Should you sell real estate in fair or poor condition, or should you upgrade the property before selling it? It’s a difficult question! Here are seven important factors often overlooked when selling probate real estate or trust real estate.
1. HOLDING COSTS
The first consideration is holding costs. List your monthly holding costs so you know how much additional cost you will incur based on how long you anticipate working on the property.
EXAMPLES OF HOLDING COSTS:
- Mortgage payment
- Property taxes
- Property insurance
- Utilities
- Maintenance costs
- HOA payments
2. DISCLOSURES
One big advantage to selling in the probate and trust context is that the seller (“personal representative of the estate”) is not required to fill out the lengthy and detailed disclosure forms required in “standard” (non-probate and trust) sales. But, if you do work on the property you’ll lose the non-disclosure advantage. You’ll want to consider this on your pros and cons list to begin a renovation. For instance, if you discover a defect while working on the house, you must either remedy the problem or disclose it, neither of which is a great option.
3. LIABILITY / RISK
Anytime you engage in construction-related work, you assume liability/risk for the quality of the work, the reliability of the contractors/subcontractors, and the potential for going over the budget or the timeline—which is where holding costs come into play. In addition to possibly “opening a can of worms” (discovering unknown issues with the home), you risk not selling for the price you anticipated.
4. COST-SHIFTING
Next, selling in the “as-is” condition allows the seller to take a more aggressive stance in shifting the costs associated with selling—which may be “customarily” assumed by the seller or split between the parties—to be redirected to the buyer. For instance, city and county transfer taxes, cost of inspections (termite / physical), cost of repairs, and required city compliance tasks (i.e., requiring smoke alarms, a carbon monoxide alarm, a seismic shut-off valve, etc.) can often be shifted to the buyer when selling in an “as-is” condition. On the other hand, a seller marketing a remodeled home can’t take such an aggressive stance since they are typically trying to sell their homes for a premium price (to justify the cost of the renovations). If buyers are willing to pay a premium price, they prefer not to (and often will not) assume or even split such costs.
5. POTENTIAL PROFIT
The whole reason for undergoing work (renovations) prior to sale is to “net” a higher profit than you otherwise would by selling in an “as-is” condition. So based on the proposed work, confirm that the new sales price meets your expectation, especially relative to the risk you assume by doing the work. Be aware of “investor squeeze,” which is the combination of a subtle softening of demand for turnkey properties and the robust demand for distressed homes. The result is a squeeze in the margin (difference) between what a distressed (non-upgraded) and a fully renovated home will sell for. This phenomenon changes with the economy, the marketplace, and interest rates, so working with real estate experts tuned into the current conditions is imperative, or you could lose your shirt.
6. BUYER POOL
Closely related to potential profit involves the number of buyers willing to buy distressed homes vs. turn key homes. In some instances, the buyer pool (demand) for turnkey homes has been much larger than for non-turnkey (“as-is”) homes. When lots of “as-is” homes are on the market, it means fewer people wanted to take on a renovation (supply). The supply and demand for fixer-upper homes changes over time. Note: If a house is in too poor a condition, it may not be financeable by a conventional lender (i.e., structural issues, exposed framing, and conditions of this nature). Having expert probate real estate advice is as crucial here as it was in the section above.
7. TAX IMPLICATIONS
Lastly, you’ll want to look into the tax effects of renovating a home and realizing a gain.
These factors should be considered on the front end.
- Anticipated sales price
- Federal capital gain rates
- State income tax (as there are no preferable capital gains tax rates in California)
- Net investment tax (possibly)
- Cost basis
- Appraisal value
CONTACT THE CREM GROUP
The CREM Group is a California probate and trust real estate brokerage servicing Los Angeles, Orange County, Riverside, and San Diego counties. We are probate realtors and one of a very small number of attorney-owned real estate brokerages specializing in probate and trust sales.
Why it matters: Selling real estate during the probate and trust administration period involves a lot of legal overlap. Court rules and procedures must be followed to the letter, and the dual specialties of law and real estate can save a lot of money, time, and heartache.
If you have any questions on the content presented above or probate and trust real estate sales, please feel free to reach out here: [email protected] or by phone: (323) 347-1009.