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When is a cash offer fair? The short answer: When it reflects the home's present condition, nearby comparable sales, repair costs, and seller closing costs, as well as the risk of a timeline stretch to close and the net proceeds the owner gets for the home, not just a steeply reduced polished retail listing price.
Quick answer: A fair cash offer is one that shows how the number was built – allowing it to be compared with a realistic traditional-sale net sheet. It's also easy to build a realistic net sheet of comparison. Just make sure that a cash buyer can answer these questions: What is the after-repair value of the home, as of closing? What's the total repair budget? How would the cash buyer treat the repair costs – front-end or back-end? How many days for repairs and a house inspection? What proof of funds might the cash buyer bring? When would the cash buyer close the sale? Once you get these six pieces of info, you can compare the net cash in hand of a traditional sale with that of a cash sale.
After-repair value: Needs to be checked against recent similar homes that were recently renovated or sold as-is. Size, age, lot, and boundaries should be similar. After-repair value is usually a middle ground between the as-is price and fully upgraded value. A diminished value formula could also be used to run this check.
Repair budget: Needs to be broken down and compared to contemporaneous estimates by qualified trade contractors for similar homes. Instead of one total number, this should be broken down into: roof replacement and repair; foundation, basement, slab, or crawl space regrading, concrete repair, sealing, waterproofing; HVAC replacement or repair; plumbing or sewer replacement or repair; electrical or wiring replacement or repair; cosmetic repair; cleanup and staging.
Net proceeds: This is calculated by subtracting the following from the sale price: sale commissions or concessions; any repair credits; flat-rate closing costs; tax escrows; insurance escrows; closing cures such as a skipped monthly mortgage payment; and utility disconnects.
So you can see why it's easier to answer the judge my offer question if the cash buyer provides a written run-down of every cost involved in either getting a clean settlement statement or closing.
Using its own acquisition process, GetHomeCash buys homes directly from the owner. Yet sellers should still ask the same questions of GetHomeCash – proof of funds, home inspection, closing costs, and delivery of a copy of the settlement statement or closing.
What Constitutes a Fair Cash Offer
A fair cash offer is not based purely on what the property would sell for "as is." Instead, a fair cash offer is based on the condition of the property it is offered for, as well as recent local comparables. And while a fair cash offer doesn't need to include every renovation, it should offer the number that is justified by a renovation cost breakdown and recent local comparable sales.
Start with the property as it sits. Every expensive fix and every spot of make-ready work should be noted and named to tell the story rather than a vague moniker that covers the repair costs for a literal washroom makeover. Local comparable sales should be similar in living area, number of bedrooms, lot size, garage type, year of construction, and closing date. Check three to six months of recent homes that have closed in the seller's neighborhood or nearby suburbs.
In Texas, homeowners can review the Seller's Disclosure Notice's categories to line up their answer to what condition the home is in. Even in an as-is transaction, the more precise the seller's disclosures, the easier it is to avoid or resolve future disputes over home condition.
The Anatomy of a Cash Offer
Prior to making an offer on any home, the professional cash buyer reviews the property against these factors on his or her own check list:
- Acquisition price
- Cost of any needed repairs
- Holding time
- Cost of resale
- Market risk
At this point, the assessment is largely internal to the cash buyer. But the numbers on the counter look nothing like what they would to the seller, who is less influenced by market risks and holding costs.
Speed
When you start with title free and clear and basic payoff information on file, a cash buyer just might be able to fast track the transaction with a few days notice. But if title comes up murky or the payoff information needs adjustment, a seven-day close is more reasonable, assuming a local title company and a few bumps in the road are avoided outright. The cash offer should state whether it is contingent on a clean title search.
Certainty
To skip the lender, the cash buyer might also agree to forgo putting everything in the contract in writing. But that would be a big mistake. Even cash offers should include inspection period, option period, access needs, and the buyer's right to cancel due to failure to perform within these conditions.
Simplicity
The number of showings often drops, pre-listing repairs get the thumb's down and inspection-driven repair negotiations get off the table. The value of these simplified terms depends not just on how fast the seller wants to move but on the house itself.
The Strongest Cash Offers Put Terms in Writing
The best cash offers spell out the terms in writing. The exact purchase price, closing date, amount and deposit method of earnest money, length of the option period, title company and closing-officer preference, split of closing costs, items that stay, leaseback terms, and occupancy after closing can all be included in a cash offer.
The Cash Offer Formula
In its simplest form, the basic investor cash offer is simply a formula: After-repair value minus repair costs, minus selling costs, minus holding costs, minus risk allowance, and then minus a little profit. Of course, the percentages used in any of these variables will change from one scenario to the next.
Estimating After-Repair Value
After-repair value is typically the resale price the buyer expects to achieve once the house has been renovated to meet his or her expectations. (If this is simply resale by someone else, the after-repair value is the same as the resale value.) So, the first step in determining a cash offer is to compare current comparable sales in your neighborhood of homes that have recently been renovated and sold. For a typical 1,900-square-foot home to be renovated, comparables should be similar in size, number of bedrooms and bathrooms, garage type and size, lot size, quality, location, and school- or neighborhood-assignment. To question the buyer's calculated value, write down which sales were used, then call up on file the addresses, dates of sale, prices paid, sizes and adjustment reasons for each.
Next, it's time to pay attention to the scope of repairs the contractor plans to make and what the repair budget is. Repair budgets vary depending on the age, condition, and type of house. A light cosmetic project might include a paint job (interior and exterior), new flooring, select fixtures, landscaping around the house, and/or major cleaning and decluttering to completely remove the old owners' touch. But a heavier project might include roof and gutter replacement (or repair), foundation replacement and waterproofing, sewer line replacement, electrical rewiring or panel replacement, HVAC system replacement, complete kitchens, full bathrooms, window replacement, and new grading and drainage around the house. Based on the condition of your home, I break repair costs into categories:
- Roof, gutter, and plumbing
- Foundation
- Electrical
- Kitchen
- Bathrooms
- Cosmetic repairs
- Trash-out, landscaping, exterior, pest, or mold damage
When it comes to an average-condition house to be renovated, $15,000 to $60,000 may be enough. A house with noticeable foundation movement or water intrusions or a roof failure can easily cost over $100,000, however. Be sure to ask the contractor just which line items account for the largest deductions in the budget.
The next thing to consider when evaluating a cash offer is that a cash offer covers the buyer's carrying costs (income taxes, insurance, utilities, lawn care, building-security costs, HOA or condo dues, and interest on capital) for the time period he or she holds the property before resale. In fact, the longer the assumed hold period (which is particularly common for permits or specialty work) the lower the potential offer should be, because it means the cash is tied up longer while the market can move around it.
Finally, keep in mind that profit is why the investor is taking the time to do the repairs, and the associated resale work, and risking market price changes. Profit is their incentive, so the next question to ask yourself is whether the investor's profit margin is reasonable given the condition of the house and the uncertainty of the future market. If an offer feels low to you, it might make sense to ask the investor which variables would have to change in their model to raise the offer — which is to say, would the scope of repairs or the after-repair value have to increase? Or is there an unusual risk involved, like potential title delay, tenants in the home, or inexperience on the part of the buyer's professional team? Do they know about a prior flood history, thin market, or other condition you know about?
The formula and comparison in action
As a simple example, let's assume a renovated value of $350,000, and repairs totaling $40,000; then the cash offer would be after-repair value minus repairs, sell and hold costs, plus some risk and profit allowance. The net difference (better or worse) shows up in the cash offer. It is just a function of how these variables play out over time.
Looking at a side-by-side comparison of the net sheets for traditional list and cash sale:
Cash Offer Comparison Example
Traditional Sale:
List price: $320,000
Final sale: $315,000
Minus: Agent commissions (6 percent) $18,900
Minus: Buyer concessions to be paid at closing $6,300
Minus: Inspection repair credit $5,000
Minus: Seller closing costs $3,150
Minus: Three-month carrying costs $4,500 (sales manager estimate)
Estimated net to seller: $277,150
GetHomeCash:
Cash offer: $250,000
Minus: Agent commissions $0
Minus: Seller repair bill $0
Minus: Standard seller closing costs $0 (assuming repair escrow, title, and concession costs are built into cash offer)
Estimated net to seller: $250,000
The difference in net is about $27,150 going for the listing deal. That has to be weighed against a number of factors: length of listing period, repair negotiations, showings, inspection risk, financing risk, and of course, carrying costs. On the other hand, a seller with a very flexible sales timeline might see those pluses as outweighing the listing minus and choose to list. A seller facing, say, an impending foreclosure date, a move deadline, or ongoing legal dispute over an inherited property might value the GetHomeCash solution's swift timeline even if the net is less.
How to evaluate an offer before you sign
If you've received a cash offer, be sure to uncover the following before putting your pen to the dotted line:
1.
- Title company or closing attorney: For a limited time, GetHomeCash is handling closings, so this will be a detail to be worked out directly with the cash buyer unless local real estate rules require the involvement of a title company or attorney. If the latter is the case, request the contact information.
- Study the option period and cancellation language: Most GetHomeCash offers are presented in an agreement that provides a 3-day option period during which you can review the offer and cancel, all without impacting your credit score. Be sure to read the "cancellation" language closely.
- Get details about contract assignment: The GetHomeCash cash buyer will often offer to sign a contract, like the kind you would sign and hold during a listing period, which will allow the company to provide financing to you. The idea is to transfer most liability, hassle, and risk to the cash buyer. Request details about the assignment process early in the discussion.
- Do the basic math: You will notice that GetHomeCash presents offers as the net number that would go onto an income statement or balance sheet for the company rather than as a list price or final sale price on a traditional net sheet. Unlike a listing agent, GetHomeCash doesn't charge a "representation" fee equivalent to an agent commission, but it is an idea worth keeping in mind when comparing any offer you receive to a listing model. Estimate your listing net with the basic math outlined above, and use that net sheet for comparison.
How GetHomeCash presents its offers
GetHomeCash offers typically begin with a basic description of your property including the city, the number of bedrooms and bathrooms, and any special features, followed by a review of recent local sales and a note on the condition of your home. We then present you with a written cash offer for your consideration. Feel free to ask questions about how the number came about; it's a good idea to also compare the GetHomeCash net to your estimated listing net sheet. Keep in mind that GetHomeCash will usually make an offer to purchase your property "as-is," which means you can skip the pre-sale cleaning up, hiring contractors and managing repair schedules, staging, and open houses. We also do not charge a listing or buyer agent commission. Our cash offers are intended to be the net number you will receive at closing before unusual title issues or loan payoff problems, which would have to be addressed by your closing attorney or title company. We offer a flexible closing date when title is clear or when the seller needs extra time to move. Direct communication from GetHomeCash to you allows you to ask a number of questions, like "How did the condition of my home and the list of requested repairs affect the number you've offered me?" and "How did the recent local comparable sales affect your offer?" Our cash offers are presented for free and are not binding in any way. Be sure to keep copies of the offer you receive, the contract you sign with the cash buyer, proof of funds or other documentation confirming the cash buyer's ability to pay, and contact information for the title company or attorney. If your cash buyer makes any written promises or assurances beyond what is in the contract, make sure to get a copy of those, as well.
FAQs: Frequently Asked Questions
Q. Am I obligated to accept the offer?
A. No. We have presented you with another option for you to review, compare, ask questions, or decline.
Q. How can a cash buyer close so quickly?
A. First, it makes sense that a buyer who does not need a mortgage loan should be able to close faster. But skip-a-step fast closes are a myth since a fast close still requires search for and review of title, adequate time to order and receive payoff statements for the home seller to reimburse the lender or new lender (if there is a mortgage loan), plus time for documentation, just like a mortgage closing. I am not suggesting for one second that the cash buyer is looking for loopholes to restrict your rights as a seller.
Q. Are there any hidden fees?
A. There should not be. The contract should clearly identify:
- The purchase price
- Who will be responsible for which closing costs
- How tax prorations, title charges and similar expenses will be handled
- What, if anything, will be deducted from the purchase price (if any)
- Who pays for what regarding sale of the property or other items tied to the sale (e.g. sewer tap charges, nails left in the wall, etc.)
Q. What if my home needs major repairs before it will be habitable?
A. Major repairs are a fact of life in the real estate business. The cash buyer takes into account the impact that roof repairs, foundation repairs, mechanical systems repairs, interior repairs, exterior repairs and the level of resale risk will have on the price he or she is willing to pay for your home. Ask the cash buyer to explain which repair categories drove the discount.
In summary, a fair cash offer is one that ties the number to (1) locally comparable recent sales; (2) the visible condition of the home; (3) anticipated repair costs; (4) closing terms; and (5) net proceeds after paying off outstanding liens and due diligence on title. A fair cash offer should remove the burden of repair bills, showings, financing delays and carrying costs. Take time to read and review the offer and contract, check references, and then, write down your thoughts so you can objectively compare the numbers on paper.
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