Dave, who is in the process of buying a house asked the following question in the comments recently
I would appreciate some advice as far as asking price and renovations.
We are currently looking at purchasing an older home that will require 80K. The current owners did nothing (and I mean nothing) to the house and have lived there for 12 yrs. Needs roof, furnace (currently 40 yrs old), all windows, floors need reinforcement, Siding. And this is just the outside. Contractors have quoted roughly 45K to do these items. The rest we would do over time. How should we adjust the asking price?
Cheap and I both agree that he should over-estimate the renos/repairs and subtract them from the market value of the repaired house (not the asking price) to come up with a fair market value. The problem of course is that coming up with the proper market value involves a lot of work looking at houses, seeing what they sell for and trying to learn the market that way.
Two other issues you may run into, particularly if you are looking in a hot neighbourhood, is that other buyers may not estimate the repairs as conservatively which might mean that your pricing model may not be accurate (it will be too low). The other scenario is that sometimes people who are desperate to buy into a particular area but can’t afford a house in good shape will overpay for a fixer. For example if there is an area where a house in good shape costs $600k and a buyer can only afford $500k then they might be tempted to buy a house that needs $150k in renos. Logically, they should only pay $450k for this house (approx) but since there will be some competition for this “entry to the neighbourhood house”, they might pay up to $500k for it just because it enables them to buy the area they want. I’m not suggesting that you overpay to compete with irrational buyers but rather to be aware of them and try avoid a situation where you are competing with them.
He also left a comment regarding his agent:
I agree with the comments on the common lines that agents try to use.
Our agent used the “don’t bid too low or you will insult the selling agent and clients” line this weekend. He also used the “meet them halfway” concerning the opening bid. He also used the “there is interest in the property” line. That was all this weekend. I said to the wife that we have a limit financially. If our 1st offer isn’t accepted, that’s OK. The house will be there a month from now when we return with another offer.
These are pretty standard lines for agents and while you shouldn’t put too much stock in anything an agent has to say, I also wouldn’t completely disregard them. The “don’t bid too low and insult the buyer” has some validity although it should really be worded “Don’t bid too low because you will be wasting everyone’s time including your own”. My point is that just because these lines can be used to further the agent’s own interest – doesn’t mean that everything the agent says is a complete lie.
I like the attitude of coming back in a month to put in another offer. The important thing to note is that while that particular house may or may not be there in a month, there are many more just like it, or even better. There is no such thing as a perfect house.