Determining a Fair Cash Offer
Use the 70% Rule
Selling your house for cash is the easiest way to turn your equity into cash. Selling your home for cash, however, means you’re not going to get the full market value for your home. The point of selling your home for cash is that the investor buying the home will also be investing their time and money into repairing the home. They are not going to give you a full market price offer for your home. Instead, they will likely give you some variation of the “70% rule”. Here is the formula that a real estate investor typically uses:
ESTIMATED SALES PRICE X 70% – REHAB COSTS = MAX OFFER
Typically with this calculation, the real estate investor will gross 30% in additional income. This money will go toward holding costs, insurance, overhead, and other expenses. Their maximum offer will typically yield around an 8-15% profit after all other expenses are taken care of.
Using the formula above, assume you are selling a house that needs $40,000 in rehab to be able to sell it for $100,000. The maximum offer you should expect would be:
100,000 X 70% – 40,000 = $30,000
You would end up receiving a $30,000 cash offer for your home. This may seem low, but the real estate investor needs to have the funds to remodel the home and sell it for a modest profit.
The benefit of this arrangement is that you get cash pretty quickly, but if you have put some time and money into remodeling the home, you may want to get the home valued by a home appraisal service. They can determine the full market value for your home, which is likely higher than what a cash offer would be. From there, you can consider selling your home on the market or selling your home for cash.
Managing your Expectations
It is very common for home sellers to overestimate the value of their home based on their own sentimental attachments to the home. It’s important, however, to keep in mind that location is a big factor that will determine a fair cash offer for your home. If your home is in a good and highly-coveted neighborhood, you’re more likely to receive a higher cash offer for the home. The real estate investor must also take into consideration some other factors, such as the estimated renovation costs, to determine a fair cash offer for your home. Even if you replaced your carpet just a few years ago, that doesn’t mean you’re going to get a better cash offer for your home. Certain systems, such as heat pumps and electrical systems, don’t last forever and need to be replaced every 12-15 years.
The bottom line is that if you’re considering selling your home for cash, location and estimated rehab costs will be the main factors that will determine the cash offer you’ll receive. If you have completed additional renovations and your home is in a coveted location, you will likely receive a higher cash offer for your home.