the best home to buy. My examples are to the extreme; usually you will see a home that may need something, but the market is hot so it’s ok to spend a little more. From the perspective of the seller, they are looking to get the maximum price for the home. Understand that they don’t care about what you or your real estate agent thinks the house needs in repairs. If their neighbor got a stupid price for their home, you can bet they are going to want the same or more for theirs.