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

To factor the remodeling costs into an offer, you first need to be able to estimate them. While it might not be practical to do a detailed inspection on a house that you haven't put an offer in on yet, you might be able to have your contractor do a quick walkthrough. Another option is to use a guide to remodeling costs like those used by contractors to price jobs. At the most basic level, you can just subtract the estimate or a portion of it from your offer. If the property is priced at $125,000 and it appears to need $30,000 in work, you could start by writing an offer of $95,000.

Just because you ask the seller to reduce the price for your remodeling or repairs doesn't mean the seller will agree. If the house is already discounted, you're less likely to be able to take a second discount. For instance, if comparable houses sell for $150,000, and the house you're looking at is priced at $120,000 but needs $30,000 worth of work, you might have trouble getting more of a discount since the work is essentially priced in. Also, while a seller might be willing to discount a property that needs work like a new roof to be habitable, he is probably going to be less willing to discount the home to make it meet your personal preferences.

One of the challenges in negotiating a discounted price is that it usually means you end up with a smaller loan. For instance, if you're looking to buy a $125,000 home with 5 percent down, you would make a $6,250 down payment and get a $118,750 mortgage. If you negotiate the price down by $20,000 because the house needs work, your loan will also go down. On a $95,000 offer price, the same 95 percent loan would only be $90,250. While your down payment would drop to $4,750, you'd still need to find a way to also come up with the $20,000 for repairs. One option is to leave the home's price higher but require that the seller complete the work for you as a condition of you buying the house. You'll have a higher mortgage and down payment, but you won't have to come up with $20,000 in one lump sum to pay for the repairs yourself.

Another option is to consider a loan that lets you build the cost of remodeling into the loan itself, like the Federal Housing Administration's 203(k) program. The 203(k) loans let you borrow money to renovate, remodel or do energy conservation upgrades to a house. The primary limitation is that you can't do luxury upgrades with the money. You can borrow up to 110 percent of the as-renovated value of the home and get cash out to pay to have the contractor do the work. If you choose to include solar energy systems in your renovation, you may be eligible to borrow even more. FHA 203(k) eligibility is set by the individual lenders that make the loans.