Housing & Mortgage
Homeowners Rethink Repairs in Competitive Market
In one of the strangest developments of the pandemic, homebuyer competition is fiercer than ever. During past recessions, Americans hunkered down and held onto cash and wealth-generating assets, such as real estate, for dear life.
This time, low mortgage rates kicked off a demand frenzy that saw a more than 28% surge in home prices over two years, according to Redfin. Much of that incredible swell is due to dwindling inventory. What is available for purchase gets snapped up, increasingly for more than sellers are asking.
In February, the average home seller in the U.S. received nearly five offers, according to a report from the National Association of Realtors. Almost half of all home offers were above ask, with the typical prospective buyer adding 3%, or about $10,000, to the list price.
But in cities where demand for homes is practically off the charts, buyers are ponying up much more than that.
Where competition leads to six-figure above-ask offers
A Redfin analysis of home sales from January 1 to February 15 revealed that more than 700 homes in the Los Angeles metro area sold for at least $100,000 above the asking price, representing about 11% of total listings (it’s a big market).
In San Francisco, half as many homes sold for $100,000 or more above ask. Yet they represented 40% of all listings—more than double the share one year ago. In nearby San Jose and Oakland, about 45% and 30% of all listings, respectively, sold at a six-figure premium.
In Seattle, 17% of home sales included a six-figure price bonus, a nearly threefold increase from a year ago.
High prices in these markets are driving higher premiums. Nationwide, buyer competition is fiercest in the $1 million to $1.5 million price range, followed by homes listed between $600,000 and $800,000, followed closely by homes listed for more than $1.5 million.
There are a few ways for a buyer to stand out in a competitive market, but none is as effective as cold, hard cash. Redfin data shows that an all-cash offer quadruples a buyer’s chances of winning a bidding war.
One Redfin agent said all-cash buyers used to be able to make offers at or below the asking price, but those cases have waned because even buyers who require a mortgage are willing to pay more than the listing price to score a home in today’s lopsided market.
It’s also common for buyers to waive appraisal contingencies, Redfin agents said, meaning they’ll pay the agreed-upon sale price even if the home turns out to be worth less.
So, one has to wonder: With buyers prepared to pay a premium, can sellers forgo the standard pre-listing checklist and still come out ahead? It sure looks that way.
Case study: Austin, Texas
In a balanced real estate market, sellers have to make their home as blemish-free as possible to attract buyers and compete with other homes on the market, says Walter Rock, a broker at ROCK Properties Realty in Austin.
Typical preparation includes making structural repairs and cosmetic updates, upgrading appliances, and staging rooms for listing photos and walkthroughs. Anything to increase the value of the property—real or perceived—and reduce the time it spends on the market. Even after accepting an offer, Rock says sellers still expected buyers to make last-minute requests for repairs.
But Austin's housing market has been turned on its head, thanks in part thanks to an influx of California transplants, Rock says. “A seller is no longer required to put much thought into preparing their home for sale,” he says. “Regardless of the condition, a seller can almost always expect multiple offers.”
Austin is one of the most competitive metros in the country, where nearly half of home sales have exceeded their asking price so far in 2022, according to Redfin. The share of homes that sold for a huge premium—$100,000 or more above the list price—doubled to 2.7% in the past year.
Rock says he still runs through the potential benefit of making “obvious” repairs or improvements when a house has some wear and tear, such as installing new carpet or interior painting. These are relatively easy updates that often pay for themselves, he says.
“As a broker/realtor, my goal is to obtain the highest return for my clients,” Rock says, “so we still have discussions [about preparing] for the sale, but we no longer try to reach perfection.”
Think about buyer expectations
Individual buyers aren’t just competing with each other: Institutional investors are snapping up homes at a record pace. Nationally, nearly one in every five homes that sold in the last quarter of 2021 was purchased by an investor, according to a Redfin analysis.
Institutional investors often buy homes to fix them up and flip them for a profit or turn them into long-term rentals. They have few of the same concerns or demands of a typical homebuyer. They’re flush with cash and ready to bid up the price of a home to make a quick deal.
In a recent “60 Minutes” segment, Heather Kruayai, a Redfin agent in Jacksonville estimated that investors are behind about one-third of the offers she receives, which are frequently all cash and at least full price. Some of the offers waive inspections, too.
Kruayai explained that most of the investor-buyers don’t even set foot on the property before making an offer. “The way the market is going now,” she told “60 Minutes,” “you really don’t need to do anything to your house to sell it.”
Some sellers are choosy about who buys their home, especially if it’s a sentimental sale or they’re close with their neighbors. Not everyone is on board with the objectives of corporate investors.
But for homeowners in investor hotspots who are unconcerned with who they hand the keys to, the message is clear: Sinking money into big repairs or updates isn’t necessary.
That said, the state of the housing market doesn’t wipe out the need for due diligence. Consult a local real estate agent, check current listings in your area to see what you’re up against, run a cost-benefit analysis on any repairs or updates you’re considering and use home sales data to find out how common above-ask offers are in your market. Whether you decide to list your home as-is or beautify it for a price markup, at least you’ve made an informed decision.
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