"Rehab Novices"

Why Such a Big Discount For

Big Homes Needing Updating?

Want a novel -- but not at all far-fetched -- (additional) explanation for why so many nicer, bigger homes are facing significant discounts in today's market, especially ones that need significant updating?

Keep reading.

Far and away, there are three big reasons why such homes -- let's just say 4 or 5 Bedrooms, 3-4 Baths, with 3,500 to 4,500 finished square feet, in a nice part of town -- are proving tougher to sell. (Note: the price tag for such a home could be anywhere from $600k-$800k (or more) locally, depending on the particulars).

One. The economy. A rough economy shrinks the number of people who can swing a $5,000 monthly mortgage payment, $10k or so in annual property taxes, and the upkeep on a bigger home.

Oh, and since Buyers of such homes typically need a jumbo mortgage, they'll need to put down $50k or $100k instead of a fraction of that amount needed to buy a home under $500k.

Two. Demographics.

The Baby Boom generation now retiring/downsizing is being followed by a smaller generation with fewer, smaller families.

Ergo, demand is less than supply.

Three. Remodeling costs. You can finance a home purchase with a still-cheap 5%-plus mortgage.

Remodeling costs are typically straight out-of-pocket (remember that little Recession we were just in?).

Rehab Novices

That's probably all the explanation needed to explain why bigger, dated homes are taking longer to sell.

But I think there's actually a fourth reason that goes with the other three.

Namely, the resulting "market compression" makes rehab/updating projects especially daunting for the people who would naturally undertake them.

Here's the logic:

Because of the peculiarities of today's market, it's not unusual to see a completely updated, mint condition home with around 2,500 square feet fetch $500k or more, depending on where it's located.

Meanwhile, some 4,000 square foot-plus homes can be had -- especially if they need significant updating -- for $600k to $700k.

What happens when someone who's outgrown their (otherwise perfect) 2,500 square foot home looks at a 4,500 square foot home that needs "everything?"

It looks overwhelming.

That's especially the case if the biggest remodeling project they've tackled previously is a new bathroom.

Ironically, this "feedback loop" results in bigger homes sitting on the market, which results in discounting, which makes them affordable (at least on paper) to more Buyers moving up from smaller homes . . . who find a big project daunting.

No, I can't prove the foregoing -- but my gut (and my Buyer clients) tells me there's something to it . . .