How Investors Price Houses: Inside a Cash Offer

My cash offer isn't a number pulled out of the air in the hope that you'll take it. There's a method behind it, and once you see the pieces, the gap between a cash offer and a neighbor's sale price makes a lot more sense.

When I look at a house, I want the deal to work for everyone involved. That means you, me, and the next party in line. If I'm wholesaling, that's the end buyer who'll take on the project. If I'm flipping it myself, it means the numbers have to leave enough room for the renovation to make sense.

Step one: what the house is worth after the work

I start at the end. The after-repair value, usually shortened to ARV, is what the house should sell for once it's fully renovated and back on the market. The clue is what similar houses nearby sold for after they were renovated, like the $700,000 sale in the example below.

This is where sellers often go wrong. The renovated sale down the block tells you what a finished house is worth. It doesn't tell you what your house is worth today.

Step two: what the work will cost

Next comes the scope of work. Roof, windows, heating and cooling, electrical, plumbing, kitchen, baths, floors, paint, and anything hidden that shows up once walls are open. I buy houses in any condition, including fire-damaged and unlivable ones, and the scope of work is where that condition shows up in the offer.

I'd rather be honest about this number than lowball it to make an offer look better. If the repair number is wrong, the deal stops working for someone, and I want it to work for everyone.

Step three: the costs between buying and selling

A renovation doesn't happen for free while it's underway. Between buying your house and selling it again, an investor pays:

• Closing costs on the purchase.
• Property taxes, insurance and utilities for every month of the project.
• Interest or the cost of the money tied up in the house.
• Commission and seller closing costs when the finished house sells, including New Jersey's realty transfer fee, which the Division of Taxation charges to the seller.

Every one of those comes out of the same resale price.

Step four: margin

Last is the profit. Without enough margin, the project doesn't make sense for me or for an end buyer, and then there's no offer at all.

A real example

Here's a mistake sellers often make. A renovated house nearby sold for $700,000. The owner of a similar house that needs a full renovation sees that sale and wants $600,000 to $625,000, thinking a discount of $75,000 to $100,000 is generous.

But their house needs $150,000 or more of work. Subtract that from $700,000 and you're at $550,000 before a single carrying cost, selling cost or dollar of profit is counted. Once those come out, the house is worth about $400,000 as it stands. That's not an investor being greedy. It's simply what the house is worth in its current condition.

The asking price wasn't unreasonable because the owner was being difficult. It was built on the wrong comparison. If your house needs work, our guide to selling a house that needs repairs goes deeper on repairs versus price.

Why I built Appraize

Running this analysis used to take me hours per house. The frustrating part was how often I'd spend all that time and find out at the end that the deal didn't work. I wanted a quick first look that would tell me what is or isn't a deal before I went deeper.

So I built Appraize.ai. It gives me that first read fast, which means I can spend my real time on the houses where an offer is likely to make sense. The tool is a starting point, not the final word, and an offer still rests on the many factors described above.

What this means for you as a seller

A few practical takeaways:

• Compare like with like. Measure your house against sales in similar condition, not just the highest sale on the street.
• Be realistic about repairs. Get a contractor's opinion if you're unsure what the work costs.
• Don't lean on automated estimates. An online number has never seen your kitchen. I explain why in the Zillow Zestimate guide.
• Ask the buyer to walk you through their offer. A serious investor should be able to explain how they got there.

If your house is in good shape, these numbers usually point toward listing with an agent, and I'll tell you so. If it needs real work, a cash offer built this way gives you an honest picture of what the house is worth as-is. That goes for condos and for houses with tenants still living there, too, since I buy both. You can learn more about how I buy houses, or ask for a free offer with no obligation. I'll close on your schedule and I won't push.