Question: I’ve submitted two offers on home this year and both times lost to multiple offers. Is this normal or is the market more competitive this year?
Answer: 2018 has been a good year for sellers and a frustrating one for buyers already. Generally, I don’t start seeing multiple offer deals until late February/early March, when it starts to warm up and days get longer.
However, about 80% of the listing and purchase deals I’ve been on this year have ended up with multiple offers. I even had a listing that had been on market for three months receive three offers in one weekend. My colleagues who work in new construction and generally have the best pulse on market pace have also been surprised by the amount of activity this early.
Here are some numbers in Arlington from January to back up the anecdotal evidence of a hot market:
Supply Down, Demand Up: Monthly of supply measures how long it would take to sell all existing inventory at the current market pace (supply and demand) is down 21% YoY and at its lowest levels (1.31 months of supply) since March 2013 (1.22 months of supply)
More Homes Under Contract: Over 200 homes went under contract in January (215) for the first time since 2012 (219)
Homes Under Contract Faster: Of the 119 homes that were listed and went under contract in January 2018, 69% went under contract within one week. Over the last five years, 49% of homes listed and under contract in January went under contract within one week.
Average Number Of New Listings: The amount of new homes listed on market in January 2018 (234) is about average for what we’ve seen over the last decade
Advice For Buyers
Periods of low inventory and high demand can be frustrating for buyers, so here are a few tips for buyers to create leverage for themselves without simply paying more:
Quality Of Lender: Have a pre-approval letter from a strong local lender who has review all relevant documents, not just somebody who checks credit score and asks for basic financial information. A strong lender letter gives the seller confidence you will close on the home on time, without complications.
Contingencies: Consider giving up your right to request repairs and credits after the home inspection and using a Pass/Fail contingency instead. This shows that you’re not interested in nickel and diming a seller, but just want to make sure there are no major issues. You can also offer to cover up to a certain dollar amount in the event of a low appraisal, if you are offering to pay above the asking price.
Close Faster: Most homeowners want to close as quickly as possible. A good lender can have you ready to close in 20 days vs the more common 30-40 day close.
Don’t Play Games: We all want to negotiate a great deal, but oftentimes a great deal is actually having your offer accepted not saving a few thousand dollars. When a seller has multiple similar offers, they often put more weight in who they think is most likely to close with the least complications. In that scenario it pays off to make it clear how much you love/want the home instead of acting like you could take it or leave in an attempt to negotiate a lower price.
Days On Market: The number of days a property has been on market should dictate how you approach an offer. You won’t have much leverage in the first few weeks or after a major price reduction.
The spring market can be a great time for buyers who are prepared for competition because you’ll see a significant increase in inventory, so that illusive 2 bedroom + den or half acre yard with a deck is more likely to materialize.
If you’re not prepared to make a strong offer, the spring can be frustrating and defeating because you may watch your dream home(s) go to other buyers who have made smarter, but not necessarily higher offers.
Question: What were the real estate related changes in the new tax plan and how will those changes impact our local real estate market?
Answer: Spending an hour every week working on my taxes in QuickBooks doesn’t qualify me as a tax expert, so before I provide my take, I’d like to introduce local tax expert Molly Sobhani, CPA of Klausner & Company, located in Rosslyn, to break-down the key changes in the new tax plan that will effect how buyers and homeowners make real estate decisions. Following Molly’s explanation, I will provide my personal thoughts and stats, which stand in contrast to most of the opinions I’ve read.
If you would like to follow-up with Molly about the tax bill or any other tax questions, she can be reached directly at email@example.com or (571) 620-0159. Take it away Molly…
After weeks of confusing, convoluted and contradicting proposals introduced by the House and Senate, the Tax Cuts & Jobs Act (TCJA) was signed into law on December 22 by President Donald J. Trump. As the dust continues to settle on TCJA, taxpayers across the country are wading through the tax reform bill and the impact of those changes.
With increases to the standard deduction, changes to the deductibility of mortgage interest and limits on property tax deductions, current homeowners and potential homebuyers have a lot to think about. The housing market will undoubtedly be impacted but how – exactly – is still a big question mark.
Summary of Major Tax Law Changes Impacting Residential Home Ownership
Interest will only be deductible on mortgage debts used to acquire your principal residence or a second home of up to $750,000 (or $375,000 for a married couples filing separately). The phase-out of deductible interest begins after the loan balance exceeds $750,000. This new debt limit applies to all loans incurred after December 15, 2017.
Interest on home equity debt (also known as Home Equity Lines of Credit or HELOCs) will no longer be deductible. This is true regardless of when the home equity debt was incurred.
State and local taxes (also known as SALT deductions) will be limited to $10,000 per year. This category of deductions also includes property taxes paid on homes.
The Standard Deduction has increased substantially from $12,700 for joint filers ($6,350 for single filers) in 2017 to $24,000 for joint filers ($12,000 for single filers) in 2018.
One provision that did not change is related to the capital gain exclusion of up to $500,000 for joint filers ($250,000 for single filers) on the sale of a primary residence. You still must use the home as your primary residence for at least two of the last five years in order to be eligible for the full exclusion.
So why do these new tax provisions make homeownership a trickier decision? The incentives for being a homeowner have now been substantially diminished by the new laws for many taxpayers.
A Hypothetical Scenario
A married couple earns $150,000/year in wages and is looking to buy a home in Arlington, VA. Their total state income taxes are $8,625 (5.75% of their $150,000 wages.) They have no other deductions to itemize in 2017 so they will take the $12,700 standard deduction.
In January 2018, they buy a condo for $425,000. They put down 20% and borrow $340,000 at 4%. They are under the $750,000 mortgage debt cap so they are eligible to deduct all of the interest they pay on their loan each year. In the first year, their total interest expense totals $13,491. Their property taxes are $4,233 based on Arlington’s 2017 rates for a $425,000 assessment. Our married couple has a brand new home and all these brand new deductions, right?
But wait! After we add the new property tax deduction of $4,233 to the $8,625 they already pay in state income taxes, they are over the $10,000 limit for SALT deductions. In this example, $2,858 of their property taxes are not deductible.
Fine. Let’s look at their total deductions then: they have the maximum $10,000 SALT deductions and $13,491 of mortgage interest, totaling $23,491. Under the old tax laws, they would itemize their deductions and see a reduction in their Federal and state taxes for these additional expenses.
But we’re not working under the old laws anymore, are we? Under TCJA, even after spending all this money on buying a new home, paying the interest on their mortgage and paying their property taxes, they are actually still better off taking the standard deduction of $24,000.
As you can see from the example above, by increasing the standard deduction to $24,000 for a married couple filing jointly, many taxpayers who otherwise would have itemized may now benefit more from the standard deduction. This essentially takes away the tax benefit of owning a house for some people. And the question that many potential homebuyers may consider is: “Why bother?” More and more, they may delay the decision to buy in favor of renting.
Other Potential Effects on Housing Markets
Home values may be impacted, too, by the change in tax laws. If mortgage interest is limited to $750,000, houses that are listed at prices over $937,500 (assuming a buyer puts 20% down) may not be as appealing to new buyers as lower-priced homes.
Another consideration is how the disparity in state income and state property tax rates may drive homebuyers into lower tax rate states. In high tax states, there could be multiple scenarios in which taxpayers lose 100% of the tax benefit of paying property taxes.
Of course, there are other (wonderful) reasons to buy a home and other (wonderful) reasons to buy a home in certain neighborhoods. The upsides generated from the Tax Cuts & Jobs Act, though, are severely lacking.
Eli’s Closing Stats and Thoughts
According to The Washington Post, Moodys Analytics predicts that home values in Arlington will drop 2.3% as a result of the new tax bill, with drops of 2% in DC, 2.5% in Montgomery County, 2.6% in Loudon County and 4% nationally. Of course, this analysis is limited to the impact of the tax bill and doesn’t take any other growth factors into consideration. In other words, if Arlington continues its growth from 2017 (3.1%), we wouldn’t see actual losses, but stunted growth.
The change in SALT deductions and increase in the Standard Deduction will reduce the benefit of homeownership for many Arlington residents, but let’s take a look at how many homeowners are likely to be impacted by the reduction of the mortgage interest deduction limit to $750,000. Of the 3,100+ homes sold in Arlington in 2017, just over 400 were bought with loans exceeding $750,000. Approximately 30% of detached homes in Arlington (350 of 1,150 sales) had a loan exceeding the new limit. Keep in mind, however, that homeowners with loans over $750,000 will still be able to deduct interest on the first $750,000.
I Don’t Believe The Market Will Suffer
While these stats and Moodys’ analysis are great, they fail to capture how homebuyers actually make decisions in the real world. The majority of buyers decide to purchase a home because of a major life event (marriage, kids, job change, etc) and once they’ve decided to purchase a home, their budget is based on how much they have saved for a down payment and how much they can afford each month in housing costs.
Their monthly budget is primarily based on income and the sum of mortgage payments, property taxes, any HOA fees, insurance and maintenance. SALT and mortgage interest deductions don’t factor into any of the core considerations for most homebuyers.
Let’s Be Realistic
Let’s be honest, for most people, taxes are a once-a-year afterthought and tax planning is mostly crossing their fingers, hoping for a few dollars back. For those who do pay close attention to their tax exposure and who stand to lose out on the benefits of the mortgage interest and SALT deductions, I question how much it actually matters.
Previously, the mortgage interest was capped at $1M and there were just 163 (5%) homes purchased in 2017 with a loan of $1M or more who will be “fully” effected by the change to a $750,000 cap. In the first year, the interest paid on that difference of $250,000 is about $10,000 (drops each year), so for somebody with an effective tax rate of 30%, that’s a $3,000 change to their bottom line from last year.
Adding the change in SALT deduction increases that for many people and $3,000+ is nothing to sneeze at, but we’re talking about the wealthiest homebuyers with incomes exceeding $250,000/year. I’d bet that for those who are conscious of the net effect on their bottom line, they’re more likely to find ways to save this money somewhere else than their home purchase.
Plus, the tax plan provides substantial benefits to wealthy Americans and may very well have a net positive effect on their bottom line anyway. Also, does anybody really think that somebody negotiating on a $1.5M+ home they plan to live in for 15+ years will pay $5,000 less because that’s the calculated net impact from mortgage interest and SALT on their 2019 taxes under the new tax bill? No way.
Let’s be realistic about the psychology of home buying and what determines buying power because that’s what impacts home prices, not expensive studies funded by special interest groups (yes, I’m kind of calling out the National Association of REALTORS for fear mongering).
Question: Are there certain considerations to be aware of when re-listing your home in the spring/summer market if you listed and then pulled it during the fall/winter market? Are there things that you would need to fix up in a slow winter market that you could let slide in a hotter market?
Answer: You’ve been on the market for months, had a few interested buyers, but nothing has stuck. Now you’re in the midst of the holidays during the coldest and darkest days of the year so you’re asking yourself what every seller is asking… should you pull your listing and wait for the market to heat back up in the spring?
There are three scenarios that I’ll consider advising sellers to take their home off the market during the winter:
You are living in the home, are under no pressure to sell, have been on the market for more than 60 days without an acceptable offer and have exhausted conversations with any buyers who have shown interest.
You have received feedback from agents and potential buyers that the home needs work and you will take time over the winter to make the necessary improvements, providing that the cost of those improvements will net you better terms than an immediate price reduction and avoiding additional carry cost.
A key selling point of your home is landscaping and/or a view that is difficult to recognize during the winter.
Pros & Cons Of Re-Listing
Pro: More Buyers… The number of homes that go under contract drops substantially from November-January and picks up quickly in February. On average, the number of new purchase contracts more than doubles by March compared to December and January.
Pro: Faster Sales… The increase is buyer activity (demand) results in homes selling a lot faster in the spring/summer
Con: Not Necessarily Higher Prices… The increased buyer activity impacts days on market a lot more than it does pricing. The amount somebody is willing to pay or qualified to pay for a home often does not change based on the season, rather larger economic factors.
Con: If you decide to re-list in the spring, you are probably planning to do so at a higher price. Be careful with this decision because agents and buyers have easy access to previous asking prices and if you have not made any substantial capital investments to your home to justify the increase, most buyers will base their negotiations on your previous asking price, not the new/higher one.
Pro: If you’re off-market for three months or more, your days on market count officially resets to zero when you re-list. This is a system rule for MRIS/BRIGHT (the database of record for agents), although most buyers use sites that show the full listing history and can easily see that something was withdrawn and re-listed.
The Spring Isn’t Easier
Don’t ease up on the marketing of your home in the spring just because there are more active buyers than the winter. You will be competing against 2-3 times more homes for sale so you could make a case that you need to do even more to stand out in the spring, not less. However, if you’re on a budget, you may want to allocate your repair, improvement and staging funds differently based on the season such as the warmth of the family room in the winter vs outdoor dining in the spring.
Question: I came across an article you wrote about how buyers and sellers can avoid the most common problems encountered in a real estate transaction and it made me wonder what some of the most common mistakes are that home owners make when selling that have the biggest impact on their bottom line.
Answer: The biggest mistake a home owner can make when selling their home is not calling me first… kidding (but not really). Below are a handful of the biggest mistakes I see home owners make when selling their home, that have the most impact on their net bottom line. This is not exclusive to homes sold without an agent either. Unfortunately, I see many of the same mistakes on For Sale By Owner (FSBO) homes as I do on listings owners are paying an agent to manage.
Over-Investing In Updates
Choosing the right combination of updates to invest in (or not) to prepare your home for sale has the biggest impact on your net bottom line of any decision you’ll make. I cannot stress the importance of getting this decision right early in the process.
You should only invest in updates that will result in an ROI of greater than 100% or it’s a waste of money and time. Of course you will be able to sell your home for more money if you redo the kitchen and master bathroom, but in most cases, you’ll only get a fraction of your money back, generating a huge net loss for you.
Similarly, don’t spend $10,000 replacing floors, but ignore painting and leave your old brass doorknobs. Selecting the right “package” of updates that will generate the highest ROI is specific to your sub-market, budget, priorities and time of year.
Working with an agent on these decisions who works with both sellers and buyers is critical because they have a strong understanding of how buyers interact with homes during showings and the impact certain updates have on their buying decisions.
Stop Using Amateur Photography
My photographers are some of the most valuable assets I have because the quality of photos can make the difference between drawing heavy traffic and being passed over… Traffic = offers and heavy traffic = multiple offers. Buyers and agents are combing through a lot of homes to decide what is worth seeing in person and the quality of your photos influences that decision more than anything else. Do not take pictures with your cell phone. Do not use an amateur photographer. Do not use a photographer without real estate experience.
Listing On The Wrong Day
It’s Sunday evening… you’ve taken pictures, selected your asking price and spent all weekend cleaning so you’re finally ready to put your beautiful home on the market, make yourself a drink and watch the offers roll in. STOP. There is one day of the week that you should put your home on the market to maximize exposure while minimizing days on market (and two acceptable alternatives), but Sunday evening is not one of them. Feel free to email me to find out which day you should list your property and why.
You raised three amazing children in your home and kept up with regular maintenance for 25 years, so who is this buyer and their inspector to tell you there are 35 items that need to be repaired? It’s hard not to take the results of a home inspection and the resulting buyer requests (read: demands) personally, but you’ll be much better off keeping your emotions out of this final negotiation. Reference my advice to sellers for home inspections here.
Remember that this is likely just as emotional of a transaction for the buyers and the goal is to reach a equitable agreement, not start a fight to defend the pride you have in your home.
There are a host of other mistakes I see including over-pricing, limited showing times and not including a floor plan but the above highlight the most common errors that have the biggest impact on a home owner’s net bottom line.
If you’re considering selling your home, even if you’re 12+ months out, don’t hesitate to reach out to me to discuss strategies that will maximize your sale. You can reach me any time by email at Eli@EliResidential.com or phone at (703) 539-2529.
Question: We are planning to buy a home in the next 12 months and wondering what the real estate market is like during the winter. We’ve heard it’s a bad time to sell, but does that mean we won’t be able to find anything we like?
Answer: I love working with buyers in the winter because we have more opportunity to negotiate (a nice reward for fumbling with keys in the dark when it’s 30 degrees) and the probability of finding a seller ready to negotiate increases substantially. In Northern Virginia, the winter market generally runs from late November through late February/early March (Thanksgiving to March Madness) and is defined by increased buyer leverage, less contract activity and fewer new listings. While many buyers can benefit from winter shopping, it’s not the right time for everybody.
Buy In The Winter If…
You’re a bargain hunter
What you like is priced just outside of your budget
There is a regular supply of homes you like
You can accept having a few offers rejected
Wait For The Spring If…
You have specific, hard-to-find criteria
You value the perfect home over a great deal
Your purchase is contingent on selling your current home (requires additional conversation)
That’s not to say you can’t negotiate a great deal in the spring or find a unique property in the winter, but if you’re playing the odds, the above is a good set of guidelines for deciding the best seasons to focus on a purchase.
I’ll let you review the trends in Northern Virginia for yourself:
Buyer Leverage Increases In The Winter
In the winter, buyers pay about 2% less, relative to original asking price, than they do in the spring. On a $500,000 purchase, that’s $10,000 in savings.
New Contracts To Purchase Drop By Half In The Winter
Buyers have more leverage in the winter because there are fewer of them actively searching the market.
It’s Harder To Find What You Want
The probability of the home you want hitting the market in the winter drops substantially, making it difficult on selective buyers. This is also why fewer homes go under contract in the winter.
If you’re on the fence about buying this winter or not sure if you have time to prepare yourself to make a purchase, send me an email at Eli@EliResidential.com or give me a call at (703) 539-2529 to discuss your options and put a strategy in place.
Question: This is in response to recent comments on my columns about what it means to sell “as-is.”
Answer: Selling a property “as-is” in Northern Virginia carries a technical definition as stated in the contract and an intended purpose that should be discussed between the buyer and seller.
In Northern Virginia’s Contingencies/Clauses Addendum you’ll find a section for selling “as-is” which contains the following terms that can be individually selected for the contract:
Seller will not clean or remove debris. The standard is for the property to be free of trash/debris and broom clean.
The seller is not responsible for addressing any wood destroying insect/termite issues. The standard agreement requires the seller to pay for any damage from wood destroying insects.
The seller is not required to fix any Homeowners Association violations related to the physical condition of the property.
The seller is not responsible for providing working smoke detectors.
The seller is not responsible for compliance with notices of violation from local authorities.
When you market a property as-is, you are implying that you will not negotiate with the buyer to fix anything and the buyer should be prepared to take on the full risk of the property in its current condition. Generally, this means a buyer will agree to take the property in the condition it is in at the time of offer and that the contract is not contingent on a home inspection (buyer withdraws the right to negotiate or void based on home inspection results).
However, you may consider accepting a short pass/fail inspection contingency whereby the buyer does not have a right to negotiate credits or fixes, but does have the right to void the contract if they find any major problems with the home during the inspection.
Who Uses As-Is?
It is common to see estate sales and homes that will be the targeted by investors (tear downs or flips) being sold as-is. In the case of many estate sales, the family member(s) who inherited the property may not live nearby, know anything about the condition of its systems, or want to be bothered by negotiations after a deal has been made. It doesn’t necessarily mean the property has problems.
Understand Your Choice
As a seller, you want to make sure you understand the message you’re sending and buyers you’re targeting when you market a home as-is. You also need to be realistic about how this will impact the sale price (discounted). As a buyer, you want to make sure you understand why a home is being sold as-is, what the seller’s contractual and implied expectations are, and be prepared to handle the risks associated with buying as-is.
Question: We are planning to sell our home and wondering if the cost of professional staging is worth it. What’s your opinion on staging and are there certain circumstances where you do or do not recommend it?
Answer: I recommend staging for almost every home I sell because it will increase your sale price by more than you spend and help your home sell faster. In fact, it makes such a difference that clients often joke after seeing their decluttered and staged home that they’re considering moving back in!
What Is Staging?
Professional staging is a service used to improve the marketability of a home by arranging rented furniture in certain rooms of a home to maximize the space and visual appeal. Most staging professionals have an interior design background and a large supply of furniture to work with.
Staging is mostly done when a home is vacant, but for sellers occupying the home they’re living in, stagers will also provide consultations on how to best utilize your existing furniture and make suggestions on small add-on items to enhance a space (area rugs, towels, flowers, wall art, etc).
How Much $$$?
Condos can usually be staged for $1,500-$2,500 and townhomes and single family homes generally cost $2,500-$4,000 depending on the number of rooms you stage and quality of furnishings. For high-end real estate, expect to spend $5,000-$10,000. You should plan on spending 0.5-1 percent of your asking price on staging a vacant home.
What Are The Advantages?
Better pictures = more interest online = more showing traffic
Significantly better showing experience for buyers
Empty space looks smaller, staging helps visually increase the size of a room
Buyers struggle to visualize how beds, couches, tables, etc will fit
Awkward spaces benefit from the design of a professional
Clean, organized look increases the sense of a well-maintained home
Play to the strengths of a room and distract from its flaws
Home has been thoroughly cleaned and freshened up as necessary (paint, replace damaged/ancient items, etc)
Using professional photography
Where’s The Proof?
You may see staging companies or agents make claims that staged properties return an “X” percent higher sale price or sell “X” days faster than unstaged properties, but the reality is these numbers are just convenient marketing figures with no real substance.
One of the challenges with statements like these in real estate is that you don’t have the ability to isolate something like staging and compare the success or failure of the same home sale with and without it. You have to rely on the experience of your agent to help with decisions like these.
My experience with staging comes from seeing the impact it has on homes I sell, but even more so, how buyers I work with react. There is a noticeable difference in how buyers react to staged homes versus empty or cluttered homes (lived in without regard for design) and this shows up in their preferences when they’re viewing properties online to decide what they want to see and then again when they’re actually in the property.
I generally take an opportunity to point this out to my clients so they understand how much of an impact staging has on their perception of a home, so they keep it in mind when it comes time for them to sell.
I’m Here To Help
If you’re considering selling and trying to decide which investments like staging, painting, and updated appliances will return more than they cost, feel free to reach out to set-up time for me to see your home and make some suggestions.
Question: The best time for me to purchase a home is over the next few months, but I’ve heard from friends that the spring is highly competitive. Do you have any tips for being more competitive in the spring market without overpaying?
Answer: In a couple of weeks I’ll publish a summary of real estate data for the first quarter of 2017 in Arlington, but I can tell you that this year is off to an explosive start and the “spring market” started early. Warmer weather brings more buyers to the market and more competition over our limited housing inventory. Here are some tips on how you can improve your chances submitting a winning offer without exposing yourself to unnecessary risk or overpaying:
Take Your Time, Do Your Homework
I always tell clients that a home has two values — market value and personal value. Personal value will drive how you structure your offer and what you’re willing to pay relative to market value. Hopefully you’ve spent time over the last couple of months sharpening your criteria and understanding how it fits within your budget. If you’ve put in the right prep work upfront, you’ll be able to recognize personal value quickly and make strong offers with confidence.
One way to make your offer stand out is by settling in three weeks instead of the more common 30-40 days. The settlement period is the time between the contract being signed (ratification) and the home purchase. It’s dictated by the time your lender needs to prepare your loan, so talk to your lender early on about ways to reduce your settlement period. Most sellers want to close on a property as soon as possible.
Most offers in Arlington include contingencies (protective terms for a buyer) for financing, appraisal and a home inspection. The shorter you can make each contingency, the more attractive your offer will look to a seller. Talk to your lender about how long they need for the financing and appraisal contingencies and don’t add unnecessary time to them. Home inspections are valuable steps in the buying process, but also carry significant risk to the seller.
There are a number of ways to improve the “normal” 7-10 home inspection contingency to make your offer more attractive such as reducing the length of the contingency to five days with a short negotiation period, using a Pass/Fail contingency by removing the right to negotiate, making the inspection for informational purposes by removing the contingency all together (do not make this decision without considerable discussion), or getting approval from the seller to conduct a pre-inspection before making your offer.
Before making your offer, find out if the seller has any preferred terms such as a post-settlement occupancy (aka rent-back), home purchase contingency, or timing of settlement (Virginia loans should close end of month).
Watch Days on Market
The number of days a property has been on the market will help you decide how to structure your offer. You should be prepared to make your strongest offer within the first week of a listing and adjust your terms with each week a property sits.
The spring market can be a great time for buyers who are prepared for the additional competition because you’ll see a significant increase in inventory, so that illusive two bedroom + den or half-acre yard with a deck is more likely to appear. If you’re not prepared to make a strong offer, the spring can be frustrating and defeating because you may watch your dream home(s) go to other buyers who have made smarter, but not necessarily higher, offers.
Question: After reading your article two weeks ago about remodeling before selling a property, I was wondering what your thoughts are on remodeling our rental property. It’s a 1BR + den a couple blocks from the Virginia Square metro with a perfectly functional bathroom and kitchen, but about 15 years old.
Answer: A couple of weeks ago, I warned about spending money on major remodeling projects before selling your home and you should be equally cautious about making major updates to a rental property. In your case, it doesn’t sound like spending $15,000+ remodeling the bathroom and kitchen is a good investment at this time. Here are some of the questions/factors you should consider:
How long will it take to break-even on your remodeling expenses based on projected increase in rent? A moderate remodeling of your bathroom and kitchen is likely to increase the amount you can rent your unit by $150-$200/month (this is case-by-case), meaning your pay-back period is likely 10+ years. Keep in mind that the market value of your updates will depreciate annually and usually at a faster pace under the wear and tear of a rental unit.
The ROI of remodeling is heavily based on the type of tenant you’re most likely to have. Your tenants will most likely place more value in convenience, affordability, and functionality than they do aesthetics and upgraded finishes/appliances. As the tenant profile shifts towards families and higher-end properties, the ROI of upgrades increases.
Length of Stay
The less time a tenant plans to stay in a property, the less concerned they’ll be with updates, but tenants planning to stay for three or more years will consider their rental to be more of a home and place great value in an updated kitchen and bathrooms. As the tenant profile shifts to longer rental periods, the better the ROI on remodeling. In your case, the tenant profile is more likely to stay for 12-24 months, diminishing the value of remodeling.
According to Joseph Aiken, CPA with Aiken & Company, the current tax code considers any capital expenditures on remodeling to be depreciable assets, meaning you can’t write off the cost of your remodeling in the year you spent the money, rather deduct it over a 27.5 year depreciation schedule.
My advice for investing in a rental property is similar to investing in pre-sale improvements. Fresh paint, quality floors, lighting, and a deep clean go a long way on a rental property without breaking the bank and can usually be written off as maintenance expenses on your taxes. Check out IRS Publication 527 for tax details on rental properties.
Question: I’m preparing to sell my home this year and wondering if remodeling the 1990s kitchen and bathrooms will improve the resale value and help me sell faster or if I should leave it as-is. Is there a good way to decide which option is best?
Answer: Yes, remodeling your 1990s kitchen and bathroom will improve the resale value and probably help the home sell faster, but that’s not the right question to ask. The question you need answered is what updates will create a positive Return on Investment (ROI), meaning that every dollar you spend on updates results in an increase in expected sale price of at least one dollar. For many sellers, this is the most valuable advice your real estate agent can provide.
Avoid Most Remodeling Projects
Simply put, most remodeling projects do not return a positive ROI for homeowners. A number of large companies including Zillow and Remodeling Magazine have conducted extensive studies and determined that most large-scale remodeling projects like bathrooms, kitchens, roofs, additions, etc only return about 50-80 percent of their cost on the resale market. Remodeling Magazine updates their Cost vs. Value statistics every year using regional data and has a great report specific to the DC Metro area.
No Simple Answer…
There’s no easy answer to this question without being in the house, meeting with the owners, and knowing the local market. Here are some questions that need to be considered:
Who is the most likely buyer? Are they likely to have cash on-hand to make updates themselves?
Can the home be considered move-in ready in its current state?
Is the home suffering from functional obsolescence or just requires a quick facelift?
In as-is condition, does the home and pricing appeal to an investor?
How has the market reacted to homes in similar as-is condition, in similar condition with minor updates, and in similar condition with major updates/remodeling?
How much similar inventory is there (current and projected) at each level of updates (as-is, minor, major)?
What are your (homeowner) sales priorities, timeline, and pre-sale cash on-hand?
Is it easy for a buyer to envision an updated version of your home?
…But I’ll Try
Here are some tips and principles I find myself using most-often when advising homeowners on pre-sale updates:
Flooring (replace/refinish), paint (walls, trim, doors), de-cluttering, and staging are affordable for most homeowners and almost always result in a positive ROI and in some cases new, matching kitchen appliances are positive ROI investments
There are a lot of little things you can do to improve curb appeal (e.g. power washing and mulching) and interior appeal (e.g. new outlet plates and door knobs) that make a big difference
Updates should be done in groups/tiers, not one-offs, so that your investment is coordinated and within budget. In other words, if you commit to doing one update, you need to commit to other similar updates in order to get a positive ROI. For example, it doesn’t make sense to replace flooring if you’re not committed to de-cluttering or to remodel a master bathroom and leave your 30 year old kitchen untouched.
If you’re planning to live in your home for a few years after remodeling so that you benefit from the updates, then a 60-80% ROI may be an acceptable return. In this case, visit a few local new homes or builder design centers to see what today’s buyers like and try to replicate it to maximize the ROI when you do sell.
Strategically investing in pre-listing updates should be a well thought out process with different options priced out next to projected impact to sale price and speed of sale. For many homeowners, this process can take upwards of 3-6 months from planning through project completion before being ready to sell, so start early and invest wisely! Feel free to reach out to me at Eli@RealtyDCMetro.com or (703) 539-2529 if you’re thinking about selling your home and want an opinion on the most effective way of investing in pre-listing updates!