Well, it’s a question that frequently gets wondered when looking at the cash buying houses like ours. We are a big believer in transparency, so I figured the best way to answer this was to explain what goes into how we come up with our offer. There are a few variables every cash buyer will have, so if you know the pieces to the formula and what the variables are, you can start to get an idea of what is a fair offer.
There are a few things you really need to know first. A couple of terms if you will. The first is After Repair Value or ARV. This is what we have come up with as a value of what your home could be all fixed up like other homes that have recently sold in your area. Those homes are called comparables, or comps. The key is that they do need to be recently sold. But also, for that home to be a comparable, we’d have to consider putting it in exactly the same condition. So if they have new kitchens and bathrooms, we’ll have to put new kitchens and bathrooms in yours. With that will come new plumbing and electricity, as most villages wouldn’t like just leaving the old building code stuff when you can make it easy to repair or improve. Other things we have to consider are similar to what real estate agents would consider and that’s home style, square footage, bed and bath count, and even location. Some of this will vary a little bit of a cash buyer is looking to keep the property as a rental and they don’t care about refinancing or they just don’t see the value in rehabbing to the same condition.
The second term is sales cost. After we repair the home, to take out the profit we’ve put into the house, we’ll have to sell it. Unfortunately, the best and quickest way for us to do that is to list the property with a real estate agent. It allows us to get the most exposure for the property. With that, just like would happen with you, you have to all kinds of fees and expenses. On average, it’s a little less than 10% of the value of the sale of the property. So if we sell it for $100,000, we can expect to pay about $10,000 in fees and expenses.
Another term you should know, but you might actually have some idea about, is rehab expenses. This is what it costs us to make the house look pretty again. As I mentioned above, the big thing here is that some cash buyers will want to totally update and rehab something while others may do something very cosmetic. A bathroom is a good example of this. Some bathroom rehabs could be multiple thousands of dollars. You could have large tubs and showers with granite tile and premium faucets and other finishes. While others, may just swap out the vanity and paint the rest. It would obviously cost a lot less for the second rehab. But that also may tell you about the kind of company you’re dealing with. Is it just someone who’s going to put lipstick on a pig or are they going to make it look really pretty and new again?
And finally, the last term you need to know when looking at the formula is the minimum profit. That is usually proprietary depending on the company and what they want as well as the risks associated with a property. Some companies may take less if they rehab may not take long and it can be sold quickly. Some companies may want a much bigger profit if the rehab takes a long time and requires lots of pieces to make happen, like an addition or total gut with the removal of walls. And some companies flat out want to make as much profit as they can when they go to resell the property. You’ll never really know which kind of company you’re dealing with and what risk they are assigning to your property.
So the formula looks like this:
If you haven’t figured it out, the two biggest variables are the After Repair Value and rehab costs. There’s a lot of discomfort in figuring this out. I’ll let you in on a secret though… the best way to find these out is to just ask. Ask a realtor what they would sell your house for if it was all fixed up. Sometimes they might even have a way to help you get the most out of your property and help you get things fixed up. Or ask the cash buyer what properties they are using as comparables. We would have no problem showing you and explaining some of the adjustments we made to figure out what yours would sell for.
The other thing you can do is ask a contractor what they would estimate the rehab of your house would cost. I’m not advocating wasting a contractor’s time, but telling them what you’re thinking and letting them know the possibility of work, and letting them make the decision I believe is fair. The one downside to this is you have to have an idea of the work that needs to be done. So asking someone local and having comparable properties for the contractor to look at will help drive them to where they need to be to give you a good rehab estimate. Also, you can try looking at places like Angi’s list to see who to contact and get a rough idea. As a cash buyer, we may come up with a scope of work to tell us what we need to do to rehab the property and the costs associated with it. We would not be able to share that info without having our contractor look at the property in depth.
Other little things that will also need to be factored in are liens on the property and holding time. Generally, holding time will be allocated for with rehab costs. But sometimes, there might be a special holding cost we’ll need to factor in, like additional heat in the winter and air conditioning in the summer. There are even some liens that may not be known about until you get a title company involved. There are some you’ll see that will need to be factored in even when you go to sell. Whenever talking to us, we explain what your final cash-in-pocket amount is and what every piece of our offer goes to, so you know exactly what’s going on when you go to sell your property.
If you still want to see what an investor will pay you for your house, fill out the form and we start to get started on your offer right away.
