Is Investing In A Fixer-Upper In New York City Worth The Hassle In 2022?

In the end, many buyers did the math over the last 18 months and found that whatever is worth … [+] A renovation could bring a house to good condition, the effort was just too big, while the discount was just too small.

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Bring your architect! This, along with similar code phrases, means the apartment you’re about to view needs a makeover – and probably a lot of it. To make up for future problems, sellers tend to offer buyers a lower price up front. Since the pandemic, however, interest in fixer-uppers has declined significantly compared to ready-to-move-in units as the current environment hampers the already uncertain renovation trajectory.

mental arithmetic

Consider how the variables in the typical shopper’s mind have changed over the past 18 months:

Unrenovated Value = Renovated Market Price -(Unrenovated Price + Renovation Cost)

In other words, to set the price, buyers look at the price of move-in units and discount the expense (and headache) of renovation. For example, if renovated units are selling for $1 million and a non-renovated unit is available for $800,000 with expected renovation costs of less than $200,000, a buyer can feel the value proposition.

The problem today is of course the cost of the renovation. But first, let’s start with what we mean by “problem.” Roughly defined it looks like this:

Anger = cost + effort + time

The higher it climbs, the more the price of the property needs to drop to make sense for a buyer. And these days, almost everything is tedious. In fact, if you look at the three variables, you can easily see how “effort” is increasing across the board:

• time– Before the pandemic, the old adage of three to six months doubled (meaning renovations typically take twice as long as you expect to start) pretty much captured the schedule and the unpredictable factors involved. Plans, factors such as city and building level permits, supplies, equipment and labor could all be reasonably estimated, albeit at a fairly high excess rate. Since the pandemic began, however, nearly every one of those schedules has been in flux. So if you assume that the renovation takes three months, it could end up taking six, nine or even twelve months. While plans can still be made fairly quickly, approving them is another matter. In terms of deliveries, kinks in the global logistics chain can mean that stated delivery times for equipment or cabinets can range from a specific number of weeks to an indefinite number of months. With Covid still an issue, many general contractors are constantly struggling to keep their teams together (due to a labor shortage in the industry), adding another layer of complexity.
• Costs-The CPI rose 7% in 2021 as the aforementioned global supply chain issues forced higher prices and prices appear to be still rising. As the cost of goods increases, so does the cost of labor. Again, before the pandemic, most of the costs were known in advance, with reasonable overruns in the mental arithmetic realm. Unfortunately for those planning renovations, today’s price, based on yesterday’s cost, may not accurately capture tomorrow’s final bill. There’s just a lot more room for improvement.
• Effort-At the risk of circular definition, exertion is tiresome in physical form. While imaging layouts and surfaces is fun for many, most underestimate the thousands of Picayune decisions that need to be made. From the choice of drawer handles to the tile width to the white hue of the ceiling, the smallest of details need to be considered. Add to this managing contractors, filing construction documents, chasing down insurance forms, arguing with suppliers, tracing equipment, and locking in work hours, and you quickly begin to understand why refurbished units are trading at a premium.

In the end, many buyers over the past 18 months have reflected and realized that no matter what value a renovation could bring to a real estate condition home, the expense was just too big, while the discount was just too small. As the real estate market picked up steam, more and more buyers competed for renovated properties, driving up prices, while prices for renovated units in general have stagnated.

blurred value

A decade ago, in 2012, the average selling price of an unrenovated home was about 86% of the price of a renovated home. Over the years, that ratio has mostly declined, standing at around 75% last year, reflecting a growing desire from shoppers to avoid headaches. Price history confirms this trend, with the median price for non-renovated units increasing 17% over the period, while renovated units doubled that with a 35% increase. In that sense, preference for convenience is not part of the aftermath of the pandemic. Instead, the pandemic pushed many buyers’ priorities into focus: They wanted bigger units, and they wanted them now. In other words, renovations are simply not worth the effort.

The return on value investing?

As 2022 begins, the discount for unrefurbished units suggests that buyers should revisit this currently overlooked sector. With Covid fears not impacting the market nearly as much as before, as new patterns and practices become a new normal and supply chains finally start to recover, the cloud of uncertainty may finally lift from planning major renovation projects. With price trends most likely to rise in early 2022, the potential value that can be realized through your own work can finally make up for the hassle.

Ratio of non-refurbished price to refurbished price

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Median Price: Renovated vs. non-renovated units

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