How does a cash buyer determine their offer price?
So you are looking at options for selling your home and explore off-market cash home buyers to see what kind of offers you might get if you take the easy route and wonder How does a cash buyer determine their offer price?.
Cash home buyers are known for providing what are referred to as ‘lowball’ offers when making offers for off-market homes. Many people wonder why their offers are so low. Cash home buyers, also referred to as an investor and also sometimes represented by wholesalers, do make what appears to be low offers. You might be asking “Why? Are they just looking to take advantage of people?”. So, How does a cash buyer determine their offer price?
In my experience, cash home buyers are producing offers that follow a formula and represent the amount they are willing and able to pay to be confident that they will be able to earn a profit with the home. There are probably some out there who either lack experience or character (as can be found in most every industry) and are looking to take advantage of homeowners. For the purposes of this article, we will not focus our attention on these people and will focus on those trying to serve their community and provide a valuable service.
Newer investors and many wholesalers operate with fairly simple formulas to determine their offer price for How does a cash buyer determine their offer price? Here is an example of one such formula:
- ARV (after repair value) X 70%
- Subtract $ needed for repairs
- Subtract Profit for cash home buyer
With numbers, this might look something like this:
- ARV = $200,000
- 70% of ARV = $140,000
- Repairs = $20,000
- Profit Required: $20,000
- PURCHASE PRICE: $100,000
To save time, repairs are sometimes very roughly estimated using rough math such as a certain $/square foot of the house’s size based on the general condition and level of repairs needed. For example:
- $5-10/square foot as a minimum
- $10-15/square foot for flooring and paint
- $30-50/square foot for a house needing cosmetic repairs
- $50+/square foot for a house needing more extensive repairs
Wholesalers and cash buyers may work off of a much more simplistic calculation similar to described above, but the below is intended to provide a fuller picture of what a cash home buyer needs to consider when buying houses for cash in West Michigan.
The starting point is the resale value (“after repair value” or “ARV”) which represents the price they believe they can sell the house for once they complete needed repairs/updates/improvements.
From there, it’s a long list of items to deduct before arriving at the purchase price. Again, this should help you answer How does a cash buyer determine their offer price?
Here is a representation of that general formula:
Start = Estimated Resale Price
Subtract Costs of Sale:
Sales Concessions
Inspection repairs
Inspection negotiations
Realtor Fees
Closing Costs, Recording Fees
Title Insurance
Property Transfer Tax
Property Tax Prorations
Inspection Costs (well & septic (and pumping), pest, etc.)
Home Warranty
Outstanding utility bill balances
Subtract Holding Costs:
Home Insurance
Property Taxes
Loan/Interest payments for private or hard money loan covering purchase price, holding costs, repairs (usually high interest!)
Utilities – electric, gas, water, sewer, trash
Lawncare / snow removal
Subtract Project Costs:
Repair/Renovation/Updating Costs
House cleaning
Dumpster and demo/removal costs
Exterior property and house/building repairs
Landscaping and property clean-up
Subtract:
Expected Profit for cash house buyer
Subtract (if a wholesaler):
Assignment fee (wholesaler profit…typically $10,000+)
Result = Cash Purchase Price
In the above example, there are many items which may not be familiar to you. Some of these are broken down here to provide further explanation. These might help you further understand How does a cash buyer determine their offer price?.
- Costs of sale- when you sell a house, there are many different cost elements to the transaction. These are broken down into a document often referred to a settlement statement for the closing. There are also other costs that might be incurred via the offer or between the time you accept an offer and the closing. Here are common examples:
- Seller concessions – it’s not uncommon for the seller to request concessions to the sale price in their offer. This would include asking for a fixed dollar amount of percentage of the sale price to be applied to the buyer’s closing costs, prepaids, etc. It can also include things like requesting money back at closing to put towards known repairs that need to be made.
- Inspection negotiations – the buyer typically relies on the expertise of a home inspector to go through the entire house and report on the condition of pretty much everything. The findings may include things that concern the buyer and may result in the buyer asking for some sort of concession such as a reduction to the sales price.
- Inspection repairs – the buyer may request, based upon the inspection report, that you make repairs prior to the close of the sale. This could be something minor such as replacing a broken light or something costly such as replacing the roof shingles.
- Realtor fees – realtor commissions and fees are not fixed and can vary. They can be a percentage of the sale price or a fixed amount and can include other fees such as administrative fees of professional photography charges.
- Closing costs and recording fees – these can vary but include things such as document preparation fees, fees for recording documents with the county, service fees, courier fees
- Title insurance – owner policy
- Property Taxes – any property tax owed yet not paid, may include prorations for the number of days you have owned the property through closing.
- Inspection costs – this can include well & septic tests, water tests, septic pumping, insect/pest inspections, and/or other requested inspections such as a structural inspection.
- Property Transfer Tax – state and/or county/municipality transfer taxes (example: on a house I sold for $141,200 there was a county transfer tax of $155.65 and state transfer tax of $1061.25
- Home Warranty – if included as part of the sales agreement
- Outstanding utility balances – outstanding balances to utility providers are often required to be paid via closing.
- Holding Costs – the longer it takes to complete the project and sale of the house, the more these costs rise (big area of risk to the cash house buyer)
- Home Insurance – this is typically going to require a vacant home policy which may be significantly more expensive than a policy for an owner occupant.
- Property taxes -these need to be accounted for for the entire holding period.
- Loan/Interest payments – cash house buyers often rely on hard money or private money lenders to provide as much as 100% of the costs of the purchase and project. These loans typically have high interest rates and the interest adds up fast!
I hope this helps you with you question regarding How does a cash buyer determine their offer price?.