Who loves math? If so, you’ll love this! For transparency, this is our actual formula for calculating offers.
[Offer] = [After Repair Value] – [Repair Cost] – [Selling Cost] – [Profit Margin]
And here is a breakdown of all the terms above.
After Repair Value (ARV): This is what your home will potentially be worth after it is complete and looks like your favorite HGTV flipping show.
Repair Cost: This is what our cost will be fixing/updating the house AFTER we purchase it from you.
Selling Costs: We buy your home with our money but we may also have to pay to market and sell your home, too. Some of our costs include paying agent fees, closing costs, taxes, holding costs, etc. All fees you do NOT have to pay when you sell your house directly to us ;). This is usually 10% all together with the selling price. (Our Selling Cost = 10% x ARV)
Profit Margin: Ummm.. this is a business after all, right? We have to make money because we have bills and employees. We wouldn’t be able to stay in business, buy more houses, pay contractors, plumbers, etc if we didn’t make some sort of profit. However, we look to serve as many as possible, and doing that doesn’t mean charging an arm and a leg.
So what does this mean? Think of it like this:
The market value of the house (after rehab), minus ALL our costs to fix it up (including our profits), will be the offer. Get it? Congrats, now you are an expert at this, but if you need to see it all together, let’s use that formula for a real-life example…
Here we go:
‘As-Is’ Value = $40K
ARV (After Repair Value) = $60K
Repairs = $15K
Selling Cost = 10% x $60K = $6K
Let’s say Our Profit Margin For This Purchase = $7K
Let make it easier:
[Your Offer] = [ARV] – [Repairs] – [Selling Costs] – [Profit]
Offer = $60K – $15K – $6K – $7K = $32K
Offer = $32K
It’s all just math and numbers. This is how we do 80% of our cash offers. We simply add the numbers up trying our best to give you the highest possible offer we can make you, to make sure you will be happy. Sometimes a cash buyer does not make sense, that’s okay! We have other ways of helping and we are a licensed dealer.
Analyzing the Offer
So, the house is worth $40K as is, meaning if you listed it with an agent you could sell it for $40K. Yet after ~8% agent fees and closing costs you would probably get about $37.5K for it, after it will be on the market for 4? 5? months! And no one can guarantee the house will actually sell, which means you will be paying lot rent for the foreseeable future.
So now you have to make a decision.
Sell it for a guaranteed sale for $32K in as little as 10-20 days, or a “maybe sale” and receive $37.5K hopefully within 4 to 5 months.