So I hate giving this as an answer, but it depends. A home buyer will typically have a formula they base their offers of off, something like 70% of fixed up value, less repairs, and less necessary selling costs.
So, it will probably be somewhat low, but sometimes it still makes sense.
Let’s look at an example.
The way we analyze deals is more aggressive than some and less aggressive than others, but I’ll try and make it as clear as possible since if you’re reading this article you’re probably considering this as an option for the sale of your home.
Let’s say you have a house worth 200k once the buyer puts in a new kitchen and bath, new flooring throughout, replaces the windows and roof, and does all those things inside to make it pretty (painting, light fixtures, new outlets and switches, etcetera).
So, we have Fixed Up Value, $200,000.
Then, we have to consider our selling costs, our minimum profit margin (this is a business, duh!), and the cost of money. As a shorthand, ball parking this at 70% of Fixed Up Value is normally accurate enough, though some buyers may be at 65% and some may be at 75%.
Even though you as a seller aren’t paying any realtor fees when you sell to us, we pay them when we sell, normally 6% of sales price, and then there are title fees, title insurance, and often enough other repairs or things the buyer asks for (like a home warranty).
So Fixed Up Value x 70% = $140,000.
That becomes our baseline. It accounts for us doing the deal and being able to resell it or refinance it afterwards. Now, the great variable, and it is so variable it can actually impact this first number (meaning sometimes it’s higher on account of being a very clean and decent property), is the Scope of Work for the house.
Let’s say the house needs a new kitchen, two bathroom remodels, painting and carpeting, and a new roof. For ease of analysis we’ll say that amount of work costs $50,000.
So, our offer price becomes $90,000.
See, it does seem low, but when you account for the fact that what we do is very hard, not many people have the skill set to pull it off, and the relative ease of these transactions for the seller, sometimes it is in their best interest.
Alternatively, when considering selling on the MLS, the property is still not worth $200,000 because of all the repairs it needs, not to mention you may have a buyer who is excited about the project and gives you an offer initially (and still wants to get a mortgage), but after they’ve done their home inspection and talked to their lender they realize that if they’re going to pay $140,000 or $150,000, they’re very likely to be into the property for $210,000 or more.
There’s a number of reasons why this is, but rehab loans on property tend to cost more to a buyer than typical mortgages, and they very likely don’t have a network of contractors and tradesmen that can give them preferred pricing. So they have to pay retail, and they end up backing out, re-thinking their initially emotional decision, and then you’re back to square one.
Because I’ve sold houses on and off the market, I’ve seen this happen several times and once the seller factors in their holding costs (say it takes you another 6 months of mortgage payments to sell the property, plus the commissions you’ll have to pay, plus the buyer concessions you may have to make) it is not necessarily a straightforward answer about which is the better alternative.
Well, again, I hope this has been somewhat helpful, and if there’s ever any way I can help please feel free to visit my website, http://www.creamcityhomebuyers.com, read the About Me and about what we do, and I’d be happy to walk you through it and see if the cash buyer might be the right option for you.
Best of luck!