The ROI of Renovations: Explaining the Financial Potential of Renovating Before Selling

Low listing inventory is a common challenge that agents (and brokerages) are facing in 2023, and one big reason is because homeowners who live in properties that could use a little TLC before going to market are unable to fund those renovations. It's hard for a homeowner to list their most valuable asset knowing that they could be asking for more money if they made a few small changes upfront!

Presale renovations are one way that homeowners can realize the full potential of their home's value without having to pay out-of-pocket for the upgrades. Here's Revive's Jessica Morrow with more details about how to discuss presale renovations with potential sellers.

Last year, homeowners invested more than $500 billion in home renovations. According to researchers, home remodeling will continue to grow, fueled by the rising disposable income of homeowners and the shift toward aesthetic upgrades.

Also adding to the massive explosion in the popularity of the home renovation market is the rapidly expanding trend where real estate agents recommend homeowners make vital improvements to their homes just before selling. This new, modern approach to selling a home enlists the skills, capital, and expertise of pre-sale renovation firms specializing in making the right home improvements for the maximum final sales price.

The leading pre-sale renovation firms work with real estate agents to help homeowners achieve one primary goal: maximizing their investment return or ROI.

Why renovate before selling?

Currently, most homeowners sell their homes as-is. But research shows that leaves 15-20% of potential profits on the table. This creates a $300 billion annual opportunity for agents and their sellers, as that's the total estimated potential proceeds if homeowners made the right improvements before listing their homes for sale.

The amount of money involved for homeowners can be life-changing. Other industry research shows that home sellers gained an average of $186,000 more in profit when selling their renovated homes, with the average ROI north of 250%.

Moreover, when agents help their sellers use a pre-sale renovation to help their homeowners increase their ROI, agents benefit too, as it can increase their GCI significantly.

How does pre-sale renovation work?

Until recently, the speed of a sale drove the real estate business. Real estate agents often rushed to get a home on the market. However, it turns out that getting a home quickly listed for sale doesn't always result in the best ROI for the property.

Home flippers understand this better than perhaps anyone. When purchasing a property, their entire focus is to determine which homes with the right improvements will have the best return on their investment.

Pre-sale renovation firms borrow the business model of the best house flippers, looking for ways to help homeowners make the right improvements for the top sales price. The process is straightforward and typically includes:

• Initial consultation: The leading pre-sale renovation firms begin with an initial consultation. This also may be automated by a real estate agent using an AI-powered app. The process determines the potential homeowner's ROI if they take the pre-sale route. While pre-sale renovations may not be the best path for every homeowner, the most important thing is to find out and avoid leaving money at the closing table.

• Budgeting and planning: A pre-sale renovation firm typically assigns an individual or a team that works with real estate agents and their clients to guide them through the renovation process. Pre-sale renovation firms do the heavy lifting and provide the funds for the strategic renovations recommended, reviewed, and approved by the homeowner. The homeowner does not pay a single dime out-of-pocket as all these expenses are paid at closing.

• Design: Crucial to a pre-sale renovation delivering a maximum ROI is making the right improvements. That includes making sure the design matches the local market demand. A pre-sale renovation firm that excels in design is crucial to obtaining the best final sales price for the home.

• Quality and on-time improvements: Pre-sale renovation firms reduce the risks of a DIY approach by homeowners and/or their agents by ensuring vetted contractors work to deliver quality improvements on time and within budget.

• Finalizing the sale: After the improvements are made – typically around nine weeks or fewer for most projects – the agent lists the home for sale at the post-renovation sales price. This maximizes the ROI, and at the closing, the pre-sale renovation firm is reimbursed for its costs, and the higher proceeds are delivered to the homeowner.

Not for every seller

Not every seller should go the renovate first route because the estimated post-renovation ROI shows it may not be worth the effort. This is particularly true of well-maintained homes and homes that have recently made significant improvements. Moreover, local market conditions could also influence if this path makes sense.

A trusted pre-sale renovation firm will help provide the information for agents and their sellers to determine this. And that's the key: real estate agents need to explore the potential outcome of taking the pre-sale renovation path with every seller.

The only way to determine if the ROI for a pre-sale renovation will work is to go through the process. Fortunately, there are new ways to help agents show homeowners exploring a sale what the ROI could be with new technology upfront, even during their listing presentation.

A better way to sell

For most homeowners considering a sale, agents will discover that walking them through the benefits of a pre-sale renovation can be a win-win.

Pre-sale renovated homes provide a higher ROI to owners and sell faster once they are on the market. Homeowners don't have to worry about the stress, time, and energy it takes when using a pre-sale renovation firm. From the beginning, homeowners know they are making the right improvements.

It's all about what today's buyers want. Millennial home buyers, the largest generation and often the number one buyers of homes, want move-in ready homes. Research shows that 70% of Millennial home buyers would choose a smaller home, giving up the need for more space to secure a move-in-ready home.

Homeowners don't have to front the money needed for the remodeling as pre-sale renovation firms provide the capital for all the improvements, which are reimbursed when the home is sold. The amount of funding supplied can range from tens to hundreds of thousands of dollars, depending on the house and the ROI goal.

By improving their ROI through a pre-sale renovation, homeowners will maximize the value of their property, minimize potential obstacles to a sale, and experience a streamlined process that results in financial gain that can help change their lives for what they want to do next.

Other related articles:

• Maximizing ROI: The Art of Presale Renovations for Real Estate Investors
• Top 5 Reasons Homes Need to be Move-In Ready
• Creating a Great First Impression: The Role of Pre-Sale Renovations in Real Estate

Jessica Morrow, a seasoned real estate veteran, is Revive Real Estate Head of Operations. Revive's mission is to guide home sellers through presale renovations without upfront costs.