Selling a Rental Property - To Paint or Not to Paint?
Updated: Oct 23, 2022
From the Desk of Doug Grimm: Insights on Preparing to Sell Investment Properties
A client once told me he was trying to decide whether or not to sell a duplex that he's owned for about 10 years. He told me that the property has some deferred maintenance and he was unsure about how much of the maintenance he should take on before selling the building. This is a common question. Is it better to sell the investment property in its current condition or is it better to put money into the property before selling? The answer depends on the situation.
I shared with him that a good goal is to handle the most obvious items that could be a distraction in the mind of a buyer. If you have a property and are considering whether or not to make repairs before selling it, simply look at the property with fresh eyes...with the eyes of a buyer. Ask yourself, "If I were looking at buying my property, and I didn't know anything about it except what I can see, what would distract me from wanting to buy it?"
My client's duplex was built in 1911 and still had the original wood lap siding - the paint was peeling, so it needed a paint job. But did it NEED the paint job before he sold it? It depends on the client's goal, here are some things to consider. Any experienced investor/buyer who has connections to contractors could get that paint job done after they buy the building and they might be able to get it done for a reasonable price. If they have to do the paint job, they'll probably want a price discount on the purchase. In the end, my client's decision was about how important the sales price is in relation to the work of getting the paint job done and paying for it before selling the property. The sales price was not the only factor. This client wanted to sell the property before winter, so we didn't have a long time to wait. If he did the paint job and asks for a higher price, that could cause a longer market time and push out into the Fall/Winter when it's typically tougher to sell.
However, price and timing are not the only considerations. We also consider who the buying prospects are and strive for maximum exposure on the market. This property had peeling paint on the exterior. Many mortgage lenders offer FHA (Federal Housing Administration) backed loans to buyers of multifamily property (up to 4 units). Due to FHA regulations, lenders offering FHA loans have stricter underwriting criteria to get these loans approved. An appraiser working on an FHA loan has a different checklist for their appraisals from conventional appraisals. Peeling paint, missing handrails, and missing or non-working smoke detectors are just three of the health and safety items that an FHA appraiser can cite on an appraiser to stop an FHA loan in its tracks.
Since January of 2019, there have been 848 sales of 2 - 4 unit buildings in the Twin Cities Metro area. Of those sales, 138 (or about 16%) were sold to buyers using FHA financing. Those sellers could have missed out on those sales had their properties not been up to FHA appraisal standards. Listing a property for sale with peeling paint would make it more difficult for FHA buyers to get their loan approved, essentially eliminating 16% of the buyer market for a property.
So if you have a property you are considering selling that needs some work, consider as many important factors as you need to. Consider how important pricing is to you, the market timing, the time/money/mental effort it would take to coordinate or do the repairs, your buyer pool, and getting maximum exposure.
Please comment on and share these ideas if you like, I’d love to hear from you. And as always, if you or someone you know has a real estate question – ask and I’ll be happy to chat with you and assist any way I can.
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