Do repairs affect the list price of a house? Episode #296

Todd: Hello. Welcome to Todd Miller TV joined here today with Oana. Oana has no idea what question I’m going to ask. I’m going to just surprise her with something. OK. So, you’ve sold a lot of REO.

Oana: Yes.

Todd: And you’ve been an investor.

Oana: Yes.

Todd: And you’ve been a flipper.

Oana: Yes.

Todd: What do you say to somebody out there who walks into an REO property? They’re either going to buy it themselves and live in it or they’re going to buy it as investment property. And they see this, we call it the sticker price, the list price, and then as they walk through it, they go, “It needs paint. It needs carpet. It needs baseboards. It needs an air conditioning unit. I may have to fix some drywall. I’m going to redo the kitchen.” And they add up $5,000 to $7,000 worth of work that the house needs, OK? Why is that an opportunity for them and what are some of the pitfalls if they don’t understand how that works?

Oana: OK. So here’s what happens. I see where you’re going with this. Somebody walks into a house and say the house is priced at $100,000 and they’re thinking, “Well, I’m going to put x number of dollars into it to fix it up so if they’re asking $100,000, let’s go ahead and discount the house the x amount of dollars that it’s going to take me to fix it up and that’s what I’m going to offer for it.”

The thing that people need to understand is the property is priced in as is condition. That means that those repairs have already been factored in.

Todd: OK.

Oana: I had somebody called me yesterday and they wanted $14,000 credit because the house didn’t have a kitchen and I just tried to laugh. I said, “Well, house has never had a kitchen. It was that way when I got the property. It wasn’t like I just removed the kitchen. So I don’t understand why you want a $14,000 discount on an already accepted offer because I don’t have a kitchen.”

Todd: OK. So let’s look at the scenario of you as an investor pricing a property. Forget the fact that you’re a real estate agent. You’re an investor pricing a property. You walk in a property and we’ll just say that the property is – if it were completely fixed up, if it were looked like every other house in the neighborhood.

Oana: Right.

Todd: It would be worth a $100,000.

Oana: Right.

Todd: OK. You walk through with a pencil and a piece of paper or your iPad and you make notes. And you calculate that for $10,000 worth of work, that house would be worth every other house in the neighborhood, a $100,000.

Oana: Right.

Todd: How do you price it as is? Do you just say, “I’m going to take the $10,000 off or do you – or no?

Oana: So it really depends on the market right now. In Las Vegas right now, if the house’s fixed up is worth a $100,000 but it needs $10,000 of repairs, I may still price it very close to $100,000 because there’s no inventory. When I look on the market, I see in that neighborhood that I will be the only house on the market.

Todd: Well, it’s just assume …

Oana: I’m the only game on the market.

Todd: … normal market, normal times because somebody watching this video maybe a year from now, there won’t be this weird market in Vegas where they it have no inventory.

Oana: Right.

Todd: It’s a normal market. There’s a normal amount of inventory.

Oana: OK.

Todd: Normally, a house is sold for a hundred grand. This house needs $10,000 worth of work. How do you price it?

Oana: OK. So if houses normally sell for a $100,000 and it needs $10,000 worth of repair, that’s probably going to get priced pretty to $90,000 because I’ve kept that in mind. I look at the price and say, “OK. What’s the as is price versus the repaired price?”

Todd: OK.

Oana: Because every property has two values. It has the as is and the repair. Sometimes the as is and the repair are the same because the house is in perfect condition.

Todd: Right. OK.

Oana: But sometimes it’s not. So every price really – every house has two prices and then we choose the marketing strategy. So based on the marketing strategy, we choose a price. So if we choose to market the property as is, then we go with the as is price.

Todd: OK.

Oana: If we choose to market the property repaired, then we go with the repaired price.

Todd: So how though as an investor, if you’re going to – I mean, if you’re going to play an arbitrage game with the property …

Oana: Right.

Todd: .,, you wouldn’t pay 90 for it, put 10 grand in and sale it for a 100 and you wouldn’t make any money. You’d be into it.

Oana: Right.

Todd: So, how is an investor – like what would you need to buy that for to be able to fix it up and sell it?

Oana: So it depends on the rate of return that you’re looking for and what kind of time you have to work with.

Todd: OK.

Oana: In today’s market, you would buy the house at market value which sounds like it’s somewhere between 90 and 100.

Todd: OK.

Oana: Go ahead and fix it and then hang on to it. Prices are going up relatively quickly right now so it makes sense to hang on to it for maybe a couple of years, rent it out and then go ahead and sell it. That makes a lot of sense. People have been doing that in Vegas for the last few years and they’re seeing a nice rate of return. I mean we’re seeing homes that maybe were bought earlier this year for maybe $90,000 to $100,000 and they’re worth somewhere around $120,000, $130,000 right now. And maybe people have put in anywhere between $7,000 and $10,000 into them.

Todd: OK.

Oana: So they’re seeing a nice rate of return. I mean it’s not to be tyrant but you do wait enough times and now, you’re talking some real money.

Todd: OK. Good. Awesome. So anyway, I just want to share that with you. I mean I agree with the as is versus repair. A lot of people don’t – they see repairs as a setback. I actually like that. When I walk into a house and I see it’s messed up, I like that because what I say is, “I can put the carpet that I want, the paint that I want, and maybe I can do it cheaper than what someone else who priced it fixed and I can actually buy some equity. Buy the house with equity in it because I fixed it up for less. They overestimated the repairs.

Oana: That’s why – the other part is that when a house needs repairs and you do the repairs, then you know that they’re done right and you don’t have surprises down the road. So for example, when I see a house with that hot heater, I am not too very happy about that because a vacant house that’s had a hot water heater then probably that hot water heater probably needs to be replaced anyway.

Todd: Right.

Oana: So I’d rather get a house without one in the first place so I don’t have to worry for this one to explode three months down the road or to not work when a tenant moves in.

Todd: Cool. Awesome. Well thank you for being on the show.

Oana: You’re welcome.

Todd: All right. So, that is my update for today and hope to see you on another video. Thanks.