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The Mortgage Professor: Should You Fix Up a Home before Selling It?

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By Jack Guttentag

Serious buyers will most likely invest in an inspection by a company that specializes in such services. The firm retained by my buyer produced a document of 22 pages of small print, plus many photographs. Buyers that don’t retain an inspector will probably assume the worst about the unseen condition of the house.

There aren’t many buyers who will pay a price based on the assumption that everything they can’t see must be OK. Pricing the house on that assumption is a good way to keep it on the market unsold indefinitely. While you continue to pay for utilities, taxes and insurance, the condition of the house worsens and your real estate agent loses interest in trying to sell it.

Facing up to the issue means asking yourself whether you will come out better if you fix the structural defects, or if you offer it at a lower price “as is.” If the repairs cost $15,000 but it results in a sale price $20,000 higher, you want to do it. If the post-repair price is only $10,000 higher, you don’t. The likelihood of each outcome depends on the circumstances.

There are two circumstances that favor fix-up before sale. One is where there is a large variance in the cost of the fix-up, and a potential buyer is likely to over-estimate the cost. In the case of a septic system, for example, the cost depends on the condition of the soil, and if the seller knows that the condition is favorable and the cost low, it makes sense to fix it before sale.

The second and probably more compelling circumstance is where most potential buyers have the capacity to make only a small down payment, and are therefore not in a position to fund the cost of major repairs after purchase. By making the repairs before sale while setting a correspondingly higher price, a buyer is in effect financing the improvement in the mortgage. If a buyer with limited cash had to make the improvements after purchase, the financing costs would be substantially higher.

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