What to Do? Renovate then Sell vs. Sell in “As-Is” Condition – Probate & Trust Context

Should you sell real estate that is in fair or poor condition or should you upgrade the property before you sell it? Here are 7 main factors I’ve identified that are important and often get overlooked when selling probate real estate or trust real estate.

Holding Costs

The first consideration is holding costs. I would recommend just listing out what your monthly holding costs look like. That way you know how much additional cost you will incur based on how long you anticipate to be working on the property.

1) Mortgage payment.
2) Property taxes.
3) Property insurance.
4) Utilities.
5) Maintenance costs.
6) HOA payments.

Disclosures

A pretty big advantage to selling in the probate and trust context is the fact that you, the seller (“personal representative of the estate”), are not required to fill out the typically very lengthy and detailed disclosure forms that are required in standard/everyday sales. I say this because the more work you do to the property essentially waives this advantage since for instance, if you discover a defect while working on the house, you will have to either remedy the problem or disclose it, both are not great options.

Liability / Risk

Anytime you engage in construction-related work you assume liability/risk for the quality of the work, the reliableness of the contractors/subcontractors, the potential for going over-budget, over-time (this is where holding costs comes into play), not selling for the price you anticipated and of course potentially “opening a can of worms” (discovering unknown issues with the home).

Cost-Shifting

Next, selling in “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 shifted to the buyer). For instance, city and county transfer taxes, cost of inspections (termite / physical), cost of repairs, required city compliance tasks (i.e. requiring smoke alarm, co alarm, seismic shut off valve, etc.), can and often are shifted to the buyer when selling in “as-is” condition. On the other hand, a seller that is selling 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) and if buyers are going to pay a premium price, they prefer (and often will not) assume or even split such costs.

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 “as-is” condition. So based on the proposed work, you would want to confirm that the new sales price meets your expectation, especially relative to the risk that you assume by doing the work. The concept of “the investor squeeze” is a personal observation I’ve been seeing over the last 2-3 years. This concept is the combination of a subtle softening of demand for turn-key properties and the still very strong demand for distressed homes. The result of these factors is a squeeze in the margin (difference) from what a distressed (non-upgraded) home will sell for and what a fully renovated home will sell for. I have spoken to many real estate investors regarding this observation and many of them have confirmed that their margins are not what they have been previously, i.e. between 2013-2017/18 when the market for turn key homes was extremely strong and continuously rising.

Buyer Pool

The next topic involves the amount of buyers willing to buy distressed homes vs. turn key homes. Traditionally, the buyer pool for turn key homes was a lot larger than the buyer pool for non-turn key homes, meaning that not everyone wanted to assume the work of taking on a renovation. However, this is definitely not the case anymore, there are almost endless people in the greater LA area who are willing to buy these properties. There is one caveat to that statement, if a house is in too poor of condition, it may not be financeable by a conventional lender (if there are structural issues, exposed framing, and conditions of this nature).

Tax Implications

Lastly, you’ll want to look into what the tax effects will be on renovating a home and realize a gain. Anticipated sales price, federal capital gain rates, state income tax (as there are no preferable capital gains tax rates in CA), net investment tax possibly, cost basis, and appraisal value are all factors that should be considered.

Contact the CREM Group in Los Angeles and Orange County

The CREM Group is a probate and trust real estate brokerage located in Los Angeles, Orange County, Riverside, and San Diego California. We are probate Realtors. We are probate Realtors. As far as we know, we are the only attorney-owned real estate brokerage that specializes in probate and trusts sales. This is relevant because the selling real estate during the probate and trust administration period involves a lot of legal overlap as well as court rules and procedures that must be adhered to; and there is no one better to handle a specialty practice than us. If you have any questions on the content presented above, or probate and trust real estate sales, please feel free to reach out to me, Mark Cianciulli, Esq., CPA at mark@cremgroupre.com or 323-347-1009.

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