How to Factor Remodeling Costs Into an Offer Price When Buying a House

How to Factor Remodeling Costs Into an Offer Price When Buying a House
••• Comstock/Comstock/Getty Images

It's hard to know what to pay for an outdated home. For starters, you can't be sure that the list price reflects the fact that the house needs renovation. No one wants to pay too much for a property, and especially not a homebuyer who is already taking on the risk of a less than perfect home. Knowing what the market value of your home will be after you complete the remodeling will help you decide on a fair offer.

Hire an experienced real estate agent. The National Association of Realtors recommends that you employ only a licensed real estate agent, and that you check their credentials by asking pertinent questions about their real estate designations, level of experience and knowledge of the subject neighborhood.

Ask you real estate agent to conduct a "comparative market analysis." This is comparison data put together by looking at the Multiple Listing Service and other resources to find all the comparable properties that have recently sold in the proximity of the subject property, and their sales prices. This analysis will give you an idea of the fair market value of the property in its current condition. Your agent can also extrapolate a possible market value for your property once it has undergone remodeling. This tells you what your house eventually will be worth.

Estimate the cost of the remodeling work. Hire a building contractor to walk through the house with you and your real estate agent, and make a list of the work that needs to be carried out, or that you wish to factor into your offer price. Ask your contractor for an estimate of the labor and materials necessary to complete the work.

Estimate your own materials cost and labor hours, if you are planning to do any of the work yourself. You can estimate the cost of materials by visiting a building supplies store, reviewing supplier catalogs or searching the internet. When it comes to labor, be realistic about what you can do and the amount of time you can spare. Apply a realistic hourly rate to your own labor, which will probably be less than a professional would charge.

Factor in the cost of extras, such building permits, plant hire and specialist insurance. If you are carrying out major work on a house you will not immediately live in, you cannot take out standard homeowner's insurance. You will need a renovation and construction product, such as a builder's risk policy. Premiums may be higher than under a standard homeowner's policy.

Work with your real estate agent to consider your data. Deduct your total remodeling costs from the property's current market value to come up with your base price. Make adjustments for contingencies, such as fluctuations in the price of materials, or possible time delays due to adverse weather conditions. Hopefully your offer will end up somewhere near the asking price. Even if it doesn't, you have evidence to back up your price negotiations with the seller.