Many sellers are interested in the process of how a professional home buyer comes up with an offer for their house. In this post, we will discuss how we develop our offers when buying houses in Rogers. If you have any questions about this topic, please feel free to contact us!
When we buy a house, the offer is based on an evaluation of what it’s worth in today’s market. We need to know what the property will be worth if we purchase it and make all repairs and updates necessary to market the property to retail home buyers. This value is often called the after-repaired-value or ARV. We take into account recent comparable sales and other data to determine this value. When looking at comparable sales, it’s important to make sure you are considering properties that are, well, comparable. Consider factors such as age, size, style, location, amenities, etc. to make sure you are truly making an apples-to-apples comparison. For example, you couldn’t compare a 50-year old home that is clearly not a current style to a new construction home that features all of the current styles and amenities.
Once you have developed a list of truly comparable homes that have recently sold, the most common method of using these comps to estimate the value is to base it on square footage. Calculate the average selling price per square foot for the group of comps, and then multiply that number by the square footage of your home to determine an approximate value.
We also think about how much time and money it will cost us to fix up the property and get it in condition to be either rented or sold. We consider things such as whether we will have to make major expenditures on items such as the roof and HVAC systems, or whether we will only be making cosmetic improvements such as paint and flooring. Accurately assessing the needed repairs is crucial for us, so we will frequently spend a significant amount of time on this as well as have a professional home inspection done to make sure we have the best possible picture of the condition of the property.
We also need to consider the exit strategy for a property. There are three common exit strategies we utilize. The first is that we would buy the property and hold it long-term as a rental property. The second is that we would completely rehab the property and sell it retail to a homebuyer. The third possible exit is that we would sell the property to another investor in our network, either as-is or with some of the major repairs completed. Exit strategy is important because the different exits have different costs and risks associated with them.
The thing that a lot of people don’t want to talk about is the profit requirement. As investors, we need to make a profit on each property we purchase. This will vary depending upon the exit strategy and other factors discussed in this article. A property we will completely rehab will have a higher profit requirement than one we will quickly sell to another investor or keep as a rental. A higher-priced property will have a higher profit margin in terms of net dollars than a lower-priced property.
There are several risk factors that must be considered when developing the offer price. Is the property suited for multiple exit strategies, or is a complete rehab and retail sale the only viable exit strategy? What is the real estate market like – are homes renting and selling quickly or sitting on the market for some time? Are the comps we were able to find good solid comps, or are some of them a bit of a stretch? What are the chances of us finding some unexpected repairs during the rehab? These are all questions that we must answer when evaluating the risk factor of purchasing your house and formulating an offer.
Let’s look at an example of a house with an ARV of $250,000. Assume that our exit strategy is to sell the property to a retail home buyer by listing it with an agent and that the cost of repairs will be $30,000. Experience tells us that when we list a property and sell it retail, our total costs are about 12% of the sales price. This includes commissions, our closing costs, and costs that most buyers ask us to pay. So $250,000 less 12% would leave us with $220,000. Subtracting the cost of repairs of $30,000 leaves us with $190,000. If our profit requirement is $20,000, then our offer would be $170,000 with no adjustment for any risk factors.
I’m often asked, why would anyone sell a house worth $250,000 for $170,000. Let’s take a look at this… The $250,000 value is for a fully-rehabbed property sold on the retail market to a buyer who will live in the home. If the current owner wants to sell the property for $250,000, they will have to make the same repairs we will have to make, plus pay the same costs we would have to pay at closing on the sale of the property. We really should be comparing $190,000 to $170,000. In looking at this closer, most homeowners will find that they do not have the network of contractors that we do, so their costs of repairs will likely exceed ours. Oftentimes, the seller will net just as much selling to us as they would if they did the repairs themselves and then sold the house. Plus they won’t have the headache of overseeing and arranging these repairs – they can sell the house as-is and move on with their lives.
The offer process can be daunting, but it is worth the effort if you want to get a fair price and sell your home quickly. We hope this post has been helpful! If you have any questions about how we come up with our offers when buying houses or would like to discuss selling yours call us today!
At Northwest Arkansas Home Buyer, we are happy to answer any questions or concerns about your situation that you may have. Professional buyers from Northwest Arkansas Home Buyer will walk you step by step through how your home’s value is determined. Once we have reached a mutual agreement on a fair price, you’ll understand just how we develop our offers at Northwest Arkansas Home Buyer when buying houses in Rogers! Send us a message or call Northwest Arkansas Home Buyer at (479) 802-0854 today to learn more about how we can help you sell your home!