Any good real estate agent will tell you that your home needs to be priced right and in good condition to sell quickly and profitably. But sellers typically don’t want to spend too much money on a place they plan to leave, especially when that cash can be put toward their next home.
Dan DiClerico, a smart home expert for HomeAdvisor, recommends spending around 5-10% of your home’s value getting it ready to list, focusing on areas with the highest return on investment.
“For example, we advise spending around $4,000 on a gentle kitchen makeover, which could raise the sale value by as much as 5%,” said DiClerico. “In the bathroom, spend $2,500 to get back 2-3%."
Talk to a real estate agent to help you determine the best place to spend your presale funds, but DiClerico’s kitchen example is pretty spot-on — 40% of real estate agents recommend a kitchen upgrade before selling, according to the National Association of Realtors 2019 Remodeling Impact Report. In fact, 20% said it actually helped them close a sale.
Other recommended projects include a new roof (39% recommend), a bathroom renovation (33%), refinishing hardwood floors (27%) and replacing the HVAC system (20%).
Payment options for home improvement
The best method for paying for those home repairs depends on several factors, including how soon you plan to sell, your credit profile and the amount you need to spend.
Consider the following payment options when planning your next move:
Cash. If you’re in a rush and need to make a repair just before the closing, it’s smarter to use cash if you have it, says Mike Windle, a partner with C. Curtis Financial Group in Plymouth, Mich. The main benefit of using your cash is that you don’t have to worry about any impact on your credit score or your debt-to-income ratio, he says. Your debt-to-income ratio compares the monthly payment on all of your debt with your gross monthly income and is one of the main factors lenders consider during the mortgage application process.
The major disadvantage of spending cash, however, is that you won’t have that money available for a down payment or moving expenses on your next property.
Home equity line of credit (HELOC). One of the best options for paying for repairs before a sale is a home equity line of credit because the interest rates are lower than a credit card. The current average rate for a HELOC is 5.51% while credit card interest rates range from 15.37% to 20.90%.
“I always recommend opening a HELOC even if you don’t plan to use it, because it’s good to have in an emergency,” said Windle.
Though your renovations will (hopefully) be complete before you list your home, make sure to apply for a HELOC before you put your house on the market. Lenders are less likely to issue you loan if they know it will be repaid almost immediately.
Personal loan. A personal loan is a lump-sum loan that you pay back in equal installments over a set amount of time. Interest rates can vary from 3.99% to more than 30%, but if you have good credit, you may be able to lock in a lower rate than you would get with a credit card, saving you money in the long run. However, applying for a personal loan can impact your credit score by as much as 10 points, and the payments will increase your debt-to-income ratio when you apply for a new mortgage.
Credit card. If you’re low on cash, another option is to put the expense on a credit card. But with average credit card interest rates getting as high as 23%, consider taking out a new card that offers an introductory rate of 0% interest. That way, you can pay off the debt without interest when your home sells. However, if you don’t pay back the loan before your introductory period ends, the higher interest rate will kick in.
Applying for a new credit card can lower your credit score, though the impact will likely be minimal and is temporary. This could, however, impact your application for a mortgage on your new home.
“Lenders sometimes check your credit again just before the closing and don’t want to see a lot of changes since you were approved for a loan,” said Windle.
Adding credit card payments to your budget will also increase your debt-to-income ratio, which could make it harder to get a loan approval in the first place. As a general rule of thumb, if mortgage payments put your debt-to-income ratio above 36%, then you may be trying to buy more house than you can afford.
Ways to reduce your pre-sale costs
Offer a credit to buyers. If the renovation you plan is cosmetic, such as replacing the carpet or updating a bathroom, rather than something required before you can sell, you may want to offer a credit to buyers rather than do the work. Buyers may not be willing to make an offer on a place that’s not in excellent condition, but according to the National Association of Realtors, about 7% of sellers offer a credit to buyers for remodeling or repairs as an incentive to buy their home.
“If the kitchen needs updating, your ideal kitchen may not be the buyers’ ideal kitchen,” said Windle. “You can get a couple of renderings for free from Home Depot or a contractor and then, if the estimate is $20,000, you offer a $20,000 credit to the buyers. Buyers may like this better since it saves them cash and they don’t necessarily need to use the money to renovate the kitchen.”
DIY or hire a pro. You may be tempted to save money with a DIY repair, but Windle warns that this could be costly.
“If you’re going to YouTube to learn how to renovate your home, you’d probably be better off and will save more money by hiring a professional,” he said. “That’s especially true if you’re doing something that requires a lot of detail work or involves plumbing or electricity. A professional will save you from the cascade of other issues that you could start by doing a job badly.”
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
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