Every home buyer begins their search with a set of parameters that is unique to them. Some people need a move-in-ready home, while others are willing and ready to tackle a complete gut-and
The Price Versus The Cost In Real Estate
Dated: April 27 2018
Every home buyer begins their search with a set of parameters that is unique to them. Some people need a move-in-ready home, while others are willing and ready to tackle a complete gut-and-remodel if the price and location are right. For most buyers, the threshold for condition lies somewhere in the middle of this spectrum.
90% of the people we work with are willing to do some work on the home that they purchase. Generally speaking, this is a good idea. Changing out hardware or painting a few walls is well within the skill set of anyone with the patience to do the job correctly. But at a certain point, your willingness to tackle projects and renovations can actually be to your detriment as a homeowner.
Here's an example:
Let's say you have a home shopping budget of $250,000 - $300,000 and you plan to live in your new home for 10 years. After shopping for a while, we have found two great candidates located right next to each other.
Priced at $260,000.
Dated carpets and wallpaper throughout and will need $10,000 in upgrades.
Kitchen and bathrooms are livable but dated, and you would need to spend $40,000 to make them as you want them.
Total price of house and renovations done over time = $310,000.
Priced just beyond your ideal range at $310,000.
Paint colors are tasteful and there are nice hardwood floors.
Kitchen and bathrooms have been recently updated.
No work is needed, so the total price = $310,000.
In this scenario, you have a house that you could make your own but needs a lot of work, OR a more expensive house that is ready to go but it's priced significantly higher. Which is the better buy? Traditional wisdom says that you want to buy the cheapest home on the block, because the sales of your more expensive neighbors will eventually drive up the value of your home. This way you also get to customize your house to match your style. These are great benefits, but not the full story.
Let's play out your first 10 years of home ownership:
- $52,000 - You put down 20% and purchase the home for $260,000. This leaves a $208,000 mortgage.
- $50,000 - Over the course of 10 years, you update the floors, walls, kitchen and bathrooms. Everything is now beautiful.
- $184,200 - You take on a 30 year mortgage (Principal, Interest, Taxes and Insurance) with payments of roughly $1535/mo, and pay it for 10 years.
In your first 10 years of ownership, you spend a total of $286,200 on your home.
- $62,000 - You put down 20% and purchase the home for $310,000. This leaves a $248,000 mortgage.
- $216,000 - You take on a 30 year mortgage (Principal, Interest, Taxes and Insurance) with payments of roughly $1800/mo, and pay it for 10 years. Your monthly payments are $265 higher than they were with the first house, but you never need to come up with $50,000 out of pocket for renovations.
The price of a home, as you can see, is quite different than the cost of owning a home.
Now let's look at your profits after selling in 10 years:
- $50,000 - You have spent $50,000 in renovations over the last 10 years.
- $208,000 - Your initial mortgage amount needs to be paid off in full when you sell.
+ $44,100 - The principal portion of 10 years of mortgage payments tallies up to just about $44,100, which is credited towards your loan payoff.
+ $350,000 - Appreciation and your renovations have increased your home's value to $350,000, a $90,000 increase in value over your initial purchase.
You walk away with $136,100 from the sale of your home.
- $248,000 - Your initial mortgage amount, paid off in full when you sell.
+ $52,600 - The principal portion of 10 years of mortgage payments tallies up to about $52,600, which is credited towards your loan payoff.
+ 340,000 - Let's say market appreciation has increased the value of your home, but because the renovations are not quite as fresh as they are in the first scenario, the home is worth $10,000 less.
You walk away with $144,600 from the sale of your home, an increase of $8,500 over House One.
This exercise is not intended to push you into spending more than you can comfortably afford: we would never recommend this. However, it is useful to illustrate that buying a fixer-upper is not right for everyone. In the scenario above, we are only looking at cosmetic condition and using estimated mortgages given today's rates and programs. Your numbers, of course, may be different. Maybe you were born holding a hammer, or you have friends who are woodworkers by trade who owe you some favors. But looking at this scenario play out, there are a few easily discernible benefits to purchasing the move-in-ready home:
- Your monthly payments on House Two are $265 higher, but you never need to find or finance $50,000 for renovations.
- Over the course of 10 years, you actually spend $8,200 less on the move-in-ready home, despite the higher monthly payment.
- When you go to sell, even if you don't sell for quite as much, you actually pocket about $8,500 more with House Two than House One.
Since his entry into real estate in 2014, Thomas has operated under the guiding premise that if he put his clients' needs first, everything else would take care of itself. Time has shown this to be tr....
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