Monday, November 17, 2014

To Improve, or Not to Improve?

To improve, or not to improve? That is the question many home sellers ask themselves when they’re getting their home ready for the market, and rightfully so: The right improvements can pay off big-time, while many others are a total waste. How do you know which is which?

Of course there’s no easy answer, otherwise people wouldn’t have been puzzling over this question since cave men contemplated slapping a new coat of whale oil on the walls. However, I can propose a rule of thumb (with plenty of exceptions, as all good rules of thumb have) that should help guide your decisions.

Repairs pay off; upgrades don’t; updates might.

Making a repair is correcting part of the home that is deficient, defective, nonoperational, or hazardous. A broken window, missing flooring, a dented garage door, a dishwasher that doesn’t turn on, from something as small as burned out light bulbs to something a large as structural problems or a 3-layer roof. Repairs pay off for two reasons. First, these are items that virtually every buyer who sees the home will see the need to correct as soon as they buy the property. This means the demand for the repair is pretty much universal, and any time you can please your entire target market it’s going to pay off. Second, these are items that are likely to come up as repair requests resulting from the buyer’s home inspection. You might as well make these repairs before you list the home so you can maximize the sale price, rather than settle for a lower price because the property needs repairs and then risk having to fix them anyway.

Making an upgrade is replacing anything in the home that serves its intended purpose and doesn’t noticeably detract from the home’s appeal, simply because you think buyers will enjoy a higher level of finish. Upgrades generally do NOT pay off because of two primary reasons.

First, there is a pretty low likelihood that the new thing you put in happens to be the exact new thing the future buyer would have chosen – let’s call this “taste mismatching.” The buyer had no choice in the matter, so the upgrade is unlikely to be worth to them what it would be worth had they chosen it.

The second reason most improvements don’t pay off is that they generally cost more than they’re worth. Just like a car, the moment you take a home improvement item out of the store it converts to garage sale value. Think about it: Take home a $5,000 kitchen appliance package, leave all the pieces in the original packaging, even keep the receipt, then sell them on Craigslist. Are you getting $5,000 for them? Not a chance, not even close. The same goes for windows, flooring, and many other upgrades assuming the existing components were not in disrepair.

Updates are the middle ground where the money is made or lost. Making an update is refinishing or replacing something that serves its intended function but noticeably and negatively detracts from the home’s appeal, either visibly or functionally, generally due to its age. Updates might include replacing Formica counter tops or the early-90’s baby blue bath fixtures, swapping out brass for brushed nickel light fixtures and door hardware, painting old cabinets and replacing the hinges and pulls, and so on. Updates may or may not give you a positive return. Increase your chances of reaping a positive return by selecting projects which meet the following guidelines:

-         -  Low in cost. In general, the higher the cost, the lower likelihood it will pay back. That’s why cleaning and painting are so effective.
-          - Likely to be desired by most buyers in your area. Go neutral in taste, and aim to match the level of finish you see in competing properties. 
      - Improve curb appeal. Curb appeal projects rank consistently at the top of return on investment.
-          - Have a dramatic visual impact – the uglier the “before,” the better the “after” looks. A perfectly functioning furnace shouldn’t be replaced just because it’s old, unless it’s a converted oil furnace circa 1962 that takes up half of your basement. Then, it just might be worth it to chunk in $2,000 for a new one. Same goes for covering up outlandish paint colors or undoing taste-specific improvements.
-          - Able to be completed using labor and/or materials you can get for below-market prices. For instance, your brother is a carpenter, or you scored a bunch of nice light fixtures from a builder’s surplus and can install them yourself.

In fact, here's an easy-to-use flow chart that will resolve all your home improvement quandaries:



In the end, the best way to answer the question of whether to make improvements will depend greatly on your specific home, your resources, and what’s typical and in-demand for your market area. Your best bet, and an investment that is sure to pay off, is to engage your favorite real estate professional and a home stager for their professional opinion.


Friday, November 7, 2014

The Hairy, Scary, Winter Market (A Myth)

Every winter I do my best to combat the stale advice we’ve been hearing for decades – “wait until spring to sell your home.” This year, the evidence to the contrary is as compelling as ever.

Take a look at the chart below as an example, then read on...



It is undeniably true that the number of buyers in the winter market is only fraction of the number of buyers during the summer. However, that’s only half the story. What matters most is not simply how many buyers there are but how many buyers there are compared to the number of sellers. Judgments shouldn’t be based solely on demand but on the relationship between demand and supply.

Let’s say you’re a potential home seller in Anyville, IL, deciding when to sell. And let’s say that during any time of year, like clockwork, every month three people purchase homes in Anyville. In the summer, usually 10 homes are on the market at any given time. And in the winter, only four homes are on the market at a time. Yet month in and month out, regardless of how many homes are available, exactly three of them sell. So in summer, the three buyers choose from 10 homes; three homes sell, and seven don’t. In winter, three buyers choose from four homes; three homes sell, and only one doesn’t.
During which of those markets would YOU rather sell?

In reality, demand for real estate isn’t fixed throughout the year - it does decrease during winter. However, the SUPPLY of real estate decreases even more, which skews the market in favor of sellers. In fact, according to a National Association of Realtors survey done last winter, the single most common complaint from winter home buyers is that there is not enough inventory to choose from. What about the weather, wasn’t THAT a popular complaint? It barely made the list. Why? The NAR also found that 89% of home buyers use the Internet in their search, so when it’s 20 below and sleeting, you’d better believe buyers are looking at homes. They’re just doing it while curled up in front of the fireplace, rather than trudging through the snow.

And as for waiting until spring? Well, that might not be such a good idea. Demand increases gradually and steadily from around December through May or June. Supply, however, increases suddenly and drastically in March, FAR outpacing the increase in demand. The result is that March is actually the single worst month of the year to sell a home. In no other month is the supply-and-demand relationship skewed more in favor of buyers. 

So if you’re still thinking of “waiting until spring,” it would seem that what your momma told you about not “jumping off a bridge just because everyone else is doing it” might be the best advice you could hear.