HVAC and water heater is out of warranty

[Brendan Seals]

So, this 3 bed room, 900 square feet, home I am planning on buying HVAC and water heater is out of warranty. I believe the Hvac is 23 years old and the water heater is 15 or more (as I remembered). The seller wanted 74,000 for it and and I asked for 68000 on it and we came to 70,000. I am thinking that those items alone could cost 4,000 to 12,000 and plus there are other problems of repainting (there was a smoker that lived there) and other electrical modification I have too do. It all together cost up 13,000 15,000 to rehab it and be good for renting. So, it would I be wrong in going down 65,000? I would have to pull out a little more for the money to fix it. What would you recommend?

[Matt Devincenzo]

What's it worth? None of what you mentioned has any bearing on the discussion without it being in the context of the 'value' of the property. 

[Brendan Seals]

zillow has it around 67k to 74k 

[Bruce Woodruff]

HVAC and WH are $8k.....you do the rest of the numbers...

[JD Martin]

My prediction: you lose this deal over what you're thinking. If you want a brand new HVAC and water heater, you generally buy a brand new house, or one that's been renovated. If I were the seller, I would assume you were taking the 23 year old HVAC and water heater into account when we settled at 70, and I would consider it bad faith for wanting to go to 65 and I would walk on the deal. 

In other words: your assumptions on replacement cost for those items should have already been considered when you settled at 70. I assume you got an inspection and that's where this is coming from, and I would suggest it would probably be better to become more learned on systems before making offers than just waiting for inspectors to tell you the obvious and hope to beat down the seller on price. If the systems work, I don't think you're justified asking for money off unless 70 is already a premium price. 

[Brendan Seals]

JD, I agreed on 70,000 with condition that nothing major comes up that need replaced or fix, if so we will put that in consideration. Also, I should of done more due diligence before having a whole house inspector come look it the house. I guess if I have to walk away from it then I will. I Just don't know if I will really get a good return on it if Put in 15,000 in it (if thats correct) and plus no cash flow until I get it ready to be rented.  

[Jill F.]

@Brendan Seals a new AC/Furnace here for that size house recently cost me 4k and last month I had a new 40Gal. hot waterheater installed and it cost me $1000 (which is up 20% over the last  year). Price will vary depending on where your invest is located.

[Bill Brandt]

I’ve had at least a dozen water heaters installed. $1100 for a 50 gallon gas one installed same day in Easter Sunday was the most I’ve ever paid. $700-850 is the “usual rate”. And there’s no reason to do that until it fails. My aunt replaced the one that came with her house in 1977 in Duluth, MN this year. Just think of how many times it could have been replaced “pre-emptivly” every 10-15 years. 

2.5 - 4ton ac unit should run $2800-$5,000 if it has to be craned on to the roof. These are non-issues. The roof or the foundation, the electrical or the plumbing can/will all cost you mroe than these two combined over the years. 

If you want the ac/water heater replaced then consider how much more you would have paid and the seller would have asked with a listing that said NEW AC and water heater. $5,000 seems about right. 

[Austin Fogt]

I think the real important part here is that you are using the "zestimate" to calulate your value. Look up comparables and come up with a real After Repaired Value. Having an accurate ARV is critical to the offer process.

[Bill Ward]

Are your numbers significantly different in paying 65 vs 70?

[Joe Splitrock]

Originally posted by @Brendan Seals:

JD, I agreed on 70,000 with condition that nothing major comes up that need replaced or fix, if so we will put that in consideration. Also, I should of done more due diligence before having a whole house inspector come look it the house. I guess if I have to walk away from it then I will. I Just don't know if I will really get a good return on it if Put in 15,000 in it (if thats correct) and plus no cash flow until I get it ready to be rented.  

 Most every house I have purchased had the HVAC and water heater come back as "will need replacing" based on age. Inspectors flag these items if they are past the average life expectancy, but that doesn't mean they need to be replaced day one. Also be aware you are buying a used house. If that house was new, it would be over $200K.

I have had HVAC systems that needed to be replaced last another ten years, some as long as 40 years. I had one water heater last 30 years, but I have also had them go bad after 8 years. 

Obviously cost varies by market, but in my market it would cost no more than $5000 to do the HVAC and water heater on a small house like that. 

[Allen L.]

@Brendan Seals I would bid max 60 for the house if you think the house is worth 75K after the work. You’re looking at maybe 10K of work m and you should give yourself 5K of equity in it. You can probably go up to 65K and make money in the long term because you are replacing the hvac and wh so you save in capex down the road. Home inspector cost is a sunk cost, this is the cost of doing business and it’s a calculated risk. I just pay my contractor or the property management firms maintenance tech 50-100 to walk a property instead of having a home inspector.

[Joe Splitrock]

@Brendan Seals 

Here are my thoughts:

1. You don't seem to know market value. Zillow value MAY be market, but in some cases that number can be low or high. You should be able to determine value in current condition and value after proposed updates. You need to know that before negotiating price. I have paid over asking price for properties and still gotten them for less than market value.

2. Make sure you are replacing things that need to be replaced. Is the HVAC and water heater broken and functioning properly or is this just due to age? HVAC can last 40 years and water heaters can last 30 years. They can also go out in half that time. Replacing things that are not broken can increase your costs for no reason. Also be aware that the replacement may be lower quality. I prefer fixing old furnaces because they have less things that can break. Home inspectors will tell you something is at end of expected life, but that doesn't mean there is not more life left.

3. Your costs seem to be off base, which can make a big difference in your numbers. You can call an HVAC company and get a quote to know real costs. 

4. You are buying a used house at a used house price. If that house was new, it would cost over $200K. My point is that the asking price doesn't reflect new condition, even at $74K. You should have considered age when making your offer. You can tell by looking at HVAC or a water heater what the approximate age may be. Your inspection concessions should be for unknown and serious problems. Revealing that a $70K house doesn't have new mechanicals is no surprise to anyone with experience.

6. What are you planning to do with this house? Are you going to live in it or rent it out? Is it short term or long term rental? What is the estimated rent value in current condition? How much will rent increase after you update it? If you told me rent after rehab was $500, I would say hard pass. If you told me rent was $2000, I would say take the deal as is and run. My point is cost of the property is all relative to proposed use and income.

Nobody can answer your question without knowing the market location and value of comparable homes. I paid $130K for a 900 square foot house in September 2020 that is worth $170K right now. Unless you are in my market, that data point is irrelevant. 

Also be aware that chasing cheap houses is not always the best strategy. The cost of CAPEX compared to rental income can be much higher. HVAC for an 1800 square foot house is not much more expensive than a 900 square foot house, but rents can be proportionally much better. Cheap houses can be burdened with high expense ratios that kill your return on investment.

[Brendan Seals]

Wow, awesome comments guys. I guess I was over thinking, this my first time buy property. Thanks for the feed back. Helps me rethink a lot of things. 

[John G.]

Just looking at this on the surface, I understand questioning the age of the HVAC and water heater.  But, why replace them if they are not broke or operating inefficiently?  We have some from early 70's still rocking in our single families....even a furnace from the 60's.  I was given the advice many years ago when I got into rentals to just hang tight and see what happens....fast forward 10yrs and they are still kicking strong.

....my 2 cents

[Bruce Woodruff]

Originally posted by @John G.:

Just looking at this on the surface, I understand questioning the age of the HVAC and water heater.  But, why replace them if they are not broke or operating inefficiently?  We have some from early 70's still rocking in our single families....even a furnace from the 60's.  I was given the advice many years ago when I got into rentals to just hang tight and see what happens....fast forward 10yrs and they are still kicking strong.

....my 2 cents

 Good point.... except for 2 things I consider:

1) sometimes it's better to replace an old appliance when it's nearing the end of it's life rather than get that call from the tenant - and that call always comes on Thanksgiving day or Christmas week.....

2) Newer appliances like these are SO much more efficient that over a period of say 5 years you will have recouped much of the cost anyway.