If you’re in the market to buy a home, I’m not sure if you should buy a fixer-upper anymore unless you’re under 40 and hungry. Instead, you should consider buying a remodeled home to save your sanity.
I’ve bought two fixer-uppers and I never want to buy another again. I’m too old and tired to earn sweat equity. I’d much rather invest in 100% passive real estate through a platform like Fundrise. If you get unlucky with a bad contractor, the remodeling process could make your life a living hell!
There’s just one problem with buying a remodeled home. You will likely have to pay an even bigger premium than ever before. However, I expected the premium over a non-remodeled home will continue to increase.
Due to the increased time, cost, and difficulty to remodel a home today, remodelers will demand higher selling prices for their efforts. Also due to the increased difficulty to remodel a home, the supply of remodeled homes will likely decline, thereby creating a greater premium for such homes.
Given the amount of pain I experienced remodeling my latest fixer, I don’t think I’ll ever sell. Receiving a market price won’t do it for me.
Why Remodeled Homes Will Sell For Bigger Premiums
In early 2019, I bought a fixer-upper with tremendous potential. The house has panoramic ocean views from all three levels. It also has an enclosed backyard, which proved to be highly valuable for a family with kids during the onset of COVID. But what made the house even more attractive from an investment perspective was the expansion potential on the ground floor.
When I bought the fixer, the ground floor consisted of an odd-shaped room and an ancient half bath on a raised platform. The entire space was about 300 square feet. My idea was to blow out the old space and expand it to ~615 square feet by reclaiming 315 square feet of the garage. The garage would still be large enough to park one full-sized SUV plus storage.
To make money in real estate, focus on expanding the livable square footage. If you can build for $300/sqft and sell for $1,000/sqft, you’ve made yourself a handsome profit. I did it before with another house in 2014-15, so I thought I’d do it again.
Below shows the old layout and wasted space. My remodel would consist of building a living room, bedroom, closet, hallway, and laundry room. The laundry room could also have a kitchenette.
Took Forever To Complete The Remodel
When you remodel within the envelope of the house, it should be a straightforward process. By not expanding outside the envelope, you don’t need special permits nor do you need to notify your neighbors.
Here in San Francisco, any expansion, including building a new deck, requires notifying the neighbors and waiting for three months to see if anybody objects. If someone does, they need to pay a $500 fee for the right to speak up in a hearing.
Phase I Of Remodel: Not Too Bad
I started phase 1 of my remodeling project (remodeling upstairs bathrooms, kitchens, paint, windows, flooring, wiring) in June 2019. By November 2019, phase 1 was finished. Phase 1 took one-and-a-half months longer than guided, but that was in the scope of my expectations.
We wanted to move into the bigger house before our daughter arrived in December 2019. The top two floors would be bigger than our previous house we bought in 2014 by about 350 square feet.
Once we moved in November 2019, we started Phase 2 of my remodeling project (downstairs gut remodel).
Given we had to rewire the entire house upstairs, my contractor decided to demolish the entire downstairs to gain easier access. I was fine with losing the 300 square feet of downstairs space so he could work easier because I also expected him to star construction downstairs soon after.
Oh how wrong I was!
Phase II Of Remodel: A Disaster
For four months, my contractor didn’t do anything after he demolished the ground floor. He just left the ground floor an empty shell from November 2019 to July 2020.
I kept asking him what was up and he kept ignoring my requests to start. Then the pandemic began in March 2020, locking everybody down for another two months. Below is a picture of our unusable demolished ground floor.
In mid-April 2020, I discovered a completely remodeled home for sale. By June 2020, I already knew my ground floor remodel project would take forever. As a result, I decided to take a leap of faith and buy a new forever home and no longer wait.
Looking back, it now seems crazy to have made such a large investment in 2020 shortly after purchasing my fixer in 2019. Like everyone, I was dealing with the uncertainty of COVID. We pulled our son from preschool. I was also dealing with an unreliable contractor with hard-to-determine remodeling costs!
But I did what I could to take care of my family. Not only did I expect my remodeling project to take longer, I also had a growing feeling COVID disruptions would last longer as well. This is another example of not depending on others to live the life you want.
My contractor didn’t come back until July 17, 2020 to start the framing, eight months after demolition. Based on my contractor’s original guidance, I thought our entire downstairs project would have been completed by June 2020.
Oh, how naive I was!
Massive Delay In Getting Final Permit Approved To Officially Begin
Once the framing and rough was done in September 2020 (after getting a demolition permit), my contractor proceeded to disappear again for several months with no explanation.
But before he disappeared, I went ahead and bought all the finished material (tiles, flooring, fixtures, tub, shower, faucets, etc) in anticipation he would return shortly. My expectation was his workers would start installing the finishes by November 1, 2020 and be done by the end of 2020. The cost of the materials was about $22,000.
Unfortunately, my contractor didn’t end up getting the construction permit until August 1, 2021, 13 months after he returned and began the framing. As a result, I had to store my finished material with the store for that time period. Thankfully, the store didn’t charge me.
My contractor decided to work ahead of the construction permit by demolishing and framing the downstairs to save time. But it took one year and nine months to finally get the official permit.
If you’re deciding between remodeling with a permit or not, I still recommend you get one. Eventually, your remodeling project will be done. A permit will help ensure the job is done right. Further, permitted work is also more valuable during resale.
Reasons For The Remodel Delay
35% of the reason for the remodel delay was because my contractor was too disorganized and unmotivated. My remodel grew into a side hustle for him where he’d only work weekends and the occasional weekday. He had landed a full-time job as a building inspector for another county. How ironic!
30% of the delay was due to COVID shutting the Department of Building Inspection (DBI) down for several months.
20% of the delay was due to workers unwilling to work during the beginning of the pandemic. Several of his workers over time had to quarantine.
Finally, 15% for the delay was due to government corruption and inefficiency. DBI supposedly spent millions of dollars to build an online tool to enable online permit submissions, review, and approval. But after putting everyone on hold for months, DBI decided to cancel the entire project and go back to partial in-person visits.
Before the pandemic, there were already plenty of reports of corruption at the DBI. Things like permit expediters bribing inspectors to get on the fast track and inspectors holding a project hostage without under the table payment were common.
These shenanigans are ironically good for real estate investors who don’t need to remodel. The harder it is to get a building permit approved, the less supply will be built. Less supply, means higher home prices.
The Benefit Of A Delayed Remodel
In April 2022, I finally finished the ground floor remodeling project that began in November 2019. I truly thought the project would have been done no later than December 31, 2020.
The old rule of thumb was to expect your remodel project to cost 50% more and take 50% longer than expected. Today, to manage expectations and protect your sanity, you best increase these percentages.
The only good thing about this long remodeling project is getting the permit signed off at a later date. A 2022 approved final inspection makes the remodel more valuable than if it were approved in 2019, 2020, or 2021. You’ll recognize the value of a newer permit approval if you ever sell your home.
For example, the home in my real estate FOMO post has a line-item description saying, “Complete renovation from 2018 – 2022.” Sounds like a brand new arduous remodel! Alas, when I went to look at its 3R report, I discovered the gut renovation was actually done in 2018. They only installed a fireplace 2022 with a permit. Tricky marketing!
Given the gut remodel was four years old instead of in 2022, my perceived value of the home instantly declined by 2% off its aggressive asking price.
The Cost Of Remodeling Delays
My remodeling delay probably cost me about $30,000 in extra labor and material costs. I expected the entire downstairs remodeling job to cost $100,000. But it cost closer to $130,000.
Then there is the cost of not renting out the bottom unit for $1,500 – $1,800 a month. If I say the delay was 12 months, then my opportunity cost is $18,000 – $21,600 of lost rent. The positive of not renting out downstairs is less wear and tear and less time dealing with tenant issues.
Finally, there is the cost of my time and happiness. I would have gladly paid more to get everything done a year sooner. If there is a remodeling next time, I may add some financial incentives for on time completion.
In total, I estimate the cost for my remodeling delay is somewhere between $48,000 – $51,600. These costs ultimately get partially passed down in the form of higher rents or a higher asking sale price.
Please follow my remodeling guidelines if you want to get the highest return on capital. Going into a remodeling project without a detailed plan is dangerous. Cost overruns could easily eat away all your expected returns.
Longer Remodeling Times Is Becoming Ubiquitous
Sadly, my remodeling story is not unique. Since the pandemic began, all home remodelers I’ve spoken to have experienced delays and cost overruns.
One fellow preschool parent told me her project has been going on for two-and-a-half years. It is now on hold because she has had three different building inspectors come out at each stage. And every building inspector wants a different thing. As a result, she has to play a cat and mouse game where she calls for the building inspector and then cancels last minute if a different name pops up.
She ended up firing her contractor and getting a new one, hence the current pause. Her belief is this new contractor will have a better chance at navigating the DBI labyrinth due to “closer connections.” Unfortunately, this new contractor will cost her more money and time, which ultimately means higher prices for buyers of remodeled homes.
How Much Will The Remodeled Home Premium Expand?
A buyer is willing to pay a premium for a remodeled home to save them time, money, and stress. I think the price premium expansion of a remodeled home over a non-remodeled home could easily grow by 50 percent. Let me explain with an example.
Let’s say you found a $1 million un-remodeled house five years ago. It cost $100,000 and three months to remodel. In the past, you could have sold it for $1,210,000 for a 10% premium of $110,000 over the all-in cost of $1,100,000.
Now let’s say you want to remodel the same house today. It now costs $130,000 and six months to remodel for a total cost of $1,130,000. Instead of being able to sell it for a 10% premium at $1,243,000, you may be able to sell it for a 15% premium at $1,299,500. The difference is $56,500; $30,000 of which is eaten up by higher construction costs. The remaining $26,000 compensates you for your time and opportunity cost.
A remodeled home’s price premium depends on how difficult it is to remodel and build in your area. In cities that are already fully built out with not a lot of land, the price premium will be much higher. Think big cities such as San Francisco, New York, Boston, and Seattle.
Conversely, cities that have endless amount of land to build and a very pro-building local government will have remodeled homes that command a lower premium. Think cities in the heartland.
This logic is consistent with remodeling more in areas where the selling price per square foot is very high. It is simply more profitable to remodel higher-priced homes.
Buy A Fixer Or A Remodeled Home?
If you’re scared to remodel after reading this post, you should be! Here are some quick thoughts on which way to go.
People who are OK to buy fixers:
- Under the age of 40
- Don’t have children
- Your day job can be done in under 40 hours a week
- Have a net worth under $1 million living in the heartland or under $3 million living on the coasts
- Single or in a stable relationship
- Bored in retirement and need more purpose
- Are a real estate addict and love project management and DIY
- Have a good relationship with an experienced and trustworthy general contractor
- Know your way around the planning and building departments
If three or more of these bullet points pertain to you, the 70% move is to buy a fixer and make some sweat equity. You can make an incredible amount of money remodeling and expanding a home and then selling or renting out.
People who should probably buy remodeled homes:
- Over the age of 40
- Have adolescent children
- Work a demanding day job that requires much more than 40 hours a week
- Married or in a precarious relationship
- Have a net worth over $1 million living in the heartland or over $3 million living on the coasts
- Fulfilled in retirement
- Have lots of passive investment income
- Are in decumulation mode and want to live it up more
- Have already gone through the experience of remodeling multiple homes
If three or more of these bullet points pertain to you, the 70% optimal move is to buy a remodeled home. Your time is too valuable. Invest in passive real estate funds through a platform like Fundrise instead. The Sunbelt provides some of the most attractive real estate opportunities. Meanwhile, your mental health will thank you for not going through a painful remodel.
The main reason why I reinvested $550,000 of my rental property sale proceeds into a private real estate fund was because I didn’t want to fix the leaking windows and rewire the rental house to the latest code. Add on dealing with rowdy tenants and it was becoming too much. 100% passive returns is what I now only want.
Remodeled Homes Will Trade At Higher Premiums
So there you have it folks! Remodeled homes are only going to get more expensive over time. The wealthier we all get, the more valuable our time. Buying and remodeling a fixer is increasingly becoming a young person’s game. Either that, or you really need to know your way around the system.
If you can find a remodeled home that isn’t trading at much of a premium, if at all, buy it! And even if you have to pay a premium, I think that premium is only going to increase over time. Anybody with any remodeling experience knows how much effort it takes to create a truly wonderful structure.
Readers, will you be buying a fixer or a remodeled home for your next purchase? What are the reasons for your decision? Do you think the price premium for remolded homes will increase like I do?
For more information on achieving financial independence and making better decisions, pick up a hard copy of my new Wall Street Journal bestseller, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. The book has three important chapters on real estate and so much more!