I got a call from estate planning attorney Terri Hilliard at the end of last year. She had an elderly client who had inherited a house in the San Fernando Valley from her son. She wanted it sold. Could I help?
Let’s Have A Look
I met the nephews of the deceased owner at the property. They had not directly inherited the property but were the trustees for their grandmother. The grandsons had to take a day off of work to come up to Los Angeles from Orange County and San Diego.
The house was a disaster from the outside. Let me tell you, that was the best thing about it.
I tried the front door. It wouldn’t budge. I literally had to push my shoulder and lean into the front door in order to squeeze inside. I was greeted by the stench of stagnant air and piles of debris, some of which seemed about 4 feet high. We could barely see the floor. The walls were cracked. The subfloor in the bathroom was exposed and didn’t look like it would support someone’s weight. And what was the black stuff on the walls and in the tub? If we don’t know for sure, it doesn’t need to be disclosed.
“Now what?”, the grandsons asked. They were concerned with how much money it would take to make the house habitable and therefore, in their minds, saleable. They worried about overseeing construction from so far away. They worried that if they didn’t put money into repairs and sold it “as-is”, they’d leave money on the table.
And they worried about the emotional toll it would take on their grandmother to have this process drag on. As trustees, they were keenly aware of their fiduciary responsibility to their grandmother.
The referring estate planning attorney was familiar with the Premodeling process I have helped other owners through.
Premodeling is a process I created that helps clients prepare their home for sale in situations like this. I help determine the scope of work and where money is best spent, oversee the project management, and can provide the necessary funds for construction, getting repaid when the sale closes.
This process comes down to math and risk tolerance. The three inputs to the formula are:
- As-is value
- Construction budget
- As-improved value
We need to make sure that there is enough profit to take into account the cost of material and labor, the time it will take to do the work, and possible changes in market conditions.
I collected my construction resources and we determined that the house would need at least $150,000 in repairs and possible remediations. A quick note here – you don’t have to report what you don’t know. In the case of this property, I didn’t want my clients to investigate subfloor, foundation, and possible mold issues. “As-is” was truly going to be “as-is”.
In the meantime, we set out to find that “as-is” price. What might seem odd to you is that determining the as-is value is quite tricky, for two reasons. The first is that there are typically no comparable sales. The second reason has been the strength of the market. The truest and best way to determine the as-is value is to list the home for sale at a price well below what we assume is the market value.
We wait for the offers to flood in, let the buyers bid against each other, and then assess our “as-is” value. If the seller is happy with the market derived price, we sell. If not, we take the property off the market and start construction.
We received 42 offers for this property and sold for 25% above the asking price. It turns out in this case, the sellers would have lost money had they done the construction EVEN THOUGH the sales price after construction would have been higher. I estimate the market value of the house after construction would have been $100,000 more, but construction costs would have eaten that up…and MORE. The only one who would have left that transaction with more money in their pocket would have been me.
Instead, the trustees created a comfortable nest egg for their grandmother and escrow closed in two weeks without the headache of construction and the uncertainty of market risk.
How I Can Help
If you’ve inherited a property, or may soon, let’s discuss the best strategy for insuring you end up with the maximum proceeds. I’ll help you assess whether premodeling or selling “as-is” is in your best interest.