In Buyer’s Market, Rehab Discount Widens

Less than three years ago, the discount on a solid-but-dated home was quite small — maybe 10%.

Today, at least anecdotally, it seems to me that the corresponding discount has widened considerably, to perhaps double that. (Note: at any given time, there are two kinds of Buyers for rehab properties: owner-occupants, and resellers — “flip” refers to something illegal).

What explains the change?

Reasons #1, #2, and #3 all have to do with the economy: it stinks. Unemployment is up, confidence is down, and the supply of homes needing rehab is much greater. Meanwhile, mortgages may be cheap, but they’re only available to borrowers with strong credit.

Related to all the foregoing is a palpable change in psychology.

When the market’s going up, contemplating a rehab is exciting. It’s easy to see potential everywhere you look — and imagine the pay-off waiting for you when it comes time to sell.

In a soft market, however, prospective Buyers focus more on risk.

Will the market drop before I’m ready to sell? Is my budget and timetable for doing the work realistic? What if subsequent Buyers don’t like the finished product?

And certainly this question: will I have an even better opportunity if I wait?

Needless to say, such psychology puts a damper on Buyers’ enthusiasm — and consequently, what they’re willing to pay for homes needing substantial updating.

Of course, the flip side is this: precisely because of the foregoing mindset . . . there’s a lot less competition for the multiple opportunities out there now.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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