Located on a well-shaded corner lot just a few blocks from the neighborhood elementary school, the 100-year-old Victorian home had the space and charm that the young couple sought, with a list price that was within their buying range. More importantly, it also needed a lot of renovation work -- a new kitchen, updated bathrooms, and restoration work to its interior.
In short, the couple quickly realized it would take more than the mortgage cost to get into the home. They would also have to spend thousands on renovations.
Armed with that information, the couple returned to the seller with a lower-than-expected offer. They pointed out which parts of the home were dilapidated and which parts were out of date. The seller agreed to lower the price for some but not all needed renovations.
The lesson: needed renovations can affect the purchase price.
Since the cost of major renovations will be difficult to recoup in a short period, sellers are generally warned to stick with repainting and replacing carpet just before selling. Major renovations usually become the buyer's responsibility.
Bring a home inspector and perhaps an architect to the property to determine the cost of needed renovations. They can help determine what type of work the house needs. Once that project list is in hand, you can start adjusting the list price downward.
For example, a minor kitchen remodels starts at about $20,000. It's about half that to renovate a bathroom. If the home needs a new kitchen and bathroom, and the list price is $350,000, you can subtract the cost of the future repairs and mentally revise the list price downward to $320,000.
You'll also need to determine which of the renovation project's costs can realistically lower the purchase price. If a roof is leaking, that repair should affect the sales price. On the other hand, if the kitchen is functional but is dated slightly, it's unlikely that the seller will consider lowering the cost to appease the buyer.
Get general bids on the major projects needed in the renovation. This way, you'll be able to better calculate how much those projects should offset the purchase price. To counteroffer, the seller may also get a bid or two.
For those homes that a contractor can not access, create your bids using renovation worksheets that will consider the square footage of the home, the cost of the materials involved, and the amount of labor required.
Again, be realistic. A seller would probably lower the purchase price for an old-fashioned kitchen but will not adjust that price because the buyer would like to add top-of-the-line cabinets. Keep those luxury costs separate in your budget.