According to the brokers on HGTV’s Selling New York, all you have to do is be willing to buy ugly stuff and you can easily make millions flipping it.
Granted, they weren’t advising buyers. They were advising sellers that spending hundreds of thousands of dollars renovating dingy apartments would certainly net them big returns via higher selling prices. (Here’s a fuller summary from Curbed.)
Their advice makes a sort of intuitive sense. Most people would pay more for a beautifully finished space than a dumpy one. But the logic doesn’t work unless you assume all buyers are, uh, illogical. Why would people be willing to pay $500,000 more for an apartment after the seller does $150,000 of renovations if they could just buy a dumpy place, spend their own money on renovations and come out $350,000 ahead?
Yes, there’s some value in having the work already done rather than having the hassle of managing your own project. And yes, lots of people make emotional decisions when buying a home. Some will go with their hearts and buy the place they fall in love with, even if their heads tell them a little work would get them the same place for less money.
But there are plenty of rational buyers out there, particularly in a market as big and sophisticated as this one. You can always sell a dumpy apartment — by lowering the price — and there enough savvy bargain hunters out there to keep the spread between renovated places and dingy places narrow enough that there simply cannot be free money for sellers who renovate. Each time sellers spend big money on renovations, they’re rolling the dice.
The brokers in Selling New York often seem to be sipping their own Kool-Aid, but even they realize are smart enough to realize that major renovation expenditures are a risk for their clients. So why do they tend to recommend such renovations with absolutely no caveats?
Because renovations always boost sale prices — the risk to sellers is that they won’t boost prices enough to finance the renovation not that they won’t boost them at all — and higher sales prices always benefit brokers, who get a commission based on the final sale price but pay none of the renovation costs.
It is, in other words, a massive conflict of interest between the seller and the broker who is theoretically working to help him. (It’s by no means the only ones. Read Freakonomics and see how different brokers act when they’re selling their own homes rather than selling them for other people.)
Fortunately, it’s an easy conflict to solve. If a broker recommends renovations, ask them to amend their contract such that they receive a commission based on a percentage of the final sale price — less that same percentage of the renovation costs. If a broker really believes that a $150,000 renovation will add $500,000 to the sales price, it’s still in his interest to push for it, but he now has no reason to push for renovations that won’t certainly cover costs.
